SEPA: The Market ResponseManaging Change in the European Marketplace

Jack JaredManaging DirectorFinancial Institutions & Public Sector– Europe, Middle East & Africa

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Citi – A Key Player in Europe

Non-Presence Country

Citi Presence Country

3

2

4

6

8

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1982 1992 2002

US

EU

1982 2002

US 4.7 9.1

EU 3.7 4.9

Italy 3.1 6.1

NV 4.8 6.0

UK 4.2 5.3

Belgium 4.9 5.1

Spain 2.9 5.1

France 3.4 4.6

Germany 4.0 4.2

Scandinavia 2.3 3.2

European Banking – The Need for Change

Financial services sector value added as % of GDP

Financial services have not grown faster than GDP in Europe

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Environmental drivers of the banking industry

Geopolitical volatility Investor confidence Increased

competition Global participation Greater client

mobility Regulation

– SEPA

– MiFID

– Basel II

Unsteady economic growth

Protect shareholder value

Margin erosion Operating cost

constraints Customer loyalty Increasing IT burden Increased Competition Capital efficiency

Market Drivers Challenges Impact

Need to respond to regulator pressure

Reduction of discretionary expense

Need for enhanced product set

Global distribution

Market drivers increase the challenges faced by European banks

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Regulation: The Catalyst for Change

Efficiency

CompetitionHarmonisation

Payment Services Directive

TARGET2

FATF SR VII

Regulatory Pressure Across the Product LinesRegulatio

n 2560/2001

Code of Conduct

MiFID

TARGET2 Securities

Basel II

SEPA

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Market Forces Go Beyond Just Regulation…..

• Paper to e-channels• Email: pc to blackberry• Mobile phones: SMS to GPRS• Info security & integrity

• Operating efficiency• Globalisation of trade• Technology infrastructure• Regulatory compliance

• Immediacy, mobility• Convenience, simplicity• Visibility and control• Value – ‘more for less’

• Common language• Transparency• Governance• Safety, robustness

Banks & Infrastructuresare UNDER PRESSURE

to change

Consumer Expectations

Regulatory Impetus

Corporate

Technology Innovation

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SEPA Defined

“SEPA will be the area where citizens, companies and other

economic actors will be able to make and receive payments in euro

within Europe, whether between or within national boundaries under

the same basic conditions, rights and obligations, regardless of their

location.”

(Source: European Payments Council Roadmap, December 2004)

“SEPA will be the area where citizens, companies and other

economic actors will be able to make and receive payments in euro

within Europe, whether between or within national boundaries under

the same basic conditions, rights and obligations, regardless of their

location.”

(Source: European Payments Council Roadmap, December 2004)

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SEPA: What Will It Deliver?

Eliminate the Concept of Cross Border Payments

• Enable free flow of capital across national borders through:

– Standard payment products– Regional payment infrastructures– Single Legal Framework (Payment Services Directive)

– Harmonised central bank reporting– Standards like BIC & IBAN– New messaging standards (XML)

• Make “Single Service Point” a reality

• Reduce cost to end-users of moving capital

• Facilitate greater integration of the single European marketplace

– Goods, services, capital & citizens

– Efficient capital flows as a prerequisite for efficient flows of good, services & citizens

Fast Facts

Dedicated Customer Service Team ensures timely information flow to each DWP User.

SEPA Facts

• SEPA includes the 27 EU Member States, the 3 European Economic Area states (Iceland, Norway & Liechtenstein) and Switzerland.

• The European Payments Council was set up as the body representing the European banking industry and the channel between the industry and the Commission. The EPC is tasked with delivering the SEPA vision.

• The EPC was initially mandated to deliver full SEPA migration by 2010.

• The Commission are now aiming for “…a critical mass of volumes to be migrated by 2010 such that SEPA will be irreversible.”

“Payments are the oil in the wheels of the Internal Market. It is of major importance that those wheels run smoothly and safely. (European Commission)

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Challenges Along the Way

Current Inefficiencies and End Goal are Clear

TODAY

“Co-opetition” as the key to progress in Europe

FUTURE

• High Cost

• Inefficient Market

• Many Infrastructures

• Different Products

• Lack of Competition

• Limited Bank/User Choice

• Lower Cost

• Highly Efficient

• Common Infrastructure

• Simplified Products

• Increased Competition

• Choice for banks and customers

SEPA

UNCERTAINTY

Reachability

AdoptionTransition Period

CBR

Compliance

Interchange

Adherence

PSD

Public Sector

Mandates

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• Pressure on revenues

• Investment in new products

• Investment in market infrastructure

• Identify and focus on core activities

• Longer term opportunities

Fast Facts

Dedicated Customer Service Team ensures timely information flow to each DWP User.

SEPA Facts

• Quote from European Bank, “50% of our annual technology budget will be required to support SEPA initiatives, but the SEPA project will reduce our revenues by 30%”.

• SEPA attempts to remove national borders from a payments perspective, but only 2% of transactions within the EU cross a national border – 98% are true domestic transactions through established, efficient local clearing systems

Implications

- Short-term impact: reduced revenues and higher investment costs- Future opportunity for lower processing costs and promotion of value-add services- Easier access to new markets and segments through harmonised infrastructure- “If all banks can become as efficient as the best institutions, margins could be

enhanced by €9billion” (McKinsey)

- SEPA: Huge Opportunity for those banks that get it right…?

The Impact on European Banks

European Banks need to reconsider payments strategy

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SEPA: Compliance vs. Opportunity

COMPLIANCE

OPPORTUNITY

Meet Requirements Offer Instruments Meet Industry Standards React to Client Needs

No Differentiation Revenue Attrition Cost of Compliance Market Share Risk

Value Add Services Leverage Platforms Target Financial Value Chain Lead Clients into SEPA Engage Industry

Differentiate as Market Leader Maintain Premium Services & Pricing Grow Revenue & Expand Market Share Payback for Cost of ComplianceC

usto

mer

Val

ue C

hain

Cus

tom

er V

alue

Cha

in

Profitability & Market S

hare

SMALL BANKS

MEDIUM BANKS

“TOP 20” BANKS

COMPETITIVE LANDSCAPE

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SEPA: Keep the Real Goal in Sight

• Yes, SEPA is about market change– New Products, Services, Capabilities and Infrastructures

• SEPA is also about a shift in business models and new opportunities– Integrate SEPA products effectively into existing banking infrastructure

– Gain simplified access to customers in multiple markets through a common set of products and standards

– Leverage standardisation offered by SEPA to maximise “business STP”

– Achieve greater centralisation, standardisation & efficiency

– Target new markets/segments to delivery business growth and reduce unit cost

– Build new operating model to meet your needs in the future European marketplace

SEPA

Distraction / Mandatory regulatory change?

Opportunity for growth and repositioning?

or

Core to the Future of Payments Business

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Thoughts on Key Success Factors

Learning points from SEPA so far….

• Continue to build on successes to date

– The start of SEPA is not the end!

• Collaboration across the industry – Find common solutions to common problems– No small achievement gaining agreement between 9000+ banks

• Keep the users engaged – what are they looking for from SEPA?– Where is the added value and the business case

• Use regulatory intervention as the enabler – It can be a catalyst, not always risk / threat / barrier– Let’s engage the regulators – our goals are aligned!

• Compliance is essential – “compliance only” is a risk

• Keep the goal in sight– Not just about payments/collections. – About a shift in business model and increasing the economic attractiveness of the region

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