Special Report
| SEPA and consolidated IT systems |
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| Written by Armin Holst, regional director for Central Europe and Benelux, Temenos | |
| Thursday, 21 February 2008 | |
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The financial integration process – in the EU as well as on a global level – has involved a substantial increase in cross-border banking.
One example is the implementation of the Markets in Financial Instruments Directive (MiFID), which is designed to facilitate transparency and best-execution of cross-border investment transactions. Another is the implementation of the Basel II reform which is overhauling the regulatory capital establishment for banks and where Europe is forging ahead. Core banking systems The most significant change in regulations and processing is the Single Euro Payments Area (SEPA), however, which has a major impact on those countries in CEE which are already members of the Euro zone. At the centre of all of this are the IT systems that banks run their operations from. Core banking systems are the engine room of the financial institutions across Europe today. Despite this, these systems are often based on aging legacy mainframe technologies that were implemented many years, sometimes decades, ago and often involve loosely-linked systems across a bank’s different branches, leading to issues around data such as quality, ability to share and timeliness. Cross-border mergers and acquisitions pose additional technology issues within a bank. How do you put two systems together if you have one system that was developed for the Italian market and one system that was developed for the German market? The disparity of these banking systems can often make it nigh on impossible to actually achieve a return on the acquisition, if you cannot rapidly integrate the two systems. Retail payments become domestic Adding to these difficulties there is the introduction of the above mentioned SEPA. This will reduce the cost of a Euro cross-border transfer to the same level as an internal domestic electronic transfer. It will be possible for businesses and consumers to make non-cash Euro payments to any beneficiary located anywhere in the Euro zone using a single bank account and a single set of payment instructions. All retail payments will in effect become domestic and the differentiation between national and cross-border payments will be removed. Euro payments will be subject to a consistent set of standards, rules and conditions to enable circulation as easily, quickly, securely and efficiently as in national markets today. It is thought that SEPA will encourage banks to consolidate their IT systems in a bid for greater efficiency. Many of the banks do not have a common core banking system across multiple countries, however, which will make it very difficult to support a common payments infrastructure. Low cost and consolidated pan-European payment systems Most of the banks did not anticipate SEPA at all and they only started looking for a technology solution in mid 2007. At present, the major tier 1 and tier 2 European banks have understood the potential of becoming a prime SEPA player and are actively working on their SEPA implementation programmes. Their main interest is to reach new large corporate clients acting at a European market level by proposing low cost and consolidated pan-European payment services. For these banks, SEPA will become a central point of their strategy from 2008 onwards. This is, however, not the case across the board. A recent research conducted by Finextra highlights that out of 150 banks surveyed across Europe, 50 per cent will only be able to fulfil the SEPA credit transfer requirements, with 6 per cent saying that they will be unable to process any SEPA-approved payments at all. These banks were largely non-Eurozone banks, indicating that SEPA has not been widely understood. When asked to identify significant issues facing their business regarding migration to SEPA, 50 per cent of banks surveyed said they were concerned about having the correct IT infrastructure in place to support customer’s SEPA needs. Only 8 per cent of respondents were able to say that their business had already fully migrated to SEPA. Interest stronger in the old Europe countries While it is likely that the major banks will put SEPA into practice early this year, it could be some time before they are followed by small and medium size banks, who have been less proactive while waiting for national clearing organisations to provide them with instructions on how to implement SEPA. It is possible that most banks will ready themselves instead for the SEPA Direct Debit initiative in 2009. One of the reasons for the varying levels of adoption is that the interest for SEPA is stronger in the old Europe countries that already have a lot of pan-European banks and corporate clients. The challenge is even more critical for them as missing SEPA may have dangerous consequences for their banking industry. New Euro countries do not take the same risk and it would be difficult for them to become a central SEPA actor in this context. Moreover, the interest is low for them in the medium term. Saturated industry Another key issue, as previously mentioned, is the migration to single, centralised core banking platforms by internationally-operating banks. The main advantages are that new products and services can be rolled out in days compared to months. All processes will become automated, including reporting, and no longer need to be duplicated across branches. Operational costs and IT spend can be drastically reduced and downtime becomes non-existent. Banks which have merged or acquired can operate as a single bank across borders and customers in different countries will receive the same products and services. All of this leads to banks becoming increasingly competitive in a saturated industry where breadth and speed of services is a real differentiator. Core system migration has become a serious business consideration. Driven by issues such as the creation of a single European market, cross-border banking, acquisitions and mergers and regulatory compliance, financial institutions around the world are realising that there are sound business reasons for transforming their aging mainframe environments into centralised, functionality-rich banking systems that better align with their business objectives. To delay doing so may well prove riskier than taking the initiative to begin the migration process. Armin Holst is regional director for Central Europe and Benelux at Temenos. Related articles
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