In reality, this is not so much the birth of a new payments area but rather the death-knell of many domestic euro clearing systems across the EU. But there are critical challenges to the conversion and validation of payments data ahead of the single euro payments area (SEPA) deadline of 1 February 2014.
As it stands, payments data held in databases is already riddled with significant errors, making the adoption of pan-European, SEPA-compliant systems look like a mammoth task if they are to be completed in time.
Crucially, the longer adoption is delayed the more it is likely to cost banks and by extension both corporate and retail customers.
As an indicator, the total number of annual transactions in the eurozone during 2010 was 34 billion. Since the start of the migration in 2008, around 25% of the credit transfers have already migrated to SEPA Credit Transfers (SCTs), but very few direct debits, less than 0.5% are now SEPA Direct Debits (SDDs). Conservative estimates suggest that every entry in any given database results in up to 10 payments.
Therefore, assuming problems manage to be corrected at the first attempt it already amounts to a minimum €22bn fix. A staggering figure, based on approximately 12.5% of the 34 billion transactions being faulty and needing attention at a cost of €50 each.
Failed transactions also pose significant costs. For instance, even for medium-sized businesses with around 100,000 customers, the cost of failed transactions could top €600,000. Also factor into that a loss of reputation for institutions, client dissatisfaction and the impact on cash flow – and the full scale of the challenge and impact of delays resulting from late adoption starts to take shape.
The Argument for SEPA Migration
SEPA emerged from the EU’s Lisbon Agenda and set out to improve the efficiency of cross-border and domestic euro payments. As part of the ambitious programme, it was agreed that existing cross-border and domestic payment schemes for credit transfers and direct debits could be replaced and migrated to new mechanisms and instruments.
Success hinges on the adoption of two global standards:
- ISO 20022, for files of payments exchanged between corporates and banks.
- ISO 13616, the International Bank Account Number (IBAN) format.
Migration to SEPA is critically dependent on the simple and effective switch to these new standards together with the Bank Identifier Code (BIC) ISO9362 in the short term and between banks in the long term. The rationale behind it was the standardisation of euro payments by setting common time limits, a reduction in credit risk, all-electronic straight-through processing (STP), and cementing reliability with no differences between national and international payments across the SEPA zone.
At the same time, it helps pave the way for a reduction in paper money in favour of the increased use of relatively cheaper and more efficient electronic transactions. By their very nature, electronic payments (e-payments) also enable authorities to tackle money laundering, and to improve surveillance of organised crime and tax avoidance.
Hurdles for the Banking Industry
Since January 2008, banks have been migrating customers over to the new payment instruments at a varying rate. But by February 2014, all will be obliged to be using SEPA payment mechanisms.
It means banks throughout the SEPA area – and not just those in the eurozone – now need to invest in back-office technology that supports their customers’ migration to SEPA payment instruments.
The introduction of SEPA is expected to increase competition among banks for multinational corporates’ business. For consumers, businesses and public sector organisations alike, SEPA is likely to mean cheaper, more efficient payments when moving euros from one SEPA-zone territory to another.
Multinational businesses and banks have the opportunity to consolidate their payments processing onto common platforms and will benefit from substantial efficiencies and economies of scale created by single-site payment factories.
Since 2003, the European Commission (EC) has insisted on the use of IBAN and BIC to ensure STP for cross-border euro payments and to allow corporates to benefit from regulated pricing. The principle of regulated pricing was underpinned more than a decade ago. But since 2006, the European Payments Council (EPC) has also mandated the use of IBAN and BIC for all euro transactions, so originators of euro payments have been required to get IBANs from customers, suppliers and staff.
The main early adopters are predominantly from large-scale payroll and treasury operations. But it is a process that is often regarded as time-consuming. It also creates the potential for incorrect information to enter the business. Some businesses simply opted to reformat their bank account information in IBAN format without considering the quality of the original bank account data. But if payment information is inaccurate, it can lead to costly repair charges and/or payment rejection.
As SCTs and SDDs have gradually replaced existing cross-border payment schemes, they have naturally imposed a need for national, domestic payments to follow as well.
During the past 20 years, many receiving banks have opted to simply repair faulty domestic transactions – where possible without charge or notification to the originator of the transaction – resulting in increasingly inaccurate data in the business systems used for national payments.
SEPA is unforgiving and gives the receiving bank little opportunity to make the same repairs. During the switch to full SEPA migration, it is clearly a timely opportunity to address the quality of domestic Basic Bank Account Number (BBAN) and IBAN data for corporate business applications.
But due to the haphazard and piecemeal nature of business acquisition and expansion, payments data is often held in numerous, differing formats in multiple systems across an organisation. Most are country-specific, with a few more sophisticated organisations adopting the IBAN as a single standard for the countries that support it.
