compliance: Planning the journey
The Single Euro Payments Area () end date regulation, approved by the European Union (EU) Parliament on 14 February 2012 and ratified by the Council on 28 February 2012, has eliminated any possibility for impacted institutions to take a 'wait and see' approach to migration.
Yet there is ample evidence that many have no clear strategy or plan in place to comply with the regulation, which sets 1 February 2014 as the end date for the migration of euro retail credit transfers and euro direct debits to instruments. A 2011 Capco report, for example, suggested that some two-thirds of financial institutions were in this position. Large players may be ready, but many medium-sized and small institutions have kept a watching brief, and are now faced with a short deadline, made more challenging by budget constraints in the current economic climate.
There is no doubt that the transition will take place, so banks, businesses, public administrations and clearing systems urgently need to build a plan to achieve migration - and stick to it. Less than twenty-four months to move to full Credit Transfer () and Direct Debit () usage represents a serious challenge for the industry, with even fully operational institutions likely to need to refine and scale up their processes and operations in order to meet their obligations.
Though on the one hand the deadline is a challenge, it is also an opportunity - to redirect flows through more efficient channels, for example. Institutions also need to look at compliance in light of other impending changes such as the introduction of TARGET2-Securities (T2S), to ensure that where possible they make investment decisions with the potential for reuse across projects and to underpin multiple strategic initiatives.
In short, all impacted institutions need a clear view of where they are starting, where they are heading and what they need to do to get them there in time to meet the deadline. They must establish their exposure to compliance and determine in which areas compliance has a clear business justification for them, considering the impact of other industry changes and being sure to capitalise on the opportunities compliance presents.
Based on this assessment, impacted institutions must build and adhere to a migration roadmap to help them achieve their goals in relation to .
Establishing the 'as is' picture
When asked, all players will say they have a complete overview of what they clear, via which channels. Our experience suggests that in reality the picture they have can be generally accurate, but nonetheless incomplete or outdated. Collecting and cross-checking this data can be cumbersome and resource and time-consuming. The challenge is often most acute in larger institutions with remote operation centres, complex hierarchies and silo structures.
Establishing a clear picture is critical for planning for migration, and tapping into third-party tools to assist in creating a complete overview of existing activities channel by channel and transaction type by transaction type is a very valid approach.
Creating a ' checklist'
It is important that migration plans cater for all aspects of compliance. Institutions need to determine the instruments that must migrate and the best channels to use. The regulation is far-reaching - extending to corporate acquisition channels and banks' bilateral relationships with their peers.
A ' checklist' should reflect a firm's complete workflows and obligations, encompassing volumes and the strategic importance of payment instruments dealt with, and will help to determine next steps.
Ensuring strategic alignment
Meeting the 2014 deadline will be a challenge for almost all players, and compliance should only be undertaken where strategically justified. The deadline also has positive implications however: it represents a timely opportunity for institutions to take a fresh look at their flows and whether there are ways in which to streamline their infrastructures. It is also essential to view compliance in the context of the other - considerable - market changes under way.
Firms should consider the following questions:
- Payments clearing is a game of scale. Is your clearing business big enough to allow for further expansion without heavy reinvestment?
- Does your clearing strategy align with the evolving environment and can you therefore devote sufficient resources to achieve compliance? Or are there activities you should stop doing or do differently? There could be a need to consider more creative solutions, including outsourcing all or part of your clearing activity.
- Are there opportunities to channel your flows through more efficient channels? Could you capitalise on the compliance deadline to renegotiate your deals with clearers? Are there commercial opportunities you could capitalise on as foreign banks re-evaluate their approaches and look to concentrate euro correspondent relationships?
- Could your approach to compliance be impacted by other changes on the horizon, whether the advent of T2S or the plethora of new regulation being introduced? Are there opportunities to capitalise on investments for to help meet other obligations?
- What external expertise do you need to fill any knowledge and skills gaps in your organisation during the transition? Where could reference data solutions help?
SWIFT's ' heatmap', for example, helps to visualise by payment instrument and per business line the mandatory steps to be taken for migration, and therefore supports the decision-making process. The heatmap makes it easier to see the costs of each sub-project and provides a clear view on the work to be done, for validation against an institution's clearing strategy.
Developing a roadmap
Each institution needs to decide which aspects of migration are strategically and economically feasible in light of its clearing strategy. It is important to be realistic and not to overstretch in terms of commitment, and also to spot the opportunities and capitalise on them where possible.
A roadmap adds an extra dimension to the heatmap. It should reflect in-house projects alongside the assessment of outsourcing opportunities and allow for close follow-up of projects, in order to make adjustments based on regular 'mark to market' of next steps against an evolving landscape.
The steps set out above provide a high level overview of what institutions need to consider when making decisions about migration. They are definitely valid for institutions that have not yet decided their strategies. They also serve as a useful extra guide for institutions that have already started their projects.
When budgets are tight and to make sure these important decisions are taken based on reliable inputs, it is important for institutions to make use of the right partners when assessing their current situations and formulating their plans, both strategic and operational. This will help to ensure their migration roadmaps reflect a realistic ambition for their future activities in a environment - and that they are capitalising on the opportunities compliance creates and exploiting reuse of standardised solutions where possible.
Co-authored by Gottfried Leibbrandt, Head of Marketing SWIFT and Harry Newman, Head of Market Initiatives, EMEA.
Related articles in this issue:
Early Movers Confirm: ISO 20022 Message Standards Generate Tangible Benefits. A guide for payment service users on the impact of provisions in the SEPA Regulation regarding the use of the ISO 20022 message standards
Related articles in previous issues:
Newsletter articles published in the section 'SEPA Case Studies' highlighting successful migration projects of bank customers
Newsletter articles published in the section 'Focus: SEPA Migration'
Newsletter articles published in the section 'Focus: ISO 20022 in the SEPA Context'
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