Ready or Not, Here comes SEPA

At the turn of the millennium corporates worldwide braced
themselves for computer systems to crash, as the much-reported Y2K bug loomed.
Today, the financial industry faces a new deadline, as on 1 February 2014, the
single euro payments area (SEPA) standards come into force.

If money
and time hadn’t been spent in preparation for Y2K, the resulting impact would
have been much more widespread than the handful of reported failures. Yet, with
regard to SEPA, the exact meaning of the deadline still hasn’t sunk in for some.

There is no Plan B in place. Ready or not, come next February for
eurozone countries, banks and corporates will need to be SEPA-compliant in order
to pay beneficiaries and collect monies owed. The UK and other European
countries outside the eurozone are allowed an extra two years in which to become
compliant for settlement, but if you’re paying in euros within the eurozone,
this will still affect your company and its treasury department from February
2014. It’s starting to look like the chances of a seamless handover for every
company throughout Europe are pretty low.

Progress so far

Progress towards SEPA has been painfully slow, although planning started back
in 2000 with and SEPA credit transfer (SCT) and two SEPA direct debit (SDD)
schemes were launched in 2008 and 2009 respectively. It had originally been
hoped that market forces and the promised benefits of SEPA would be enough to
move end-users to adopt the new SEPA payment instruments, but this doesn’t
appear to be the case for all.

One of the primary stumbling blocks in
adoption appears to be the complexity of it all. The SEPA ISO 20022 extensible
markup language (XML) payment initiation (PAIN) message standards used for
communicating with the bank are significantly more complex than preceding
formats – many of which are still being used today. This increased complexity is
ultimately required to facilitate the increasingly sophisticated needs of modern
business. Some even suggest they don’t go far enough, with many calls to further
expand on the formats to leverage its full capabilities and finally deliver
complex corporations the data transfer needed with their suppliers.

The banking industry has been keeping a close eye on the progress of
corporates achieving compliance. Towards the end of 2012,
a survey carried out by EuroFinance 
found that 31% of treasury and finance professionals inside the SEPA zone didn’t
know exactly what will be required for their organisations to be compliant by
the deadline. The findings were mirrored four months later with little change by
European Central Bank’s (ECB) first SEPA migration report
in March 2013, also revealing a
significant number of businesses, both large and small, still failing to
completely understand SEPA and the requirements for transition.

the level of preparedness notably low, many companies have also underestimated
the time involved with introducing the SEPA payment standards, particularly for
large corporations. While most seem to have completed the planning stage, a
number of corporates appear to have delayed their internal deadlines for actual
implementation –
some extending even as far as the end of this year
. With the average corporate
making thousands of payments every day, moving all of these to the new mandates
is a huge undertaking and it appears to be a common failing that many
underestimate the time involved in fully migrating.

For those who
haven’t implemented the SEPA systems already, work needs to speed up immediately
for the required changes to be made in time. Playing it so close to the
completion date is a huge risk for such a complex task. The sooner that
companies finish implementing SEPA, the more likely any problems can be
identified and resolved in time for the 1 February 2014 end date.

What Does This Mean for Corporates?

SEPA applies to all related
payments within the region, both business and personal. A corporate within the
eurozone must provide payments in a SEPA standard for SCTs or SDDs if they want
them processed under SEPA rules. High value payments through Target2 will
continue unaffected by SEPA, with the certainty of same day settlement and
higher bank charges.

Fortunately corporates do not need to make the
changes alone. Most banks are able to offer support and solutions, both built by
themselves and supplied by vendors, to help with the transition. Should it come
down to it, most banks should also be able to offer translation services for old
payment message standards for another couple of years. However, this is only a
short-term fix, and come 2016 such translation services are also set to be
stopped by the EU

This doesn’t come without risk, or indeed cost. The
translation of messages to SEPA standards are not just straightforward
conversions. There is the possibility that banks could reject those payments
that don’t conform to the data requirements. If those rejections occur, either
the payment doesn’t happen or the bank could issue a charge to ‘repair’ the
payment. An example here is the provision of international bank account numbers
(IBANs) for the beneficiary, which although have been in use for some time,
still do not yet have 100% coverage in corporate payment systems.

you Ready?

SCTs are becoming increasingly accepted and have been
moving that way for some time, so these should be fine. Although those payments
still not using the SEPA scheme come next February are either going to fail or
could be sent through the higher-cost Target2 scheme, increasing corporate bank
charges significantly.

SDDs are far more complex. Many do not have
enough experience with the payment formats to give everyone the comfort they
need. Come the deadline, this could well result in a number of failed

As banks have had to support debtor processing of DDs
for some time (i.e. the collection of funds from an individual’s account), most
should be fine.  But if your company still uses the pre-SEPA DD collection
practice, then this is far more of a challenge. It will be your collections that
have problems, which of course then maps onto your ability to pay your

With little over six months until the deadline, it’s no
longer a case of if and when. SEPA is happening. There is no choice about
conforming to the new standards, and chances are that those who fail to be ready
in time won’t forget it so easily.

The concept of life after the
deadline is a difficult one to predict. Whether corporates meet the deadline or
not, we can be certain of one thing; this won’t be the last we hear of SEPA and
its complexities.


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