By Ivan Schneider
Bank Systems & Technology
February 11, 2004

Events in Europe have an uncanny way of becoming
relevant to the rest of the world. That's just one
reason that an initiative known as SEPA is worth a
close look in 2004. At the behest of regulators,
the European Payments Council intends to unify the
national and pan-European payments organizations
into a Single Euro Payments Area, or SEPA, by 2010.

Indeed, European banks have been told that they'll
have to offer cross-border transactions using the
same pricing that they use for domestic transactions.
"The implication is that the banks in Europe are
going to have to learn to live with lower revenues
on correspondent and cross-border business," says
Eric Sepkes, vice president and director of global
financial institution strategy at Citibank's
global corporate and investment bank, and a 30-year
veteran of the organization. Sepkes is also a member
of APACS and the European Payments Council.

Adding salt to the wounds, the transformation to
SEPA will cost plenty. "It puts huge landed costs
on everyone initially," says Sepkes. "This is not
something where you can turn the lights off today
in one environment, switch them on tomorrow, and
it's all new."

But from a macroeconomic standpoint, SEPA does have
its benefits. Lower revenues for the banks come from
lower transaction costs for their customers-and not
just European customers. "It is not just for EU
citizens or EU corporates," says Sepkes. "The
regulation is written to cover any account holder
of a euro account in the EU. Even an American entity
that has an account in the EU will be covered by it."

Therefore, banks that make the investment to connect
to SEPA may enjoy a competitive advantage in the
global economy over those that do not. "Companies
that don't [currently] have euro accounts in
Europe may see some benefit by changing," says
Sepkes. "For a dollar account, they don't get
the benefit."

2 Requirements

Getting to SEPA will require at least two things:
First, the creation of at least one Pan-European
Automated Clearing House (PE/ACH); and, second,
a standard message format.

On the first task, the Euro Banking Association
(EBA) has piloted STEP2, a PE/ACH designed for
small-value payments. "Through that one ACH,
you'll be deliver payments to any bank within
the EU-and therefore to any banking customer,"
says Sepkes.

Creating the hub is the easy part. It's the spokes
that get tricky. "A PE/ACH will use its own
payment message format, which is different to
the other ones that exist today," according to
Sepkes. "Why? Because all of them are different."

That's right: Each country in Europe-even
Liechtenstein-has its own ACH system. What's
more, none of them is politically suitable for
use in a PE/ACH, says Sepkes, "because you'd
be giving an advantage to the corporates
that bank from those countries."

So EBA was the first to come up with a new
format, but that raises another problem.
"Ninety-eight percent of all transactions are
domestic," points out Sepkes. That leaves the
shiny new hub with its pretty spokes handling
2 percent of Europe's payment volume. "It
wouldn't be economically viable," says Sepkes.
"ACH is about volume-you'd never become
competitive."

Thus the eminently logical conclusion: Move
the national ACH networks onto the PE/ACH.
"Whether we'd need only one PE/ACH is a
debate, but you definitely need a single
message format," says Sepkes. "But for any
PE/ACH to compete, it has to have
accessibility to all of the bank accounts
in Europe."

Even though 2010 is far off, 2004 is not
too early to formulate a strategy. "Banks
have been doing an ostrich approach to this
issue, burying their heads in the sand and
pretending it's not going to happen," says
Sepkes. "The regulator has dragged their
heads out of the sand. But I don't think
they've cleared the sand out of their eyes yet."