In order to get the highest quality conversion, validation of raw data as it is received is vital to ensure errors or warnings which may impair the quality of the output IBANs are highlighted as early as possible.
The validation process, undertaken prior to conversion to the IBAN format, flags up problems with input data on everything from incomplete branch and account numbers, defunct branches, merged banks, incorrectly formatted data, inconsistent account information and quirky regional trends like the use of sub-account numbers.
Analysis has broken the errors into three categories: format, integrity and content.
- Format errors relate purely to the technical presentation of the bank account. In many cases a number of different formats might be acceptable in a given country such as different account number lengths used in Germany. Format errors are typically identified first and may prevent further checking being performed.
- Integrity errors relate to invalid check digits or violations of specific rules for a domestic account number.
- Content errors refer to problems which relate solely to the meaning of the data, such as unallocated bank codes.
The most common error relates to unused or transferred bank codes and indicates two types of conditions – data not being kept up to date as branches close, or invalid data supplied at point of capture. This error relates to 7% of records analysed and suggests that there may be significant problems with data currently held in business systems.
Types and rates of error also vary significantly by the country in which the destination account is located. At the high-end are Sweden, Finland and Cyprus demonstrating inherent levels of error in more than two-thirds of accounts – largely because of poor formatting, so-called “data hygiene”, or as a result of good data validation and correction on the payments initiation systems within these countries.
Neglecting these outliers, the rate of error varies up to about one in three.
The IBAN format was designed to make mass storage of bank account data from multiple countries easier – but despite performing better than most domestic and national formats, it is not a fool-proof system. As a result, the IBAN has become the international benchmark that all countries must adopt, which includes an integrity check. This helps identify where IBANs have been mis-transcribed, truncated or wrongly entered – but it cannot identify format, integrity or content errors within the domestic accounts to which they correspond. Simply converting to the IBAN format without validation of the original bank account data therefore also perpetuates the errors.
By comparing the number of erroneous records as a proportion of the total number of records analysed, it becomes clear that around one in eight records already contain one or more errors. This relates to typical error rates reported by originators from domestic payment systems of between 5% and 60%. That suggests domestic schemes are actually operating with a manageable error level – either as a result of manual error correction, or automated processes to tolerate transactions for defunct bank branches. But with SEPA relying on the IBAN data format for account integrity and payment routing, combined with the fact that it is a relatively new standard with differing formats between countries, reported error rates may still increase further.
While banks are good at ensuring customers’ data is in an acceptable format, they do not appear to check the integrity of the information or validate its content against up to date reference data. Separating good transactions from bad as early as possible is vital in order to quickly resolve costly problems. Member States taking steps to ensure early adoption of the IBAN format will clearly be well placed and in good shape to ensure fewer failed transactions among multinational corporates, when the SEPA end date is reached.
Given the number of countries involved in migrating to SEPA, there are other clear advantages to early adoption as financial institutions and corporates also face the added challenge posed by a multi-state, multi-speed roll-out. Among the early adopter countries are Finland, Italy and Luxembourg.
Making plans now to convert will reduce the risk of failed payments and noncompliance. An end-to-end project could take at least six months to deliver, so businesses should make plans now. It is also worth bearing in mind that the payments industry only has limited resources to help migration – so the 2014 deadline is now time-critical.
The End-date is Quickly Approaching
The EC’s announcement on the SEPA end date was confirmed by the European Council at the beginning of March 2012. It was also made regardless of the on-going preoccupation with the challenges of the eurozone, sovereign debt in some member states and the impact of the bailouts.
Despite concerns about their economic situations, which has seen borrowing costs rise, it is clear the appetite for political and economic structures that has bound the 17-nation bloc together is still in place and unlikely to completely unravel. The harmonisation of payments brought in by SEPA is a significant achievement and is unlikely to be unwound purely because some of the participants cannot fit within the strictures of the currency system.
Therefore the demand and common political willpower for bank systems to be improved to enable end-to-end STP, originated by files submitted, or by e-payment, electronic invoicing (e-invoicing) and mobile payments (m-payments) across borders is as strong, pressing and critical as it was when the EU’s Lisbon Agenda was first drafted more than 10 years ago. Europe is less competitive today and needs the standardisation and efficiency that SEPA can deliver.
Early and rapid adoption of SEPA also reflects a broader global sentiment towards strengthening financial structures by ‘future-proofing’ and stress-testing best in class systems. For example, the European Banking Authority (EBA) has now conducted detailed tests on around 100 EU banks in 23 countries, representing nearly 70% of the continent’s asset base.
Following formal ratification of the end date for the migration and the beginning of full SEPA, the clock is now ticking. But, crucially, embracing SEPA offers a timely opportunity to review, improve and cut the costs of payment processes – on a pan-European scale.
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