The argument for SEPA Instant Credit adoption part one: The opportunities

By Darryl Proctor | 15 June 2017

SEPA Instant Credits (SEPA Inst.) is due to go live in November 2017. Temenos is amongst those assisting a number of banks in joining the scheme, supporting all infrastructures, including featuring as a front runner for the EBA’s R1 system. European banks have just months to prepare to meet this imminent deadline, however there are still those yet to start the journey. SEPA Inst. enablement isn’t obligatory for banks (only infrastructure providers) so why would a bank look to offer customers this service and what’s needed to make SEPA Inst. a reality?


Reviewing the business case for SEPA Instant Credits

Some recent feedback we’ve received from banks is that they just don’t see the business case for SEPA Inst. This is a surprise as there are many established cases and examples of how real-time payments in general can add value and SEPA has also added value to date.

One of the main business case for real-time payments is based on corporate banking. As a result of the digitisation of the supply chain, real-time payments enable corporates to collect and analyse financial transaction data in real-time, derive financial insights immediately, and drastically reduce the effort involved in reconciliation. But let’s look at the opportunities more closely.

Cross-border payments – a $240bn opportunity

Ultimately, corporates expect better cross-border payments services and according to McKinsey, 70% are willing to consider alternative providers to get them. Individual (C2C) remittances make up less than 0.5% of the world’s cross-border payment activity ($405bn in flows).

Providers earn $25bn in revenue around the world, accounting for 8% of total cross-border revenue. In comparison, business-to-business (B2B) payments offer $135tn in flows, bringing in $240bn in revenue. The average transaction value is between $15,000 and $20,000, so that means corporate cross-border payments typically cost $30 to $40 per transaction.

That’s a lot to pay for a payment that takes three days to settle and may not provide any certainty when funds are committed. These statistics are global, but give you an idea of the opportunity that offering SEPA Inst. Credits could provide. This also indicates the high risk that alternative providers could take this opportunity (and your customers) if banks aren’t able to offer SEPA Inst.

And, to further reinforce the benefit to corporates that SEPA Inst. offers, we need only to look at the current advantages of SEPA for corporates. Surveys show that as much as 75% of treasury professionals said that their European payments are more efficient post SEPA. But are these examples of demand for instant cross-border transactions and the success of SEPA from a corporate banking perspective enough to build a business case?

Real-time payments – the new bank standard?

I believe yes and no. Of course, volumes must be considered to build a business case, however, so should disintermediation. After all, it is estimated that it costs between four and ten times more to acquire a new customer in general than it does to keep an existing one. However, bank acquisition is considered to be even higher, with some sources saying cost of acquiring a new customer is over 30 times that of keeping an existing one. And with today’s growing competition it’s never been more important to have a competitive offering.

There is no doubt that real-time payments as a whole will play an enormous role in the evolution of the payments market.

With 22 live schemes already, this rising tide of immediate payments reflects growing consumer demand for real-time transactions, driven partly by the ubiquity of smartphones and other connected devices, which have catalysed consumer expectation for immediacy. As well as meeting consumers’ rising expectations around payments, the banking industry is facing rising pressure from governments to create ubiquitous nationwide and regional immediate payments systems that can be used by all financial institutions. Given these twin drivers, real-time payments from a domestic perspective is expected to become the new standard for banks, acting as the banking world’s answer to payment initiatives from new competitors such as Venmo (US) and BlueCash (Poland).

Ultimately, banks have a choice, offer real-time payments (SEPA or domestic) or risk losing market share.

Real-time payments – offering added value to corporates

Rapid payments can allow a bank to offer premium services to its corporate clients. These benefits include last-minute payroll services, disaster payments, multi-bank cash concentration, tax payments and many others. In essence, concert, rapid transactions initiatives can enhance the revenue lever, by not only driving a customer to use its services concentrated across multiple bank, it also gives the treasurer that much sought-after ‘real time cash position’. A recent survey by Ovum and Temenos, Understanding Today’s Corporate Treasurer, further highlights corporates’ need for real-time cash positions. It shows that only 13% of multinational corporates can see their global cash position in real-time – creating a clear challenge to effective cash and liquidity management. At the same time, only 45% are able to view more than half of their global cash position in real-time.

Real-time payments – ultimately benefiting banks

Data compiled by the Reserve Bank of Australia and The Centre for Economics and Business Research shows that a real-time, centralised system is the least expensive method of processing payments per transaction. Real-time payments has the potential to eventually reduce costs for banks, by breaking their payment silos. Banks incur additional costs just to maintain the status quo in payments, operating and maintaining multiple silos. Ultimately, real-time payments provides an opportunity for banks to move away from ageing legacy payment systems and toward a modern infrastructure.

Real-time payments also tend to result in fewer ‘exceptions’ to the payments clearing process. In fact, cost savings from reduced failed payments due to real-time are likely to be the largest potential saving from a real time infrastructure – estimated between $612m and $1.7bn in 2020.

However, banks must consider that, while real-time payments will help accelerate the shift away from cash and cheques, it may also impact other revenue streams.

In addition, real-time payments means a greater level of real-time data. Deployment of ISO 20022 opens up the possibilities for data handling and the marketing of consumer analytics. This is because reporting can be broken down into payment status, account balances and transaction details in both intra-day and end-of-day situations. ISO 20022 not only has a rich set of data definitions, but it is supported by sophisticated toolsets and utilities to manage them that greatly simplify definition of new message sets and rules. In turn, this makes ISO 20022-based systems easier and less costly to maintain than ISO 3583-based systems (which don’t have a similar set of tools).


The argument for SEPA Instant Credit adoption part two: The challenges will be published later this week

This article was originally published in Payments R{E}volution magazine