To be or not to be? And if so, when? These are just some of the key questions facing European corporates, banks and payment service providers over the long-mooted migration to the harmonised single euro payments area (SEPA).
With an end date at last firmly established, after nigh-on a decade of haggling, the clock towards completion is finally ticking. Yet nearly one in three corporates still have not started to migrate and uptake has been disappointingly slow. According to the European Payments Council (EPC) figures on the European Central Bank (ECB) website in November, the adoption rate of SEPA credit transfers (SCTs) currently stands at around 31%, with SEPA direct debits (SDDs) at 2.1%.
Given these latest figures, meeting the migration deadline of 1 February 2014 is certainly not going to be easy. It’s clear that not everyone will be compliant in time. The challenges the industry and corporates face are significant and there are less than 270 working days to go. Corporates need to roll up their sleeves and act now. It seems to be the smaller organisations, which only trade in their home markets, who will struggle the most with the deadline. On the other hand, the majority of multinational corporate treasuries already have SEPA readiness programmes in place and view SEPA as a priority because it supports their core drivers of cash visibility, risk reduction and cost savings.
A Shock to the System
Concerns were again thrown into sharp relief when Logica (now CGI) conducted SEPA research with more than 50 eurozone corporates. According to the ‘EuroFinance’ survey published on 15 September 2011 on behalf of Logica, 25% of those surveyed believed SEPA to ‘carry no relevance to them’. A more recent 2013 gtnews Payments Survey carried out late last year and published this year, also shows that 37% of its corporate treasury readers’ questioned do not yet have SEPA services in place.
Companies must wake up to the consequences of failing to act. It’s still not clear whether there will be any penalties for late adoption. However, without implementing the right solution, companies will be the ones with mud of their faces. They will struggle to collect euros by direct debit, which, in turn, will obviously have an impact on cash flow. There is also the danger that some banks will charge penalties for failed collections, or for reworking collections, which will hit margins.
Corporates also risk leaving their competitors to gain an edge and subsequently increased market share through the benefits of SEPA, which is set to reduce the cost of payments over time and reaching new customers across the expanded ‘domestic’ SEPA market which is now pretty much all of Europe.
There are signs that the European Parliament’s establishment of an end date has provided a jolt to the system. While it would be an overstatement to say that a pervasive panic has set in across the corporate treasury landscape, there is growing realisation that time is running out. This has already prompted an increase in competition for SEPA resources among businesses, banks and IT companies. In the months ahead, IT players could have a considerable part to play in ensuring that corporates have all the tools necessary to make the leap; many treasuries will be relying on them to achieve compliance.
The Mandate Challenge
As the statistics indicate, SEPA Direct Debits (SDD) represent the greatest headache for organisations across the board. Based on the creditor-driven mandate flow (CMF), by which the creditor is the biller, the corporate replaces the bank in terms of holding and managing the direct debit mandate, presenting a raft of new responsibilities.
Most corporates don’t typically have the processes and systems in place to support the CMF. There is a lot they need to contemplate; how to upload mandate-related information, and assigning a unique mandate reference and creditor ID. If a treasury does not have this information in an electronic format, then they should consider the likes of a scanning and Optical Character Recognition (OCR) software service, otherwise you need to key them in manually which is obviously time-consuming.
Then there is the use of Bank Identifier Codes (BIC) and International Bank Account Numbers (IBAN). To get hold of these, a corporate might decide to contact counterparties directly or use a conversion service. This is a key area because if you have poor quality data it will mean errors and failed payments. The SEPA schemes also have different timings for collections, you need to distinguish between first, one-off and recurring, and factor in these new timelines to your business processes and systems.
Consequently, expert IT service providers have risen to the fore of late in assisting companies with their SEPA programmes. When evaluating providers, corporates should consider strength and depth of SEPA expertise, including local variations, as well as having a complete suite of service offerings.
More than Technology
SEPA is more than a technical challenge and IT alone won’t completely facilitate the migration of payment systems to SEPA compliance. For corporates looking to build or deploy such solutions in-house, there firstly needs to be a greater appreciation of the intricacies of SEPA and its ramifications on payment and business processes. Corporates must not underestimate the need for SEPA expertise and the impact SEPA can have on business processes. SEPA’s reach extends across the entire business including functions such as treasury, finance, IT, payroll and legal.
For large corporates looking at SEPA, it is much more than a mere compliance issue. It needs to be approached strategically. Therefore, it really requires someone such as a CFO with seniority, authority and vision to challenge some of the cultural issues and internal barriers, and drive through change.
Good Data Hygiene: Now or Never
For large corporates in particular, ensuring data quality will be critical for a tidy and successful SEPA migration. Recent research from Experian points to approximately 7-10% of customer account data containing errors. Many firms may not even be aware of this problem as often banks repair data on behalf of the corporates free of charge. When SEPA comes to fruition, it’s likely that many banks will start to charge for repairing these ‘dirty’ transactions as they will not have low-cost automated methods of fixing such payments across the SEPA region.
In order to avoid being taken to the cleaners with additional costs for inaccurate data and the risk of failed payments, larger corporates must adopt data hygiene best practice, which includes considering the use of specialist BIC and IBAN validation services to maximise straight through processing (STP) rates and reap the benefits of SEPA.
Given there is only a year left until the SEPA end date, there simply isn’t enough time for companies to embark on complex in-house IT projects in preparation for the SEPA Regulation. Using outsourced services is now the only realistic option for many corporates that want to be certain of SEPA compliance. This approach will buy valuable time to allow corporates to revisit their medium-term SEPA technology strategy, without being locked in, opening up the possibilities of greater efficiencies later.
Note: Extracts of this article originally appeared on Financial Director Europe’s website.
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