Planning for SEPAImplementation: From Compliance to a Strategic Response

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The Opportunities andThreats of a New MarketContext The European Payment ServicesDirective (PSD) will be transposedinto law and come into force byNovember 2009, and therequirements imposed by the EPCregarding the Single Euro PaymentsArea (SEPA) means complianceprogrammes are already wellunderway. Inherently many ofthese programmes are driven toreach minimal technicalrequirements for incoming andoutgoing payments messages, andmany operate within business unitsilos. Banks have anticipated thatthe cost of compliance will be high;however these programmestypically do not provide theoptimal benefit because they fail toaddress the broader strategic threatsand opportunities.

The implications of the regulatorychange are significant -compression of transactions feesand float, pressure to reduceprocessing costs, data managementchallenges associated withtransparency requirements, thethreat of new market entrants asthe 'Payments Institutions' categoryis explicitly created, and theinstitution of maximum executiontime for domestic and cross-borderpayments of D+3 through 1/1/2012and D+1 thereafter. These impacts,coupled with increasing customerexpectations in the commercialsegment, provide opportunities forsavvy market players to lurelucrative corporates from theirtraditional domestic bank withenhanced cash and liquiditymanagement propositions. Otheropportunities exist for M & A plays,and for payments insourcing. Astrategic response, in our view,

considers this external change inlight of the existing internalcontext - commercial, operationaland technical; and will separatethose who truly prosper within thenew post-SEPA and PSDenvironment.

Payments Revolution:Single EuropeanPayments Area (SEPA)Regulatory Milestones

Nov 19th - TARGET2 Go-Live28th Jan 2008 - SEPA CreditTransfersMay 27th 2008 - Faster PaymentsNov 2009 - PSD Transposition toNational Law & SEPA Direct DebitsLate 2009 - SEPA CardsLate 2010 - EMV Chip and PINscheme

Set on the backdrop of increasedglobalisation and consolidationacross the financial services sector,the European payments landscapeis changing significantly due toregulatory catalysts. Developmentsacross the payments market arebeing driven as politicians,regulators, central banks,corporates, banks, and tradeassociations respond to mandatesand initiatives such as the PaymentServices Directive, Faster Payments,and the Single Euro Payments Area(SEPA). SEPA is the harmonisationproject introduced by the EuropeanPayments Council (EPC), involvingnational payments schemes, andinfrastructure implementing newstandardised business and technicalframeworks. Importantly, in aneffort to increase competition in theprocessing sector, a core feature ofSEPA is a clear separation of thebrand and scheme from theinfrastructure and delivery system.The reach of SEPA spans the 27 EU

member states plus Iceland,Lichtenstein, Norway andSwitzerland. It is impactingnational payments strategies,industry infrastructure, companies'compliance agendas, and in somecases competitive strategy.Essentially, the change is resultingin new legal, business andtechnical responses to enableborderless processing of credittransfers, direct debits and cardpayments across the Europe.

Key Findings - TheEuropean PaymentsRevolution: AnAccenture Survey• SEPA is costing banks

significantly more than expected

• 39% of banks and processorsplan to replace legacy paymentsplatforms

• The scale and complexity ofchange around SEPA isoverloading banks' andprocessors' IT resources, andrestricting investment in newproduct innovation

• The pressure on financialinstitutions' business andtechnical resources will continue

• Banks are concerned that SEPADirect Debit implementation willbe overly complicated

• Over 70% of banks surveyedbelieve SEPA will ultimatelyjustify new internal paymentsinfrastructure and enableEuropean expansion, despite thechallenges surrounding thepurely commercial business casefor spending on SEPAcompliance

• Organisations have anexpectation of only 37 percentthat their internal platforms willbe fully and independently SEPAcompliant before 1st January2008

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• The greatest opportunities areseen to be in the corporatesegment, with the result thatnew SEPA paymentspropositions for corporatecustomers are being prioritisedand pursued ahead of those forconsumers

• Euro-zone banks will spend ahigher proportion of theirpayments platform budgets onSEPA than non-Eurozone banks

• With the advent of SEPA, Visaand MasterCard are expected toemerge as strong competitors tomajor US and European cardsprocessing companies

The SEPA Opportunity &ChallengeFor banks, the market change isforcing hard business decisions on- geographic reach, use of internalpayments schemes and systems,new products and servicesofferings, new customer segmentsto target, IT and channelinvestment, operationalreorganisation, and governance.Clever innovation and newpropositions will create value forcustomers, from consumers tocorporates, and serve to replace thediminishing revenues fromtransactions fees and float.

