Trade financiers anticipate fewer letters of credit (L/Cs) when cross-border payments between European countries that ditched domestic currencies in favour of the euro effectively become domestic payments under the Single Euro Payments Area (SEPA).

The EU push for the SEPA makes sense from a policy perspective, but trade financiers are uncertain about its impact, especially at a time when new technologies are making a profound impact on Europe's payments infrastructure.

Central bank position

As the European Central Bank (ECB) puts it, the payments infrastructure of each euro area country was developed originally in order to serve the needs of the individual country. The introduction of the single currency created the need for a euro area-wide integrated infrastructure.

"National borders no longer matter, and there is no difference between a 'domestic' and a 'cross-border' euro payment," the bank says.

The bank also points out that cross-border retail payments are more costly than national ones, and "the intersection between the national payment systems is inefficient and creates high costs for the banks."

Beyond L/Cs

To address these issues - not all of which are confined to the SEPA - big players are lining up to provide super efficient technology-rich payment infrastructures. One of these is SWIFT (Society for Worldwide Interbank Financial Telecommunications) with its trade services utility (TSU).

Last year's SIBOS, the annual conference staged by SWIFT, focused on SEPA and discussed its relation to TSU. Speakers at the conference in Copenhagen discussed how the TSU could help banks secure a key role in the supply chain and how it would refine the products and services offered by banks.

"Traditionally we have just looked at letters of credit, but there is much more," head of trade services for EMEA at JPMorgan Chase, Jeremy Shaw, told delegates.

Consolidation

The introduction of SEPA - probably in 2008 - is expected to crimp the profitability of payments products, and it is anticipated that only be a handful of transaction managers such as SWIFT will emerge.

Customers and bigger banks will benefit as the expected slew of faster, more efficient payment instruments come on stream, but it will force competition amongst banks. "Our strategy is to be one of the five providers. We expect to be an aggregator, rather than the aggregated," global head of financial institutions at ING Bank, Eric Hollanders told the Asian Banker recently.

The same journal also anticipated decreases in pricing and profit as a result of the initiative. "L/C volumes are also bound to suffer," it said.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.