The scope of this article is to point out how the present financial crisis is affecting the European payments landscape and the Single Euro Payments Area implementation. The current unpredictable and very challenging market situation has not fundamentally changed the fact that payment services need to continue modernization in order to become more flexible, agile and adapt in order to comply with its important purpose in society. SEPA is needed to ensure the new modern payment platform that can enable Europe to move beyond basic services, increase payments efficiency, embrace innovation and integrate further services in the trade process. Today, the turbulent market conditions could have the effect of accentuating rather than reducing the business case imperative and momentum to achieving full SEPA implementation.Single Euro Payments Area; credit crunch; corporate bodies; cash management; financial turmoil

Avadanei, Andreea

English

Research Papers in Economics

  1 
Perspectives on Single Euro Payments Area Adoption in the Light of the Financial Crisis 
 
Andreea Avadanei 
 
 
Abstract. The scope of this article is to point out how the present financial crisis is affecting the 
European  payments  landscape  and  the  Single  Euro  Payments  Area  implementation.  The  current 
unpredictable  and  very challenging  market  situation  has  not  fundamentally changed  the  fact that 
payment services need to continue modernization in order to become more flexible, agile and adapt in 
order to comply with its important purpose in society. SEPA is needed to ensure the new modern 
payment platform that can enable Europe to move beyond basic services, increase payments efficiency, 
embrace innovation and integrate further services in the trade process. Today, the turbulent market 
conditions could have the effect of accentuating rather than reducing the business case imperative and 
momentum to achieving full SEPA implementation. 
 
Key words: Single Euro Payments Area, credit crunch, corporate bodies, cash management, financial 
turmoil. 
 
Introduction 
The European Union governments set ambitious goals for Europe in the Lisbon Agenda with 
the proclamation of creating the most prosperous and successful position for the EU in the global 
economy. In order to expand the European single market, the national-orientated payment systems 
needed  to  convert,  and  distinctive  payment  habits  and  cultures  needed  to  merge  towards  more 
harmonized patterns. This is a demanding objective for 31 mature economies, many of them with 
proud histories of how patterns and cultures have evolved over centuries and decades. This is not an 
easy task to overcome and it needs the right balance of change process management in order to insure 
that important value in existing services is not diminished in the new harmonized European services. 
Change must move towards something better in order to justify the burdens and possible pain points of 
the process.  In its premises, Single Euro Payments Area is an initiative of the aiming at harmonizing 
the system of cashless payments in the extended Euro zone, creating a coordinated environment of 
rules, standards and procedures, working as a single domestic payments market in which citizens and 
economics actors are able to make payments as easily and inexpensively as in their home countries.  
2008 was a challenging year for the project: it brought the first successful, visible deliverables 
of SEPA to the market with the introduction of the Credit Transfer and Card Framework. However, 
much remains to be done to achieve the full objects, and progress needs to continue.   2 
Moving into 2009, there was a major change happening that wasn’t expected at the time the 
vision of SEPA was outlined. Even within the past few months, the banking industry has further 
consolidated and changed, and we are now starting to see the true impact of the financial turmoil on 
the real economy throughout Europe, with no one remaining unaffected. 
The early 1990s was the last time that several European countries experienced serious financial 
crisis
1. The Nordic region banks were left with no option but t move away from paper-based and 
manual solution towards electronic and more value-creating services for their customers. And if the 
scope  previously  was  primarily  to  solve  the  problems  on  a  country  and  community  level-basing 
solutions on country proprietary regulations, standards and networks-one outcome of the financial 
crises was the new era and evolution of e-payment services for the benefit of all parties. 
Why has Europe been so badly affected? First, Collateralized debt obligations (CDOs) were 
traded worldwide and financial institutions all over the world, including many in Europe, became 
exposed to them and to other instruments whose value directly or indirectly fell as a result of the sub-
prime loan defaults in the United States. Second, although there has been very little sub-prime lending 
in Europe, some members states have also seen significant downturns in their own housing markets. 
Third,  given  that  financial  markets  are  global  and  financial  institutions  trade  with  each  other 
worldwide,  EU  financial  institutions  are  directly  affected  when  US  institutions  get  into  trouble. 
Sentiment also plays an important part-the extreme crisis of confidence in the US financial markets in 
recent weeks immediately spreads elsewhere-as is always the case in such circumstances. Fourth, all 
this has coincided with other global shocks, particularly soaring oil and commodity prices, resulting in 
rising inflation and with inflation and with exchange rate volatility. Those factors too have led to an 
economic downturn everywhere and have also had a negative affect on stock markets and therefore on 
the amount of capital available to banks to resist the current pressure. 
In 2010, no country is isolated. Trade and business deals flow across all physical state borders, 
emphasizing the need for widely accessible and secure ways of effecting payments. The current crisis 
can  also  create  a  strong  momentum  to  lift  the  market  to  the  next  level  of  modernization  and 
dematerialization, but this time not merely with a single country dimension. Now it is time to take the 
European step. 
The article is structured to answer three research questions: 
A. How is the credit crisis changing the payments landscape for both corporate bodies and 
banks? What does the market analysis show? 
B. How can a business case for SEPA and the Payments Services Directive be made in the 
current economic climate? 
C. Is Single Euro Payments Area at a crossroads? 
 
