TowerGroup Research Explores Challenges to "Harmonizing" Payments Processing in Europe

NEEDHAM, MA, 23 May, 2005 - Despite advances in unifying the region, the aim of establishing a Single Euro Payments Area (SEPA) by 2010 remains a challenge. New research from TowerGroup finds that while the goal of unifying payments systems is clear in principle, practical complications still remain
- including gaining buy-in from banks across the E.U. that stand to see reductions in revenue and margins earned for providing customers with payment processing services.

"Foreseeing high levels of necessary spending and consequent reductions of both margins and total revenues, European banks will be reluctant to invest in the pan-European payments vision without a regulatory mandate," said David Medeiros, director of the Global Payments research service at TowerGroup and author of the research. "A regulatory mandate can come only from coordination among the multiple industry oversight bodies and governmental regulators, whose consensus will be necessary for real change to occur. For these among other reasons, TowerGroup believes that the 2010 deadline for harmonization of European payments is likely to be unrealistically aggressive."

Highlights of the research include:

- Payment "harmonization" initiatives to date have been successful because they have been limited in scope, handling only one currency or only one type of payment mechanism, or processing payments only for members of a private-sector industry association.

- Challenges to unifying the overall payments process range from relatively straightforward and tactical (such as establishing specifications for a pan-European 'International Bank Account Number') to organizationally and technologically complex and strategic (such as the decision whether to replace entirely, modify and integrate, or simply interlink the dozens of existing nation-specific payment clearing and settlement infrastructures).

- Assuming the necessary cooperation is achieved, TowerGroup estimates incremental spending over the next six years by the European banking industry on payment-related cross-border transparency initiatives will exceed US $10 billion. This is over and above the approximately US $6 billion per year already spent on European payments infrastructures.

- Unfortunately for the European banks involved, the result of all this spending will be a substantial net decrease in revenue and margins earned for processing payments.

"Aside from establishing a pan-European payments process, impending changes in the European payments landscape will have broad impact on the structure and size of the banking industry across the region," noted Medeiros. "Those banks that have the scale and scope to benefit are likely to seize the advantage from smaller banks that lack either the resources or foresight to plan for developments toward a homogenized European payments environment."

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