Two approaches are being adoptedto address SEPA: CompetitiveInvestment and MinimalisticCompliance. Those subscribing tothe former are seizing theopportunity to extend theirgeographic reach by targeting non-domestic customer segments whichhave historically been their mostprofitable at home. Also, thisapproach is often accompanied bythe development of new customer-centric value propositions andpayments channel innovation, suchas mobile-banking solutions.

Clearly the prospective benefits,include: revenue growth fromextended geographic reach,revenue growth through increasedpenetration with core domesticcustomer segments, lower cost-per-transaction - primarily achievedthrough increased STP rates, andthe cost savings associated withmaintaining more simplifiedpayments platforms.

The second approach, MinimalisticCompliance, as the name suggests,is anchored to the principle ofinvestment avoidance. Ironically,the scale of change involved willnecessitate a compliance-relatedspend for large banks estimated at€50M - €70 for business andtechnology initiatives. Whileimmediate-term savings are to behad by doing as little as possible toachieve compliance, these playersare still conducting examinationsof strategy around conductingtransactions. We have surfaced anumber of key considerations andconstraints, regardless of approachadopted, that are driven by internaland external contextual factors (seesidebar - SEPA Considerations).

There are significant challenges forbanks as they proceed withaddressing SEPA:

• Bank and processor marketconsolidation

• Threat of new market entrants

• Poor supplier service levels

• Imperfect information asscheme rules are updated

• Delivery within the timeframedriven by the need to becompliant

• Lack of necessary skills toinnovate

• Aging legacy technologycoupled with implementinglarge scale platform refresh

Executives and managers are beingconfronted by decisions impactingevery part of their paymentsbusiness and IT department. Both atactical and strategic response toSEPA is required to achievecompliance and stay competitive.Strategic choices covering thegrowth agenda, market positioning,key service and productpropositions, and channelsophistication will all impactrevenues, costs and competitorbehaviour. Further difficulties areencountered when considering theoperating model to execute thestrategy. Should the bank retaininternal processing or outsourcecommoditised back-office to alower cost provider, or look toachieve the scale required to in-source payments?

External Considerations& Context• Decision required on rule books

version to be used forrequirements gathering. TheDirect Debit Rulebook andImplementation Guide version2.3 is now available, may nolonger be relevant for directdebits in 2009.

• Inconsistencies and omissionswithin the implementationguides, when compared to ISO20022

• Reachability requirementsassumptions must be made dueto routing vagary within the rulebooks

• Assumptions and decisions arerequired regarding bilateralagreements and CSMparticipation, especially in lightof industry consolidation, tominimise costly duplication andthe risk of inconsistent customerservice

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• Implications of the outputs fromthe EPC working groups on e-Invoicing and mobile payments

• Potential institution of a thirddirect debit card scheme, andenabling 'any card at anyterminal'

• Clarification of central bankreporting requirements forpayments over €10,000

• Customer propositions regardingthe utilisation of the 140character field (such as providingtheir defined reference data forease of reconciliation)

• Application of national rulesregarding tax residency andaccount ownership

• Potential retention of nationalpayments infrastructure anddevelopment of national AOS

Accenture Point of ViewInternal Considerations & Context• Impacts within the branch

network and operations ofpayments processes, proceduresand workflow

• Consumer and small business -competitive responses forrevenue protection of nationalretail and business bankingmarkets against new entry andfee erosion, and to address pan-European growth opportunities

• Corporates and large business -seizing opportunities to retaindomestic clients throughenhanced products / servicesmix, while increasing pan-European footprint and providingcorporate solutions that allowoptimal payments initiation,reporting and cash management

• Formulating an approach forhandling paper-based credittransfer payments post-SEPA

• Address Debit Mandate Flow -

optional routing that may becostly to implement

• Customer-to-bankcommunication can be definedby the banks, because therulebooks only provide arecommendation - format andtechnology must be decided

• Implications of SDD calendarlogic: due date = settlement date= execution date

• Possible implication on theminimum reserve requirements withthe central bank

• Possible change of risk profile ofcorporates that are allowed tosubmit direct debits, as the newprocess exposes banks toincreased credit risk

• Compulsory acceptance of allSEPA Direct Debits, regardless ofsource bank

• Creation of a database to enablerouting to approximately 7,000European banks

We have recognised theimplications of SEPA and defined aclear point of view on the areasupon which our clients need tofocus:

• Cost pressure that is erodingmargins means that costs forcore processing have to decreasein order to maintain margins,and STP rates must be increased.A sourcing strategy should bedefined to enable niche banks tominimize investment and futureoperating costs, while partneringto receive required servicelevels. Transactions banks withsizeable volumes will developthe payments processingcapabilities required to insourcepayments, and the modular

solutions needed to onboardpayments from smaller bankswithout unnecessary re-work.