                                                
1 Gnevko, Slava, (2009), Carpe Diem: the Business Case for SEPA and the PSD During an Economic Slowdown?, p. 5;   3 
A. But what does SEPA really mean for businesses as a corporate? This initiative will be a key 
accelerator in reducing the number of accounts you need to hold through the use of in-house banks and 
pan-European accounts, as well as ensure interoperability through open formats and connectivity. In 
particular, SEPA offers multinationals the opportunity to centralize payment and collection initiation 
by establishing shared service centers or payment factories, as well as reduce the number of bank 
relationships as consolidation of the banking industry creates truly pan-European banks.  The present 
financial  turmoil  has  clearly  shown  the  importance  of  liquidity  and  cash  management  and  the 
superiority of retail deposits as a source of bank financing. In addition, the focus on driving further 
working  capital  efficiencies  has  never  been  as  important.  There  are  plenty  of  opportunities  for 
improvement, though, and corporate bodies should look to take advantage of the tools and techniques 
that are available today. 
 For  corporations,  SEPA  can  provide  advantages  to  sell  cash  and  liquidity  management 
services;  for  consumers,  it  can  help  attract  retail  deposits.  Moreover,  payments  are  a  profitable 
business in its own right-providing a regular, reliable source of income with average annual volume 
growth of 8-9%
2. The way to survive in today’s climate is to be pro-active and more quickly. Due to 
the credit crunch, all corporations need to „go back to basics”
3 in terms of pan-European liquidity 
management. The increasing automation of daily treasury operations is enabling corporate treasurers to 
take  a  more  strategic  role  within  the  company.  The  treasury  role  now  encompasses  group-wide 
business  solutions;  working  capital,  risk  management,  productivity  management;  involvement  in 
dispute resolution; a collaborative role with the CFO; and a leading and more visible role as a key 
decision maker in regional and global activities. This is particularly important against the backdrop of 
the credit crunch, as the priorities in terms of liquidity management have changed in the last few 
months. For example, guaranteeing the availability of funds and that those funds are used to their 
maximum potential have asserted themselves as the priority for all corporate bodies right now.                                                              
Despite the crisis, payments remain an attractive business and one where a bank will wish to 
maintain its competitive edge. To capitalize on these investments, it is crucial that SEPA migration is 
kept on time and on track-the redundant cots of running duplicate payments systems must be avoided. 
Therefore although it seems like a new market model, it’s actually a return to the old model that has 
not been seen in recent years of big acquisitions, an increased focus on investment banking products 
and international growth
4. Predominantly, banks make money on their core businesses; it has been the 
peripherical activities where they have experienced the biggest losses, such as in assets generated from 
the investment banking model of originate and distribute. Today, 'back to basics' has become the 
banks' rallying call to combat the credit crisis. Previously, banks were expected to grow their bottom 
                                                
