SEPA: A Core Issue Checklist for Corporates

On 16 December 2010, the European Commission (EC) published a proposal for regulating the end dates for single euro payments area (SEPA) migration. Although still under review, the regulation is expected to come into force late this year or early next year, which would mean that existing domestic credit transfers could be decommissioned as early as 2012/13 and direct debits as early as 2013/14, effectively replaced by SEPA instruments.

With the end dates in sight, many corporates are asking fundamental questions:

  • What does this mean for my company?
  • When does my company need to be ready?
  • What steps does my company need to take?

What has become clear is that no company will escape SEPA. However, the impact will vary from one company to the next – the project could be quick and easy, or complex and time consuming.

For example, a company that uses mainly domestic credit transfers may only need to obtain International Bank Account Numbers (IBANs) and Bank Identifier Codes (BICs), and its bank will provides format conversion services; whereas implementing SEPA Direct Debits (SDDs) requires more work. Companies active in a number of European countries will also face greater complexity because the process for obtaining IBANs/BICs will vary from country to country.

By going through a checklist of features that may be applicable, a company can get a sense of the project’s complexity.

Setting Up a SEPA Project Team

As a result of the proposed regulation, the industry is likely to be looking at rather tight implementation timeframes for SEPA Credit Transfers (SCTs) and for SDDs. Corporates should start planning and budgeting now, in order to get the project in this year’s budget cycle. A positive effect of a regulated end date is that it will be easier to get funding because the project is now a regulatory one, rather than one that requires a business case.

At the outset, a company should perform a high-level analysis and then put together a project team that is responsible for implementing SEPA migration.

Project Manager: Ensuring all potentially affected departments are involved

Finance department:

  • Invoicing – add IBAN/BICs.
  • Accounting, accounts receivable (A/R), accounts payable (A/P) – account reconciliation/capture IBANs and BICs/update database.
  • Investigations (client inquiries).
  • Treasury: enterprise resource planning (ERP) impact/liquidity management/bank relationships.

Other affected departments:

  • Sales/procurement – inform business partners/potentially new contacts/new forms.
  • Customer service – SEPA-specific client questions.
  • Human resources (HR) – salary and benefit payments.
  • Legal – mandate migration/change contracts if collection via SDD.
  • External partners – e.g. call centres.

 

The SEPA Project Checklist

The following checklist is an illustration of potential considerations only and cannot outline all possible ‘to dos’. What a corporate needs to do will, of course, vary greatly from one company to the other.

Strategic analysis

When a corporate examines SEPA from a strategic perspective, this poses the question of whether to centralise payments and collections. SEPA is another driver that encourages the trend towards a centralised structure because it harmonises cross-border payment processes.

If a corporate does decide to create a payment or collection factory, then the project takes on a much larger dimension.

To dos:
  • Analyse set-up of accounts and cash management structures and systems landscape in Europe.
  • Check account centralisation and system consolidation potential.
  • Assess and quantify benefits.

A second question has to do with timing – does the corporate want to be one of the first movers or the last? With the end date taking shape, that question is not posed as sharply. But most can’t migrate immediately because of the preparation needed in advance of migration. For this reason, the bulk of SCT migration is expected to occur in the second half of 2012.

To dos:
  • Analyse migration complexity.
  • Clarify SEPA-interest of business partners.
  • Determine own migration strategy.
  • Proactive, or wait-and-see?
  • Credit transfers and direct debits together or separately?
  • All countries at once, or one by one?

A third question revolves around a format strategy – does the company want to switch its payment formats to XML now, or continue to rely on bank conversion services? Today, all banks recommend XML as the format of the future, but this change has an impact on the corporate’s ERP systems and connectivity because XML files tend to be much larger than domestic equivalents.

To dos:
  • Analyse which formats are currently in use.
  • Set timing of XML migration or keep other global formats and adjust for SEPA.
  • Assess availability of temporary solutions (banks’ conversion capabilities differ) – if required.
  • Check if a new release is needed from external system provider to obtain the XML module.

The corporate should also map its infrastructural changes, particularly for pan-European companies that have grown through mergers and acquisitions (M&As). Often such a company will have many ERP systems or treasury workstations. A varied landscape makes it more difficult for a company to analyse whether all systems allow for IBANs, for example, or if the company needs to upgrade. A corporate could use this opportunity to streamline its systems landscape.

To dos:
  • Identify affected systems.
  • Check the preconditions for and the availability of SEPA-upgrades/modules with vendor(s).
  • Is a new release required?
  • Define specifications and timelines for own system adjustments.
  • Interface analysis and plans for adjustments.
  • Planning and conducting tests.