• Sophisticated regional and globalpayments solutions withconsistent pricing and highservice levels are demanded -cash and liquidity management,shortened settlement cycles, andhigh quality information.

• We forecast a fragmentation ofthe payments value chain and anemergence of value chainspecialists and insourcers, withsome positioning as lost costproviders operating at scale.

• Many Banks need to re-platformtheir payment systems. Multiplesingle purpose applicationscombined with applications goingout of maintenance, and a loss ofcritical tacit knowledge iscontributing to higher operationalrisk and incr easing cost ofmaintenance. Current paymentsystems are not flexible enoughto allow banks to react tosophisticated customer demandsquickly and in a cost-efficientway.

• Payment systems cannot beexamined in isolation. Thebreadth of regulatory changes(Third AML Directive, Solvency II,MiFID, Faster Payments Basle II)require modifications to severalsystems and processes, and cost-savings can be achieved byaddressing them concurrently.

• Processing efficiencies must bedriven from an improvement inquality for the customer. In thecurrent environment there isoften insufficient validation, andmaintenance of parameters is adhoc.

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• The onus is on the legislativecommunity to generate SEPAmomentum, by potentially bymandating that public sectorpayments are issued in SEPAcompliant formats, thusestablishing the momentumrequired to reach the criticalmass of volumes required toreach the 'tipping point' atwhich the decommissioning oflegacy systems makes sense.

SEPA Technical Considerations

• Implications of the Direct Debitmandate and transactionsdatabases within the current ITinfrastructure, and implicationsregarding interchange fees

• Choice of XML parser technologyfor conversion and validation,especially in relation toperformance and volume

• Consideration of approximately2700 attributes for handling,especially since identical tags indifferent XML branches (differentcontext) have different meanings

• Channel enablement - decisionwhich channels to enable forSEPA XML messages

• Scalable architecture that cansupport future expected growthof SEPA transaction volume

• Messages have to be sent to thedebtor bank ahead of the actualprocessing and booking,requiring the uncoupling of theinternal and external side of agiven payment

• Impacts on account managementsystems and statement printingsystems (correspondence), andpossibly the Payments workflowas SDD requires an extension ofthe payments system format

Accenture CapabilitiesAccenture is a global managementconsulting, technology services andoutsourcing company. We haveover 160,000 employees in 48countries, and annual revenues inexcess of $16B. Our Bankingpractice in Europe employs over10,000 people.

Accenture possesses a great breadthand depth of experience in thepayments area. In fact, we haveapproximately 1,000 peopleworldwide working on paymentsrelated projects in Banking; andwithin Europe, we have over 700people supporting paymentssystems through outsourcingarrangements and over 200 peopleworking on consulting and systemintegration engagements forelectronic payments and cards inmajor banks. For this work, we usea variety of payments strategytools, reference architectures,process and operating models anddiagnostics (see Accenture SEPAAssets below). Our payments workcovers strategy, businessarchitectures, operating models, andtechnical architectures. It alsocovers the management of physicalcash and financial supply chainoptimisation. The implementationof payments transformationprogrammes is a core capability atAccenture, and we work across thetechnical delivery lifecycleimplementing most of the majorpayments software platforms: ACI,SAP PE, iFlex, Clear2Pay,Tietonator and Fundtech.

We structure our engagement teamswith the optimal mix of functional,technical / product experts andindustry specialists to formulatesolutions based on market relevantstrategies which incorporateindustry best practice.

Selected Accenture SEPACredentials

Leading Irish Bank

SEPA Business RequirementsGathering - Accenture wereengaged to assist the Bank in thegathering of business requirementsto address the SEPA legislation.The scope of the overall programmespans payment origination,maintenance, validation, extraction,posting, clearing, settlement andreporting. The requirementsgathering served as a part of anoverall organisational programmeto define a business operatingmodel, and to implement thechange through the systemsdevelopment lifecycle. Therequirements address such areas as:

• Payments value limits

• Validity time of mandates

• Settlement of returns

• Timing of returns, rejects,reversals and refusals

• Agency arrangements

• Validation of outgoing remits /mandates

• Mandate storage and de-materialisation

A process was utilised toconceptualise current state, to applydeep knowledge of the SEPArulebooks and implementationguide (versions 2.2), and toultimately deliver the complete setof business requirements, andassociated traceability matrix, toenable inward and outward bulkSCT and SDD functionality.

