The acronym single euro payments area (SEPA) has been repeated so often lately that in the minds of many treasurers and cash managers it has become a symbol of mandatory evil, conjuring images of system upgrades and complicated changes in cash management processes, without guaranteed benefits. As corporations are committing resources into SEPA compatibility, they naturally need assurance that the banking community will provide corresponding services, according to the agreed schedules. In the second section of the article, Nordea shares some thoughts on this from the bank’s point of view.
SEPA as a Key Factor of Cash Management Strategy: Case Study YIT Group
Many corporates drag their feet about implementing compatibility with SEPA requirements in their system environments, with the excuse that it brings no added value – rather it is seen as a regulatory burden which is not well supported by banks.
These corporates have probably failed to understand the essence of the SEPA concept and the potential that it offers. After all, the changes required – mainly file and data format changes – are merely technical details within the big picture. By approaching SEPA from the corporate’s own strategic objectives and by designing its implementation to support the master plan of cash management, it can actually help solve several challenges that you may have identified when planning the strategy.
At YIT Group, a Finland-based multinational construction and building systems company, the introduction of SEPA compatibility into systems and processes was carried out as a component of a carefully planned cash management development programme. Realising that mandatory changes where fundamentally system changes, other already planned improvements were also designed into the same project, to offer significant added value.
Benefits Derived from SEPA Characteristics
Here are some of the generic benefits specifically enabled by the SEPA factor, as identified at YIT:
- The unification of data formats across multiple countries opens up possibilities to centralise services onto fewer parallel systems.
- The technical harmonisation of systems leads to easier process harmonisation.
- Process harmonisation can be turned into cost savings.
- As the SEPA requirements are equal for all involved countries, the work and lessons learned can be re-used for efficient consecutive implementations.
The above list of benefits are a dream come true for many treasurers.
Consistent Interfaces Towards Banks
In addition to benefits related to processes and tools, SEPA opens up a whole new world of opportunities in the corporate’s cash management strategy towards banks. As all banks are required to provide services which are based on technically equal infrastructure and interfaces, the overall value of the co-operation will manifest itself mainly in terms of service quality. Things like geographical coverage, reliability, and in general the quality of relationship management and support provided to the customer’s business will play much bigger roles than mere pricing.
After having invested in streamlining and automating cash management processes, the customer expects a matching service quality. Manual investigation of incidents and issues becomes even more costly than before, as the organisation will no longer be tuned for executing basic tasks using manual labour.
Visibility and Predictability
Furthermore, YIT Group was specifically interested in leveraging the improved visibility into cash movement. Being able to know exactly how long it takes for a transaction to complete end-to-end opens up an opportunity to create more reliable liquidity forecasts and thus improve the overall result of cash management. The group looks forward to quantifying this benefit when SEPA and the other related changes will have been in full utilisation for a longer period.
Putting the Change into Practice
The technical implementation accounts for only half of the end result; changing technical platforms without the re-design and careful roll-out of processes can place the working motivation of operative staff at risk. YIT Group identified several features of the SEPA related changes that would dramatically affect parts of the cash management process.
Arguably the biggest change is the new account statement format which gives way to a profoundly different reconciliation process. The new account statement can have the following impact:
- The information content of the account statement increases.
- Regardless of country or bank, the reference, invoice number and/or customer identification data on payments will be delivered to the recipient.
- The recipient will be able to increase the level of automation in reconciliation.
The efficiencies that can be derived from these characteristics are enormous for the corporate. Customers will therefore set their expectations to banks and especially clearing operators, so as to ensure that this potential will not be lost due to information being dropped out during any step of the payment processing. Unanimous adoption of these standards is a must, in order for the international corporate community to harvest the opportunity they bring.
A Unified Bank Approach
For Nordea, uncertainty around the SEPA realisation and the potential negative affect this could have on bank customers has been a major factor in our plans and decisions to invest in the changes. Nordea view SEPA as bringing benefits to our customers through more efficient European trade and cash management. The bank strongly believes that not supporting SEPA would essentially work against its customer interests. With this position it has been logical to work for and participate actively in the creation of the SEPA rules and standards on the European forums. Likewise, the sooner the parallel national legacy infrastructures can be out-placed, the bigger the savings in the project from the operational perspective. Nordea has found good support in Finland from the whole banking community and the other stakeholders for these objectives.
Speeding up the Migration
Nordea and the Finnish financial community have driven the adoption of global practices and standards, including the customer-to-bank space. Finland’s national migration end-date for credit transfers was set with ambition for the end of October 2011. This date is just around the corner, and at present the share of SEPA transactions in Finland is approaching 80%.
More generally in the European banking sector uncertainty has been used as an excuse not to promote SEPA and finalise the product offerings. For many banks, SEPA seems to be more a threat than an opportunity, due to the fact that it opens up the competition for corporate customers’ cash management business. Obviously this hesitation cannot work in favour of the bank or its customer in the long run.
Uncertainty Fosters Hesitation
Nordea is working to remove uncertainty around the corporate SEPA projects and to provide clarity to the requirements. The migration end-date regulation, which includes adoption of many components enabling increased efficiency for customer cash management processes is a welcome development.
Efficiency gains include:
- The end-to-end transparency of the payment process.
- The one day execution time (created in the PSD).
- The inclusion of the usage of ISO 20022 standard for the customer.
- The regulation text is not yet final, but it is likely to include an obligation for the bank to offer ISO standard at least when a customer requests it.
For further innovation and design of a more effective payment infrastructure, customers should pay attention to the way the common user voice is channelled to the pan-European design-table. So far it has been challenging to identify whose message best reflects the overall demand in SEPA. Requirements set by the corporate community should and shall be heard when deciding on the focus areas for the continued development of format and process standards. Here again, non-clarity leaves room for hesitation, uncertainty and challenges to the decision-making on investments towards future. This is equally relevant to corporate processes and to payment infrastructure.
A Collective Effort Leads to Full Benefits
Early experience regarding SEPA has proven that instead of being a mere technical requirement, it can pave the way for enormous efficiencies in corporate processes related payments and reconciliation. Now that the first national migration deadlines are approaching, the importance of a unanimous approach from the banking community has been highlighted. If customers are convinced of the end-to-end interoperability, they are much more likely to make the effort to fully harvest the process streamlining opportunity.
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