Another by-product of a SEPA migration project is the chance to reduce the number of banking relationships. The question of how many banking relationships are optimal grows in importance, because if a company can make local payments from a central account in another country, does it still need a local bank?

To dos:
  • Check if and by when relationship banks will offer SCT and SDD.
  • Compare SEPA requirements with banks’ SEPA capabilities – submit request for proposal (RFP) for SEPA transactions.
  • Analyse what value-added services are on offer.
  • Determine which banks to use in SEPA.
Migrating to IBAN and BIC

The first hurdle for most companies is the basic question of how to obtain IBANs and BICs. Should a company go directly to its counterparty if it only has a few, or should it use the format conversion services that banks or third parties offer?

There are local solutions in each country, which tend to be relatively inexpensive, but if a company has to convert in 30 countries, then it can become quite cumbersome to oversee 30 different processes. Therefore, it might be better to use a third party; however, vendors tend to be more expensive. Often Deutsche Bank recommends that clients use domestic conversion services for high volume countries because they are inexpensive, but if they have a few countries with relatively few IBANs, to use a vendor.

To dos:
  • Determine how to obtain the corresponding IBANs and BICs: directly from counterparties (contact them) or indirectly via local conversion service?
  • Decide how to communicate own IBAN and BIC.
  • When and where should this information appear?
  • Make the required changes to invoices and other forms.
  • Prepare customer service to answer questions, such as: “What is an IBAN? Where do I find it? What is it used for?”

The next step is to determine the technical impact of converting, so a corporate needs to understand which of its current systems are able to handle IBANs and BICs.

To dos:
  • Identify all systems that contain account numbers and bank codes.
  • Adjust field lengths to IBAN and BIC.
  • Decide how to enter IBAN and BIC into the systems.

    • File uploads, document scans and/or manual input.

     

  • Potentially develop IBAN checks to be applied during capture.
Payment detail field

Under SEPA, the payment detail field is only 140 characters long, which may be shorter than corporates are accustomed to today. Particularly in the B2B space, most companies include a lot of payment detail because they pay more than one invoice at a time. Corporates need to either adjust their payment patterns by breaking them down into more than one payment, or maybe think about how to shorten the information they provide.

To dos:
  • Check the length of the payment details fields used by country.
  • Adjust length and content.
  • Allowed characters are numbers, letters and special signs.
  • Think about using the orderer/creditor (end-to-end) reference field for certain information (e.g. contract number).
Optional originator/creditor reference field

SEPA payments also include an optional creditor reference field for the sender. If a creditor wants to receive specific information, for example an invoice number, this additional 35-character field can be used.

To dos:
  • Determine if this field is needed.
  • Define content.
  • Allowed characters are numbers, letters and special signs.
  • Establish reconciliation processes based on reference number.
Optional purpose codes

In addition, optional purpose codes can help the beneficiary identify the payment type, e.g. salary, phone bill, etc. This is relevant if the beneficiary asks for this information, in order to categorise incoming payments.

To dos:
  • Check with your counterparties if they require purpose codes (and which ones).
  • Find out if their bank supports purpose codes.
  • Define own processes when receiving purpose codes.
Category purpose code

The category purpose code is another optional field, which allows the sender to designate the way that their payment is processed. For example, a company’s payments are normally all executed overnight with the standard SCT and maybe all booked individually. However, the company may want its salary payments to be executed the same day and booked in bulk.

Therefore, it could use the category purpose code for salary payments to indicate to its bank that these are salary payments. The company could set up a standing instruction so that when it sends a file with this category purpose code, then the bank knows to book them in bulk and execute on the same day.

The category purpose code is also optional for the bank, so a corporate needs to ensure that its bank offers this service.

To dos:
  • Determine the need for special processing options, e.g. for salary payments.
  • Indicate these options in the file.
Reference party field

Lastly, there is a reference party field – also called an ‘on behalf of’ field – which is relevant for payment/collection factories. For example, if Company ABC Germany is making a payment on behalf of its subsidiary in France, it has a separate field so it doesn’t need to fill up the limited space in the payment detail field.

To dos:
  • Check if making on-behalf-of payments or collections today/want to use them in the future.
  • If the information is supplied today, potentially migrate it to the new fields (maximum 70 characters).
  • Define the processes and inform counterparties.

Additional Preparation for SCT Only

Execution and cut-off times

As a result of the Payment Services Directive (PSD), the execution time will change – so corporates need to be aware of this for time-sensitive payments, such as salaries. Currently, it is a maximum of two days for a SCT, but from 2012 it will be only one day. This should help in liquidity planning because the payee will be certain that the payment will reach the beneficiary by the next day.

