VocaLink’s decision to turn its back
on SEPA may make sense from a profit and loss perspective – because
cross-border payment volumes are still low. But the payments
processor is sending the wrong message to clients – because, the
vision of SEPA is not a case of if, but when, writes Duygu
Tavan
Go deeper with GlobalData
VocaLink has announced it will no longer be
pursuing growth in the SEPA compliant payments space. The payments
provider cites higher demand for immediate payments as the reason
for re-aligning its global business strategy. Now VocaLink is push
its Faster Payments business and has created a new division, Global
Transaction Services, in order to respond to evolving demands in
the payments industry, VocaLink CEO Marion King said.
In an official announcement, King made no direct comment on
VocaLink’s success or failure to stand out from the abundant pool
of SEPA compliant payment processors. “SEPA has been a positive
development for Europe”, King said, but did not say how SEPA
compliancy efforts have translated into revenue for VocaLink. “As a
result [of the low SEPA volumes], we have decided to realign our
global products to reflect our customers’ current priorities around
immediate payments,” King said in the statement.
Oversupply of processors compressed VocaLink authority
in payments space
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By GlobalDataFor those close to VocaLink, this decision
does not come as a surprise. But for those in the market place, it
does, says Celent’s senior analyst Gareth Lodge.
Lodge in fact co-wrote VocaLink’s SEPA
strategy when he worked for the payments processor. He thinks
VocaLink’s change in business focus makes sense from a strategic
point of view because there is an oversupply of payment processors.
“There are 50-60 payment processors of note in Europe. In an
efficient market, what you’d look for is five to seven – so not too
few to give rise to monopoly, but enough for active competition on
price and products.” In the faster payments space, however, there
are a handful of processors specialising in faster cross-border
payments. So that explains VocaLink’s business re-focus.
It is still quite difficult for banks to
disengage from a national processor because domestic features and
requirements are hardcoded through the transaction chain and the
cost of effort to disentangle from old systems can be quite high
EPI’s sister publication
Cards International reported in July. “So unless a bank is
forced to move their system, they won’t,” says Lodge. He adds that
SEPA is a political view. “It wasn’t a case of ‘here is a business
opportunity, there is a dying need for it,” he argues.
“For all the volumes in Europe in excess of
€100bn ($144.55bn), less than 2% ever cross the border. So SEPA is
changing the 98% to try to make that 2% more efficient and to grow
that volume. In the long-term, the market will change and people
will benefit from SEPA,” he says.
For VocaLink, however, the speed of
development was not fast enough, King said. “The speed at which
[SEPA] will happen is much less than was anticipated at the outset,
eight years ago. The scope may also be further reduced by the
increasing tendency to make additional national arrangements,
multi-year waivers, and exceptions to EC Regulation.” She does not
deny that SEPA will fail, but King’s optimism about SEPA is focused
on the benefits that Europe as a whole will get – not how or
whether VocaLink can generate revenues from SEPA compliant
services.
An unwise decision?
It seems an unwise decision to withdraw from
SEPA, regardless of how low the cross-border payments volumes are –
because the investments have already been made across Europe.
People close to the European Payments Council
were rather surprised by VocaLink’s change in business direction, a
reaction that echoes throughout the payments market. “From a
product-centric, profit-loss perspective, it may make sense [to
pull out of SEPA]. But SEPA is not a case of whether it’ll work or
not. So much has been invested in it already – it is highly
unlikely that anybody will pull out of it. It may be delayed, but
everybody says it is not a matter if it happens, but when,” says
Aite Group senior analyst Enrico Camerinelli, who specialises in
wholesale banking, cash and trade finance and payments.
“In reality, you have to consider what a
corporate client wants. And they do not just expect a processing
agent, they really expect some services and support in their
business decision, they’d expect their service provider to stay
abreast of regulatory changes- maybe not even expect the service
provider to invest money in the service, but just at least be like
a counsellor to give advice.”
“So, pulling away just because SEPA has no
high volumes right now gives the sense that whatever happens with
SEPA from now on, they [VocaLink] will not consider it their
business – which I don think is a good message to their clients.”
The announcement of the new division coupled with the announcement
of withdrawal from SEPA services makes it sound as if immediate
payment services conflict with SEPA. They do not, in fact.
Why don’t they do both – SEPA and Faster
Payments?
Camerinelli considers VocaLink’s decision to
drop SEPA services from its business focus “an imprudent move.”
He argues that SEPA holds the promise of
helping gain efficiencies and moving away from it now is an unwise
idea. “Why don’t they just keep their SEPA services at a minimum
and concentrate on Faster Payments? I don’t think it’s a smart move
because banks will be increasingly forced to cut costs in an ever
more competitive transaction banking space,” he highlights.
“SEPA holds the promise of helping gain
efficiencies and moving away from it now seems to be an imprudent
move; unless of course VocaLink is in financial straits and is
using this ‘SEPA excuse’ to reduce exposure to a currently stagnant
service and focus on more lucrative (though short term) services.”
The change in VocaLink’s business strategy comes at a time when key
aspects of SEPA are starting to take off. Unbundling, the
separation of the card acceptance brand or scheme from the
processing, authorisation, clearing and settlement of transactions
– is taking place according to regulatory guidelines.
The EPC is adding additional reconciliation
and data system update requirements to the guidelines and given the
low volume of SEPA – and the contrast between the changes of
regulation and the low cross-border payments volume, it seems
logical to conclude that efforts to keep up with the changes mean
very little to VocaLink. EPC chairman Gerard Hartsink declined to
make a direct comment on VocaLink’s business focus
re-allocation. However, the EPC reinforced its comiitment
to the roll-out of SEPA.
So if SEPA is developing and nobody else is
pulling out, why did VocaLink? Surely it cannot be just to pursue
other business opportunities? Camerinelli agrees: “Does SEPA
conflict with faster payments? No, I would argue the opposite,
actually. SEPA provides standard ways of securing payment
transactions, facilitates payment processing. “Right now, for banks
to change their systems just to reduce transaction fees may not be
so appealing. But if VocaLink wants to focus on faster payments, I
don’t understand why they have to pull out of SEPA.”
“I think it issimply a matter of return on
investment, having to cope with all the changes and nothing really
happening in SEPA, so it was probably a case of re-allocating
business investments.”