Leading Global FinancialInstitution

This top 10 European paymentsprocessor, operating on a globalscale, faced a number of challengesin creating a holistic SEPAresponse, including a disparatetechnical environments due to anumber of mergers. Theirobjectives, included:

• Creation of a European corepayments solutions for bothSEPA Credit Transfer and SEPADirect Debit

• Convergence of core paymentsarchitecture to realize a centralsolution for multiple productlines

• Distributed development inoffshore delivery centres

Accenture partnered with the tobring rigor and expertise to theprogramme in various areas:

• Developed a solution blueprintand business requirements,including an architecture designfocusing on systems integrationand performing requirementsmanagement

• Leveraged expertise in complexproject management byexecuting a programmeplanning exercise

• Led the programmemanagement, includingcoaching the client's ownproject managers throughout theentire cycle of the project, andsupporting build activities bydriving the issue managementprocess

• Created test scenarios and testcases

• Aligned proceses andtechnology across the EuropeanIT landscape and business units.

Achieved the the on-schedulecompletion of a programme plan torealise a central core paymentssolution, and compliance for theSEPA Credit Transfer deadline inJanuary 2008.

Large Pan-European Bank

As a payments insourcer this largeGerman bank processes for otherbanks - totalling 5.3 billiontransactions annually. Volumes ofpayments handled account forapproximately 16% of all domesticpayments in Germany

Key challenges facing the Bankincluded:

• Payment volumes from otherBanks under cost pressure dueto EU regulation on SingleEuropean Payments Area

• Reaching the goal of increasedROI through insourcing

• Meeting ambitious timeline forSEPA introduction in Q1/2008

Accenture has played a key role inthe development of this missioncritical component of the bank'stechnical infrastructure. Ongoingenhancement and implementationof the SAP Payment Enginesolution has necessitated projectmanagement expertise, withparticular emphasis on deepexpertise in relation the SEPArulebooks and implementationguide as they relate toimplementing SCT and SDDfunctionality. The SAP PaymentsEngine solution has aided in thefollowing areas:

• Requirements analysis andspecification based on clientinput

• Architecture / Technical Design,Build and Test of SAP PE

• High-quality implementationadhering to SAP standardguidelines

• Accenture has leveraged itsglobal repository of provenmethodologies, tools and assetsto create a highly detailed andcomplete specification for thePayment Engine solution.

Testing expertise in complexdevelopment scenarios has beenbrought to bear to ensure a robustsolution throughout theimplementation based on SAP PECore Release 2.2, and Accenturehas been asked to make a proposalon further systems integrationservices.

Leading Austrian Bank

A leading financial servicesprovider in Central Europe, andbased in Austria, this bank isCentral Europe's foremost financialservices group providing banking,investment, loans and insuranceservices, and focuses on consumersand small to medium-sizedcompanies. The Group hassubsidiaries in a number of CEEcountries. In 2006 a group wideprogramme (GPI = Group PaymentsInitiative) was established toaddress the Single EuropeanPayments Area at a group level andenhancing the bank's capabilities inthe area of payments (GroupPayments Initiative). Theprogramme started in January 2007with the centralisation of cross-border customer payments usingthe Bank's existing payments

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infrastructure (processing only) andalso took the first steps in creatinga central function.

Accenture was asked to support theBank's Programme Management tomanage this complex multi-siteprogramme, especially in the areasof:

• Business case forimplementation of a processinghub for cross-border customerpayments, includingquantification of benefits

• Preparation of paymentsstrategy

• Programme planning

• Establishing programme andproject management structure:status reporting, scopemanagement, issue and changerequest management, meetingfacilitation, collaboration tools,etc.

• Stakeholder management (C-level and below)

The Global Payments Initiative ison time and budget for groupdelivery.

Software Vendor

SAP engaged Accenture to developthe SAP Payments Engine which ispart of SAP's core banking suite.The SAP Payment Engine isdesigned to be the central paymentprocessing hub of a financialinstitution. The functionality ofthe Payment Engine encompassesinput/output formatting, routing,clearing, validation, and repair, forbulk and single message payments.This allows the Payment Engine tocover a wide range of paymentsproducts reaching from highvolume and low value (ACH)

payments to electronic cheque andhigh value low volume(RTGS/Wire) payments. Thedevelopment included requirementsand design iterations, andsignificant testing due to thecomplexity of functionality. Thesoftware is being installed in amajor bank in Germany which isoperating as a paymentstransaction insourcer for two othermajor German banks and ismarketed by SAP to banksworldwide. Accenture continues tomaintain and further enhance thesoftware - we have conductedrequirements gathering, analysis,and design for SDD and SCTfunctionality. The requirementsanalysis, functional and technicaldesign are now complete usingversion 2.2 of the rulebooks, andconstruction and iterative testing ofthe SCT and SDD input/outputformatters and processing rules isprogressing on time.