Cut-off times may change in comparison to what corporates are accustomed to for domestic equivalents. They will vary from bank to bank, but it’s important for corporates to be aware that this is changing in case they have to submit payments earlier.

To dos:
  • Analyse what time-critical transactions are made today (e.g. salary, benefit/social security, etc).
  • Define whether processes for executing these payments need to be adjusted.
  • Determine processing preferences.
  • Adjust file-submission processes to account for different cut-off times.

Additional Preparation for SDD Only

Mandate management

With SDD, corporates will need to manage received direct debit mandates. Today, some countries operate a debtor mandate flow, which means that the mandate goes to the debtor bank rather than the creditor. With SDD, it is a creditor mandate flow, which means that the creditor must physically keep the paper mandate. From an operational perspective, large direct debit users in countries such as France and Belgium must design internal processes to cope with these paper mandates. In addition, corporates will need to make the mandate data electronic, because certain mandate elements will have to be submitted with every SDD to the bank.

Mandate number

Corporates now need to give every mandate a number. They are free to generate the mandate number, with a maximum of 35 characters, however they want. It could be a contract number, a client number, or just an ascending or descending number. Deutsche Bank recommends using something that is similar to a client number, so it is easy to recognise which client’s mandate it is.

To dos:
  • Generate the mandates.
  • Determine mandate form.
  • Create the text in required language(s).
  • Potentially print and mail the mandates.
  • Choose mandate reference (e.g. contract numbers, ascending numbers, etc).
  • Generate mandate reference (maximum 35 characters).
  • Add them to mandates or communicate them to clients afterwards.
  • Check mandate-management options.

    • Physical storage/scanning.

     

  • Save mandate data in mandate database.
  • Define processes for mandate administration (e.g. capture of new mandates, changes to existing mandates, ordering of copies, etc).
  • Alternative: outsourcing.
Creditor identifier

Corporates also need to obtain a creditor identifier, which uniquely identifies each creditor through an alpha-numeric code, rather than relying on a name, which can vary. Where a corporate can get this ID varies from country to country – in Germany, for example, it is done through a central service by the central bank.

The combination of creditor identifier and mandate number allows each debtor bank to uniquely identify an incoming direct debit.

To dos:
  • Obtain creditor identifier.
  • One identifier or separate ones for different legal entities?
  • Potentially use creditor business code within the ID to distinguish separate entities or departments so that only one ID is needed.
Submission deadlines

SDD submission deadlines are five days for the initial direct debit prior to due date, and then two days for recurring core SDDs. For business-to-business (B2B) SDDs, it is only one day before due date. This difference will have a significant impact on internal processes, in terms of when corporates will need to submit those files to their banks to ensure they make the due date.

It becomes even more complicated if corporates send mixed files with initial and recurring SDDs. Their banks may split them and the corporate could see two separate bookings.

The five-day submission deadline will be a pain point for online and point-of-sale (POS) retailers because in some countries, such as Germany, they can create a direct debit and submit it to their bank on one day, and it is settled the next day. The longer submission deadlines will impact liquidity and risk management around direct debits.

To dos:
  • Setting of due date.
  • Ensure the debtor is informed in advance.
  • Define/adjust submission processes, taking into account the deadlines.
  • Five days for first/one-off transactions; two days for recurring ones.
  • Define/adjust booking processes/options.
Return transactions

For return transactions (R-transactions), SDDs have different codes on the account statement. Normally, a corporate sees the reason and then decides whether to generate a new direct debit, call the client, or a number of other actions. If an automated process is in place, they may have to re-program their system based on these new return reason codes.

To dos:
  • Analyse the return reasons and compare with today’s situation.
  • Adjust reconciliation process to account for the new text keys.
  • Define strategy for each reason code:

    • Resubmit?
    • Contact debtor?
    • Sell to collection agency?

     

Conclusion: There is No Escape from SEPA

SEPA will affect every company – but to what extent is dependent on a number of factors. Even for a company that only needs to obtain IBANs and BICs, which seems rather easy, that work still needs to be done. The company will need to enter IBANs and BICs into its treasury system in order to properly generate SEPA payment files.

For the majority of corporates, particularly the mid-tier and larger companies, a SEPA migration project may require a considerable amount of preparation.

Based on the above checklist, each corporate should go through its own project and analyse the relevant aspects to consider in its migration to SEPA. Once it has a laundry list of all the potential ‘to dos’, then it can start to plan how long it will take and how much it may cost. Corporates need to start on or accelerate their SEPA journey now that the end dates are in sight.

To read more from Deutsche Bank, please visit their gtnews microsite.

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