After years of discussions, compromises and hesitation, the end date for the single euro payments area (SEPA) is fast approaching. Set for 1 February 2014, it marks the deadline by which domestic payment instruments within the area must be migrated to SEPA-compliant standards. After this date, banks will no longer transfer non-compliant payments to clearing houses, and businesses that wish to make euro payments within the 27 countries that make up the SEPA zone will be required to use the SEPA-compliant format.
Yet, despite years of preparation, key stakeholders in the European and global payment industry seem reluctant to get on board. In some regards, such slow uptake is understandable. In the minds of many SEPA is regarded as a banking industry project only, with little effect or benefit for corporates. Furthermore, many complex logistics need to be addressed by those companies looking to capitalise on the cost savings that SEPA is designed to create. For others, SEPA is simply seen as another layer of regulation, meant to be addressed if and only when there is no other choice.
Undoubtedly, corporates that choose to treat the SEPA end date as optional or requiring little attention may find themselves facing a number of risks better avoided or diminished. However, corporates will also benefit from SEPA for a number of reasons, including increased clarity and efficiency in payments, the ability to simplify liquidity and cash management and ensure that remittance information is accurately transmitted and received. In addition, a standardised payment structure will provide a new level of competition by banks for corporates’ business, especially if the level of payment efficiency is seen as interchangeable among banking institutions.
However, in order to reap these benefits corporates must first view the 2014 end date as an opportunity and not a burden by using SEPA compliance as a springboard to help control costs, improve transparency and boost efficiency. At the same time, a host of pitfalls must be avoided and a clear strategy put into place to meet or exceed the requirements.
A New Payments Reality
Officially known as the European Commission’s (EC) regulation setting requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924/2009, the SEPA end date regulation finalises a range of payment mandates, including converting Basic Bank Account Numbers (BBANs) to International Bank Account Numbers (IBANs), the requirement of SWIFT/Bank Identifier Codes (BICs) and the need for ISO 20022 message formats, to name but a few.
Designed as a system to move money as cheaply, reliably and quickly from one corner of the EU to another as easily as within most member states, SEPA standardises all next day euro payments around a single, all-electronic, straight-through processing (STP) system. To accomplish this, SEPA essentially decommissions the 17 existing national payment systems and creates a single, European-wide automated clearing house (ACH) system for euro transfers.
To date, corporate embrace of SEPA is sluggish at best. Even many large multinational companies (MNCs) such as telecoms, financial service firms or retailers, which could best be expected to benefit, have failed to launch effective SEPA compliance programmes. According to the European Payments Council (EPC), as of November 2011 the share of SEPA Credit Transfers (SCTs) as a percentage of the total volume of credit transfers generated by bank customers amounted to 22.6% in the euro area, while the share of direct debits amounted to only 0.16%.*
Nevertheless, whatever reluctance or scepticism exists regarding the value or importance of SEPA compliance among payment originators, the fact remains that the SEPA deadline ensures corporates can no longer ignore the necessary compliance requirements. Instead, they should act now to understand the many opportunities that SEPA provides, creating a strategy for effective migration and ensuring their payments processes operate successfully well before the deadline.
The Costs of Inefficiency
In order to successfully meet the challenges of the upcoming end date, as well as to secure the promised efficiencies and cost savings, corporates generating payment instructions must meet a number of SEPA-related requirements, including:
- Validating the structure of an IBAN to verify a valid length, bank code, IBAN and legacy account number check digits.
- Converting customer-supplied ISO country codes or country name, bank branch codes and account numbers into properly-formatted IBANs with valid IBAN check digits.
- Providing the connected SWIFT/BICs for the converted IBANs to create the SWIFT MT103+ message for efficient payment STP.
- Effectively meet ISO 20022 messaging standards to exchange remittance data between banks.
For SEPA zone credit transfers, IBANs and BICs will be the only acceptable beneficiary customer account identifier and bank routing designations. Consequently, in their absence banks can charge repair fees or additional service fees to process incorrect payments. More importantly, any legacy systems in use today for accounts payable (A/P), accounts receivable (A/R), tax or payroll transactions will either no longer work or prove unacceptably inefficient.
In addition, if banks are unable to process non-compliant payments via the SEPA channel, corporations could miss payment dates and potentially incur higherrates. As a result, corporations will be forced to either pay a premium to make payments, require manual intervention or accept a higher level of payment errors.
Taking Action for Compliance Success
Fortunately, on the other side of careful preparation lies a host of benefits for corporates in becoming SEPA-compliant. Beyond simply being able to ensure remittance information is accurately transmitted and received, companies will be able to leverage advantages from settlement windows that help make operations more streamlined. In addition, fees for SEPA Direct Debits (SDDs) and SCTs, especially cross-border transactions, are significantly less expensive as cross-border transfers are priced similarly to domestic transactions. Greater uniformity to SEPA services offered by banks could also empower corporates to become more effective in pricing negotiations, confident that they can take their payment volumes to another bank without significantly degrading their STP rates.
Of course, these advantages will only be realised for corporates that take action and become SEPA compliant. This means corporations currently sitting on the sidelines can no longer take a ‘wait and see’ approach to compliance. Instead, they should act now to understand the many opportunities that SEPA provides, create a strategy for SEPA migration and ensure their new payments process is compliant and operating reliably well before the deadline.
For even for the most committed corporates, there can still be significant challenges to achieving full compliance. Among the largest is converting an existing database of payee details for suppliers, vendors, employees and others from BBAN into IBAN with BIC. National BBAN formats need confirmation against algorithms at the national and bank level before being forward-fitted to IBAN, and trusting off-the-shelf or free-ware sources is risky as they too often lack critical information to confirm if the banks managing these accounts are still active, where they route their transactions and how to associate the proper routing BIC for settlement.
Firms that underestimate the time to become ready for the end date can pay a price, too. While February 2014 may seem a long way off, a significant amount of work may be necessary to implement new practices and policies into a work flow, test policies fully and put new practices into operation.
February 2014 is Imminent
With the deadline now only 15 months away, what should corporates do? To start with, committing now to do the work necessary to become compliant is essential for success. If mandates need to be re-executed, for example, it may require approaching clients and vendors who have already signed domestic debit or credit scheme mandates to re-initiate a new mandate acknowledging the IBAN. The language in these covenants needs to reflect the most current set of rules for SDDs and SCTs as well.
While February, 2014 may seem a long way off, in reality it’s just around the corner. For corporates ready to roll up their sleeves and do the work needed, the benefits could well justify the effort.
*SEPA Migration: Facts and Figures. EPC Newsletter, Issue 13, January 2012
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