2 Lund, Berit, (2009), The Status of  SEPA in 2009, p. 4; 
3 Brissaud, Oliver, (2008), Credit Crunch-Impact on corporates, p. 3; 
4 Shepard, Simon, (2009), The Impact of the Credit Crisis on SEPA Implementation, p. 2-4;   4 
line faster than the gross domestic product (GDP), which obviously meant that they were taking far 
more risks and looking at more complex products, both of which have come undone in the current dip. 
In the light of the present financial turmoil, the market analysis has led to the following: 
  A central management structure is needed-there is s a necessity for strong central structure for 
managing and governing the SEPA and the PSD migration. In September 2008, SEPA Credit Transfer 
achieved the market share of only 1.65
5 of the overall community’s credit transfer volume. If the 
sluggish trend continues and SEPA Direct Debit migration follows the same pattern, the perceived 
SEPA benefits won’t be achieved over 6-10 years. 
  There is a necessity for the review of the investments and cost aspects of SEPA and PSD 
migration due to changed economic conditions. These factors, and especially the decline in IT spend, 
negatively affect SEPA solutions and systems.  
  Changes in capital markets-the role, origin and cost of capital have significantly changed the 
allocation of investment and distribution of benefits for SEPA and PSD business case. According to 
Morgan Stanley, the cost of equity for banks has risen to about 12.5%, while future returns at the end 
of the crisis may be no higher than 13%.  
 
B. The business case both SEPA and PSD must be reviewed because it evolved under the 
changing economic conditions. The deterioration in the European and world economy and decline in 
financial services market can endanger the timeline and level of investment in SEPA and PSD. The 
regulatory changes from SEPA and PSD present banks with many new compliance requirements, but 
also offer a series of opportunities, including the chance to: re-asses business models and consolidate 
payments infrastructure; rationalize legal entity structure if they operate on a pan-European basis; 
design and tailor new products to enable the capture of new markets; create efficiency savings by 
applying the standards in the PSD to operations outside of Europe. 
Following  the  postulates  of  the  game  theory  (Nash  equilibrium-prisoner’s  dilemma)  a 
combination  of  choices  and  implementation  strategies  on  the  supply  side  and  the 
implementation/investment choices on the demand side would create a series of economic outcomes 
for the project. As parts of possible outcomes are the following: adherence to the provisions of PSD, 
meeting estimated benefits; implementing within the European Commission’ timeframe; staying on the 
level of original planned investment; reaching the required levels of penetration within all stakeholder 
groups; staying on the level of original planned investment. 
Given the current economic conditions and the precarious financial situation some banks have 
found themselves in, is now really the best time to be forcing banks to invest in SEPA? Having earned 
money off the status quo for some time, banks are finding hard to come to terms wit the new world of 
                                                
5 McCreevy, Charlie, (2009), Financial Crisis-SEPA can be Part of the Solution, p. 3;   5 
payments that the PSD beckons it. And the credit crunch is only likely to widen the gap between 
customers’ expectations and banks’ ability to deliver new payment services and products. 
The Institute of International Finance (IIF) calculated the damaging consequences of the credit 
crunch: up to June 2008, banks internationally made 476billion USD
6 (373bn EUR or 294bn GBP) in 
credit write downs and also raised 354bn USD (278bn EUR or 234bn GBP) in capital. By the end of 
September 2008, the re-capitalization figures further increased to 554bn USD (435.2bn EUR or 342bn 
GBP) with 338bn USD for the US, 55bn for the UK and 96.1bn EUR for European banks. Morgan 
Stanley  predicted  that  Europe’s  banks  might  need  an  additional  83bn  EUR  (105bn  USD)  capital 
injection. Although participation of individual payment services providers is very important for the 
successful  implementation  of  SEPA  (31  national  payment  systems),  the  cooperation  and coherent 
actions of 29
7 national communities, which are subject to PSD, is also important. Therefore the current 
systemic crises in general, and failure of the whole national economies such as Iceland (not subject to 
the PSD) and Hungary in particular, are major negative factors and impediments to the successful 
implementation of these initiatives and legislation 
 
