Berndt: Commoditization of payments in Europe with SEPA

To answer whether regulations sweeping the financial services industry will broadly increase or lower transaction fees on the part of corporates is a difficult task. Some initiatives, such as FAST in Singapore that guarantees near instant settlement of payments, promise benefits to corporates. In Europe, too, efforts to bring inner-European payments in line with purely domestic ones under the Single Euro Payments Area (SEPA) initiative, have translated into savings for many corporates.

Carole Berndt, global head of transaction services, international banking, at the Royal Bank of Scotland, even observes a “commoditization of payments in Europe with the introduction of SEPA”, leading to price compression on the cash management side.

At the same time, some fear that efforts to stabilize the banking sector post 2007-2008 will entail unforeseen consequences that ultimately raise prices for end users, including corporate clients. Large global banks with networks spanning all major (and many minor) economies especially face challenges in keeping up their infrastructure everywhere. “For institutions with an international network like RBS, it is not an issue of complying with just one regulatory regime,” says Berndt, “but multiplied exponentially by geography and function.”

“I am not sure whether it will be possible for everyone to sustain everything, everywhere,” she adds and highlights the need for more banking collaboration.

If and when intermediary banks are introduced in the financial supply chain of a cross-border payment, costs likely increase, though. Coupled with the facts that correspondent banking is under intense scrutiny by regulators and is directly associated with billions in fines this year alone, international payments to high-risk geographies will likely be subject to higher premiums.

And then there is Basel III, which needs careful balancing of information to assess the real impact on transaction fees.

One way in which Basel III may increase payment transaction fees has to do with the net stable funding ratio (NSFR). It used to be that banks hardly paid for correspondent bank payment fees (interbank), because the float on their nostro balances held at other banks was sufficiently attractive. NSFR stands to make those nostro balances less attractive as it is likely to disallow banks to count them towards their coverage ratios.

This may induce correspondent banks to start charging their bank customers more for payments, which will ultimately be passed down to corporate and retail end users.

While Basel III undoubtedly will have an impact on transaction costs, treasurers need to be careful to distinguish the impact of the regulation on their banks and opportunistic relationship managers using it for their own agenda.