After a string of delays, the new end date for the Single Euro Payments Area migration remains to be seen. Gilbert Lichter, secretary-general of the European Banking Association, talks to Philip Kleinfeld about the enduring importance of the pan-European payment system.
With the backlash against austerity and technocracy well underway in Europe's troubled periphery, the single payment area has lost much of the zeal it once had. Not only are the authorities distracted by a looming and unruly default, but a concept predicated on the idea of fiscal union cannot be stable while the currency on which it is based remains so profoundly threatened.
At the same time, and somewhat paradoxically, some corners of Europe's political class are arguing for more Europe, not less. The imbalances that lead Greece, Ireland, Portugal, Spain and Italy to a crisis of sovereign debt can - they claim - be cured only by extending the project even further.
A scheme like the Single Euro Payments Area (SEPA), which is designed to standardise the means of exchange, offers the kind of integration through which the continent can finally self-define.
SEPA migration: a reality
An expression of precisely that appetite for unification can be read into the European Council's latest call for SEPA migration to occur no later than 4 February 2014. The fact that domestic transfers are cheaper and easier to process than foreign ones remains a constant barrier to cross-border trade and general market efficiency.
That's the view of Gilbert Lichter, secretary-general of the European Banking Association, who sees the single payment area as, "the most natural and compelling follow-up to the idea of a single currency".
With endorsements like that, it was initially hoped that SEPA could be implemented as part of a natural market-driven project rather than through regulation. But the perception that private banks have of the scheme has not been entirely positive.
A recent Capco study found that 50% of banks anticipate a direct loss to their future revenue as a result of the project. And by the end of 2011, having had ten years to contemplate the idea, only 20% have actually migrated to the credit transfer system. According to Lichter, the eurozone crisis goes at least some way to explaining this obvious ambivalence.
"Being part of a currency union, there was an implicit understanding of solidarity, which meant that many countries were allowed to borrow far more than they could support," he explains. "Correcting this process will be difficult. Banks will have to carry a lot of the burden by writing off the claims they have on sovereign debt.
"We understand that where banks face serious strains, new system developments will be hard, particularly those that require such intensive investment."
Without a crisis of profound indebtedness, and hard calls for more liquidity and more lending, private banks may not have needed a legal push to motivate their compliance. But pressures of this kind are unlikely to subside any time soon. Banks are having to navigate a sea of regulatory change to over-the-counter derivatives, capital ratios and risk management.
On top of this, they find themselves at the beginning of a new and potentially dangerous public discourse about the direction of their future. Though finding space for a SEPA end-date may be difficult amid these changes, Lichter remains upbeat.
"The outlook for an end date has been around for at least two years," he says. "It shouldn't have caught anyone by surprise."
Lichter has been a member of the European Banking Association since joining as secretary-general back in 1992. The association was originally designed to supervise the European clearing system, but it has been providing advice and guidance on European payment since the idea of SEPA was first mooted.
Lichter's opinion is well valued, but even under the mantra of political legislation, the possibility of a missed deadline still seems plausible. Many banks will sense political weakness in the multiple setbacks that SEPA has faced; others may refuse to recognise the target so long as a deeper crisis remains fundamentally unsolved.
On the face of it, that perception seems unfair. The single payment area has been designed for the benefit of the real economy, but the interests of banks have not been ignored. Not only does the infrastructure streamline payment processing, it also expands the range of retail payments a bank can take and by consequence, the scope of clients it attracts. There is hope that once banks fully accept the theoretical and practical case for SEPA, the move towards its instruments and infrastructure will be easier.
"The creation of SEPA takes away the complexity that banks have previously had to deal with," says Lichter. "Having different, fragmented payment systems in many countries has been a source of so much cost over the years. Today, you see banks that are connected to lots of payment systems all over Europe. SEPA is an opportunity to send and receive retail payments through a single channel.
"In addition, those banks that have understood the opportunities that SEPA brings, and have prepared themselves to serve the interest of their customers, can approach the corporates who stand to gain from the project and offer them a pan- European service through a single gateway. This is where those who have been looking at SEPA with far-sightedness can find real benefit and real advantage to the customer services that they provide."
Moving to a more dynamic and consistent payments system also creates a series of practical challenges for financial institutions, regardless of the current economic climate. Adapting legacy systems to entirely new standards is not easy.
Of the 9,000 banks required to migrate, many will need to reconsider their entire processing capacity and decide whether or not to invest or outsource their systems. This may prove difficult for some who value their own payment credentials, but nostalgia is not always useful in times of change.
"The preparation for SEPA will sharpen the question of a bank's payment capacity," says Lichter. "I think whether or not a bank decides to outsource will depend on the size of the organisation.
"Medium and smaller-sized banks might find processing certain parts of the value chain too cumbersome and decide to outsource. Others may find that, in an increasingly concentrated payment market, they simply lack the critical mass. But the bigger banks that think of payment processing as part of their life blood, may well decide to keep things in-house."
SEPA's waiting game
Though questions still remain about SEPA's overall monetary benefits, it's clear that Europe's economic life still lacks harmony and that this proposal offers at least one important way of rectifying that. But, as with the entire eurozone crisis, the chief danger that the single payment area faces is not economic, it's political.
As nation states fracture and dissent sweeps across a continent locked into a loop of debt deflation, the question is not so much does SEPA matter, but will it happen, when and in what form?
"The greatest risk to SEPA is that our efforts are endangered by a nationalistic reflex," says Lichter. "We want to avoid a situation where people adopt SEPA, but still maintain the kind of specificities that would cause fragmentations to linger on."
Detaching SEPA's progress from Europe's wider backdrop may prove unwise, but banks must, nonetheless, begin to find ways of meeting the requirements they face. Decision-makers must look at the value they can extract from their payment functions, and ask whether or not now is the time to find external providers. These are hard questions to ask during what German Chancellor Angela Merkel, only last year, dared to call Europe's toughest hour since World War Two.