C.  Today,  SEPA  is  “lost  in  conversation”,  because  a  more  important  conversation  is 
happening-the one about survival. Some banks have done a little to make the changes needed for 
SEPA  implementation,  but  most  haven’t  done  enough.  Despite  the  financial  buffeting  that  is 
happening, it is extremely important that a clear and constant focus is kept on SEPA and its benefits. 
The credit crisis has undoubtedly changed the banking landscape forever; it has also called into doubt 
the vision of a Single Euro Payments Area.  As SEPA migration in some countries looks like it may be 
lapsing due to economic conditions we can outline four main areas that need to be addressed to help 
the  project  regain  some  momentum:  the  European  Payments  Council  must  bring  together  all 
stakeholders  in  order  to  move  SEPA  to  the  next  critical  stage;  an  end  date  must  be  set  for  the 
retirement of the legacy payments instruments; it must be found a way so that the basic SEPA product 
can be enhanced without creating market fragmentation; bank need to collaborate with each other more 
if SEPA is to be a success. 
SEPA is at a crossroads. The current financial current financial market turmoil and related 
economic decline constitute a less than ideal background for a project that has a far strong policy that 
business  case  dimension.  But  a  demonstration  now  by  policy  makers  and  regulators  that  “better 
regulation” is more than a motto could still allow   European society to reap the benefits of this project 
in medium term. For the thousand of people heavily involved in creating the new payments landscape 
in Europe, the journey can sometimes be rough. Faced with this, perhaps some inspiration from our 
predecessor’s hard work with innovation can add further motivation for all of us. Back in the 18
th 
                                                
6 Macknight, Joy, (2009), SEPA-Lost in transposition?, pp.4-6; 
7 ***European Commision, (2009), Transposition of PSD, pp.12-16;     6 
century, the diesel engine was invented by Christian Karl Diesel, but the one that took this great 
innovation through major improvements some years later was Charles F. Kettering, a US electrical 
engineer. Kettering stated: ”A problem well started is a problem half solved”. A bright and innovative 
career also made him conclude: ”Every great improvement has come after repeated failure. Virtually 
nothing  comes  out  right  the  first  time.  Failures,  repeated  failures,  are  the  posts  on  the  road  to 
achievement.” This could be something to bear in order to keep a strong focus, even during periods 
where implementation may seem fraught with difficulties. SEPA is a common effort for the future. It is 
an important journey that demands courage, motivation and execution from all parties. 
 
      Conclusion 
Despite  the  significant  challenges  and  hurdles  that  still  exist  -  including,  of  course,  the 
unsettling impact of general market events over recent months - the foundations nevertheless continue 
to be put into place for an unprecedented joint initiative between the payment industry, the regulators 
and the user community with a view to realizing the significant benefits on offer to all stakeholders by 
taking the SEPA project to its national conclusion.  
The changes in macroeconomic market conditions, significant changes and shifts of power in 
the  capital  markets  and  vulnerability  of  all  participants  require  more  regulatory  supervision  and 
control. The EC, ECB and national regulator’s strategies need to be changed to secure the benefits and 
manage  risks.  Economic  incentives  have  to  be  created  for  the  collaborative  and  standardization 
solutions. The question facing the industry now is: would regulators be able to pick up the reigns of 
power and maintain the pace and benefits of migration for SEPA and PSD? 
 
References 
1. Brissaud, Oliver, Credit Crunch-Impact on corporates, 2008, Belgium, from www.gtnews.com; 
2.  Downes,  Nick,  SEPA:  The  Migration  and  Motivation  for  Challenge  for  banks,  2008,  United 
Kingdom,  from www.gtnews.com;  
3.Gnevko, Slava, Carpe Diem: the Business Case for SEPA and the PSD During an Economic 
Slowdown, 2009, Germany, from www.vocalink.com; 
4. Lund, Berit, The Status of  SEPA in 2009, 2009,  Norway, from www.ebaportal.eu 
5. Macknight, Joy, SEPA-Lost in transposition?, 2009, United Kingdom, from www.vocalink.com 
6. McCreevy, Charlie, Financial Crisis-SEPA can be Part of the Solution, 2009, Bruxelles, from 
www.europeanpaymentscouncil.eu 
7. Shepard, Simon, The Impact of the Credit Crisis on SEPA Implementation, 2009, United Kingdom, 
from www.ingcommercialbank.com 
8. ***European Commission, Transposition of PSD, 2009, Bruxelles, from 
http://ec.europa.eu/internal_market 

Carpe Diem: the Business Case for SEPA and the PSD During an Economic Slowdown,

Credit Crunch-Impact on corporates,

Financial Crisis-SEPA can be Part of the Solution,

SEPA-Lost in transposition?,

SEPA: The Migration and Motivation for Challenge for banks,

The Impact of the Credit Crisis on SEPA Implementation,

The Status of SEPA in

Transposition of PSD,

Perspectives on Single Euro Payments Area adoption in the light of the financial crisis

Perspectives on Single Euro Payments Area adoption in the light of the financial crisis

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