Cost to banks of dealing with failed SEPA transactions will be up to €1.3 billion a year

19 April 2007

The cost to banks of dealing with failed SEPA transactions will be up to €1.3 billion(1) immediately following the introduction of the Single Euro Payments Area (SEPA) according to a new study by LogicaCMG(2), a leading business consulting and IT services company.

The research, conducted by Coleman Parkes on behalf of LogicaCMG, looked at the practical issues of efficiency and Straight Through Processing (STP) that result from the introduction of the new SEPA schemes and services. More than 100 of the leading banks operating in Europe were surveyed. The survey established that 35 per cent of retail banks anticipate problems in the correct addressing and processing of SEPA payments through banks and intermediaries.

According to the banks, which together represent in excess of 70 per cent of total payments volumes, the impact on the banks of failed transactions will be the costs of handling exceptions (63%), the increase in the number of payments returned to the originator (60%) and finally the loss of reputation (59%). From the survey, it would appear that the industry average cost of dealing with a failed transaction is likely to be in the region of 6 Euros. Based on banks’ own estimates of SEPA volumes during 2008 this would translate into potential total costs of almost €1.3 billion in 2008.

The growth in SEPA volumes anticipated by the industry will drive this cost substantially higher as SEPA adoption and migration occurs.
Commenting on the findings, Simon Bailey, payments director, global financial services, LogicaCMG said: “The potential cost of dealing with failed transactions, as we have discovered, could be huge as SEPA comes into force. But significantly the survey has also found that there is a high reputation impact and a customer service issue that banks will also have to manage. Failed retail payments transactions will be very apparent to customers. In an industry as competitive as retail banking, such failures could have damaging consequences and it would seem evident that current plans do not appear to address this issue in a systemic manner.”

In addition nearly a fifth of banks (17 per cent) expect difficulties in identifying the correct intermediary routing information for receiving banks, accepting that there will be operational failures as SEPA is introduced. Despite the increased complexity of the pan-European retail payments market only just over half of banks in the eurozone (60 per cent) have a formal plan to resolve the issue of IBAN and BIC transaction addressing and routing.

Simon Bailey continues: “Between 2008 and 2010, the banks own estimates of the number of SEPA compliant transactions mean growth of at least 40 per cent. The cost to the industry and risk of failures will increase dramatically if the issue is not addressed.”

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