As 1 February 2014 fast approaches, this end-date for
migration to the single euro payments area (SEPA) credit transfer (SCT) and SEPA
direct debit (SDD) instruments is encouraging corporates to take a short-term
view of the initiative. Consequently, the focus is also on short-term challenges
rather than the significant longer-term benefits, which blinds many companies to
the processing efficiency gains and centralisation opportunities to which the
initial phase of SEPA leads. In fact, so preoccupied are corporates in meeting
requirements for ‘stage one’ of SEPA, that many may have lost sight of the
initiative’s ultimate end-goals and how they can be realised.
begin to outline the benefits by reiterating that SEPA is a standardisation
exercise that aims to improve the efficiency of cross-border payments within the
eurozone, and turn fragmented national markets into a single domestic one. One
of the ways it seeks to achieve such uniformity is through the obligatory use of
the XML ISO 20022 messaging format for SEPA transactions.
the move to XML is not without challenges. The primary difficulty is that, at
present, there are multiple versions of XML in use that have slightly different
definitions, as well as localised variations across the eurozone. These ‘local
flavours’ also present difficulties with respect to the timing of the move to
XML, such as in the cases of Spain and Italy where SEPA migration has been
staggered in line with regulatory concessions.
In order to overcome
such hurdles, treasurers should check their partner banks and suppliers operate
using the ISO 20022 Common Global Implementation (CGI) standard to ensure full
XML functionality, as well as carefully co-ordinating with all bank partners
with respect to timing.
In addition to such complexities, there are
also significant technical concerns. Supporting XML as an output format requires
corporates to ensure their payment vehicles and enterprise resource planning
(ERP) systems are XML-compatible. As XML files tend to be much larger than their
local and global equivalents, compatibility will require substantial upgrades
and additional technical support to guarantee that connectivity is not adversely
affected by the move.
Although such difficulties are considerable, it
is important that corporates look at XML’s broader benefits rather than just the
challenges inherent to XML migration. By increasing transparency and control
across the end-to-end payment chain – and providing a natural congruence with
SEPA’s aim to create a harmonised European payments landscape – XML can
standardise transaction-related communication. In turn, this can form the basis
of more extensive treasury centralisation initiatives, such as the establishment
of payments and collections factories.
By definition, payments and collection factories automate
and streamline the accounts payable (AP) and receivable (AR) functions, so their
use directly correlates with the growing demand for payments on-behalf-of (POBO)
and collections on-behalf-of (COBO) settlements. Depending on the size and scope
of centralisation required, POBO and COBO settlements can, in turn, offer
greater account reconciliation, increased efficiency with respect to payments
processing and both internal and external economies of scale.
payments have grown in popularity among corporates that have already made some
degree of progress in terms of centralisation – whether on the payments or
receivables side. As both POBO and COBO are aided by the use of the single
currency, the centralisation of these settlement systems is an obvious advantage
of SEPA migration.
Certainly, both enable corporates to leverage SEPA
requirements with rationalised account structures and operational efficiency;
for example in both arrangements either the paying or collecting entity will
have to have authorisation agreements with respective group companies to decide
which will pay and/or collect, and with whom ownership of the payment resides.
Yet, in order to use both vehicles, updated software and processing
capabilities are required; most notably through upgrading ERP systems to allow
for the sufficient matching of invoice numbers. It also necessitates the current
use of the ‘on-behalf-of’ message field that is displayed in the XML ISO 20022
Indeed, XML messaging has a field to indicate who exactly is
making a payment, which not only enables automated reconciliation but also
timely allocation of accounts. This is particularly important when using COBO
payment vehicles, as the reconciliation process is required to match the bank
accounts item, with the ‘on-behalf-of’ field being used to send it to the
applicable intercompany account.
SEPA and Centralisation
Interestingly, however, it seems that the opportunity to centralise
collections – as opposed to payments – is offering greater appeal to corporate
treasurers. This is particularly important with respect to treasurers operating
on a business-to-business (B2B) and business-to-consumer (B2C) basis, as they
will be able to utilise the two new SDD schemes – Core and B2B – to not only
collect DDs from both corporates and consumers, but also to execute DDs in terms
of COBO agreements. This would ensure timely payments and improved collection
rates, both of which would be based from a single collections function.
And just as the regulatory initiative intends to standardise payments
across the eurozone – removing the need for various accounts handled by multiple
local banks – the use of payments and collection factories, as well as shared
service centres (SSCs), can help corporate treasurers to not only become
SEPA-compliant but also to
centralise their internal payments processing
and optimise treasury management capabilities.
Building Blocks for
SEPA leads to numerous treasury management benefits, and
should therefore be seen as a gateway to future cost and efficiency gains, as
opposed to (yet another) complex regulatory requirement.
the XML messaging format as a common standard brings value to the entire
payments industry, offering uniformity and increased transparency throughout the
end-to-end payment chain. As such, it is a foundation for offering straight
through-processing (STP), which is one of the reasons why, for some corporates,
XML migration is a key strategic initiative, even outside SEPA compliance.
Furthermore, XML can enable greater use of POBO and COBO settlements,
thereby increasing centralisation of payments and collections, provided that
corporates have the correct infrastructure and operational support in place.
And in both respects, help is at hand. Long-term advocates of the SEPA
initiative, such as Deutsche Bank, are able to help corporates navigate the
challenges through a combination of education, guidance and practical support.
The creation of the bank’s dedicated SEPA site serves as a hub for knowledge
sharing and compliance expertise – and the aim is for it to offer a valuable
resource to clients and the wider treasury industry as they move from stage one
of SEPA to the centralisation phase.
Moving towards centralisation
is not without its difficulties. However, with access to the correct guidance
and operational support, becoming SEPA-compliant is a first step in the right
direction and makes optimal treasury management a realistic and achievable goal
for all corporate treasurers.
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