Accenture SEPA Assets

SEPA Business Requirements

Accenture offers a set of ready-to-use SEPA business requirementsthat have been distilled out of therelevant SEPA documents (namelyEPC Rulebook, EPC ImplementationGuide, PSD) and have beencombined with the experience ofseveral SEPA implementations tocreate an excellent foundation forany SEPA business requirementsphase. The requirements alsoinclude recommendations for thecustomer-to-bank space anddiscuss the subject of currencyconversion for SEPA transactionfrom non-Euro accounts.

SEPA ImplementationSupport Tools

Accenture has developed a set ofimplementation tools ranging fromXML parser performanceassessments, function maps, andSEPA test files to detailed XMLfield mappings. These tools can beused in implementation projects tohelp to avoid common pitfalls andto facilitate technology decisionmaking processes.

Accenture SEPA Test Quick Starter KitAccenture offers a test package toassess SEPA-compliance andoperational readiness. This offeringsaves cost to assess SEPAcompliance, helps identifyopportunities to gain competitiveadvantage as well as ensurescompleteness of the test approachwhen assessing SEPA compliance.The ready-to-use test kit contains atest approach outline, test planincluding resource requirementsand usage, generic and easy tocustomise test cases, generic andeasy to customise test data. We alsoprovide support at various levelsdepending on client requirements.

SAP Payments Engine SEPAAcceleratorThe SAP Payments Engine SEPAAccelerator provides clients with atactical solution to achievecompliance by using existingdomestic systems (namelypayments systems and accountmanagement systems) to interfacingaccount management systems withparts of the Payments Enginefunctionality to send and receiveSEPA payments in parallel withdomestic payment systems. It is acomparatively low risk solution asit leaves existing processesrelatively untouched. Strategic

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flexibility is enhanced as latermigration to the full PaymentsEngine solution is possible once fullimplications of SEPA are known.

Accenture European PaymentsSurveyAccenture commissioned theEuropean Payments Survey tocreate a clear picture of currentposition of payments in Europe andthe forces that will reshape theindustry over the next five years.Its scope encompasses AutomatedClearing Houses (credit transfersand direct debits) and cardspayments (debit card and creditcard). The survey objectivesincluded an examination of thedegree of change planned, theexpected impact of SEPA, and thefuture shape of the industry. Thesurvey also focused on howEurope's banks and paymentsprocessors intend to respond toperceived opportunities and marketchanges.

ConclusionSEPA is catalysing change anddriving innovation! The SEPAprogramme industry-wide willresult in tremendous change forbanks and the wider Europeanpayments industry. Banks initiallyanticipate that the main impact tobe the high cost of compliance.Many banks also predict thecollateral damage from SEPAimplementation will include asubstantial reduction in revenueassociated with transactions feesand float, pressure to reduce thecosts of payments processing, datamanagement challenges due totransparency requirements, andreduced execution times onEuropean cross-border payments.However, on the positive side,banks will have access to an

increased supply of competitivepayment processors (both cards andACH); and the opportunitiesassociated with M & A plays,payments insourcing businessmodels and new pan-Europeancash management propositions tolure corporates from theirtraditional domestic bank.

Next StepsWould you like to investigate theideas in this paper more deeply byidentifying the most appropriateresponse to this changingregulatory environment? If so, thenext step is to gain anunderstanding of the depth andbreadth of our SEPA offering, andto discuss how we might be ofassistance as you navigate theSEPA change. For moreinformation, please contact either:

Julian SkanPartner Banking PracticeAccenture Financial ServicesJulian.Skan@accenture.comTel: +44(0)207 844 5125

Dale FickettSEPA Lead - UK & IrelandAccenture Strategy Consultingdale.s.fickett@accenture.comMobile: +353 87 998 2616

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About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company. Committed todelivering innovation, Accenturecollaborates with its clients to helpthem become high-performancebusinesses and governments. Withdeep industry and business processexpertise, broad global resources and aproven track record, Accenture canmobilize the right people, skills andtechnologies to help clients improvetheir performance. With approximately170,000 people in 49 countries, thecompany generated net revenues ofUS$19.70 billion for the fiscal yearended Aug. 31, 2007. Its home page iswww.accenture.com.