SEPA: A Moving Target

The EC’s extension effectively moved the SEPA end date to 1 August 2014. To complicate matters further, given the timing of the proposal, the EU co-legislators stood no chance of amending the regulation in time for the original 1 February deadline. Currently the intention is for this to happen later this month.

The European Payments Council (EPC), in its newsletter 300114_21, succinctly expressed it as follows:

“Consequently, payment service users and providers in the euro area are forced to determine their course of action as of 1 February 2014 based on the assumption that EU co-legislators will amend Regulation (EU) No 260/2012 to effectively delay the migration deadline in the euro area to 1 August 2014 and application of penalties for processing payments that do not comply with this Regulation to 2 August 2014. Market participants will also have to rely on the assumption that a new EU Regulation amending Regulation (EU) No 260/2012 will “have a retroactive effect as from 31 January” as proposed by the European Commission.”

So what we have in fact bears some resemblance to Erwin Schrödinger’s famous cat-based thought experiment. We might have actually passed a mandatory deadline on 1 February or we might not. It won’t actually be confirmed until the ‘box’ is opened, perhaps later this month. The SEPA deadline effectively exists in a superposition of states; which for the author is a first after working nearly three decades in the business.

Before commenting on how this confusing state of affairs was arrived at, let’s consider whether it was necessary. To begin, here are the most recent SEPA statistics for the final months of 2013, as stated by the European Central Bank (ECB) on 20 January:

“According to the latest figures provided by national central banks, 74% of credit transfers in the euro area were already compliant at the end of December (up from 64% in November). For direct debits, the figure stands at 41%, a very steep increase from the 26% registered in November. The December figures show that, if the current pace of migration continues, the vast majority of stakeholders will complete their migration by 1 February 2014.”

The wording of that final sentence raises questions. Firstly, what is the definition of ‘vast majority’? Is that 85%, 95% or another value? Is a vast majority the same percentage for both SEPA credit transfers (SCTs) and direct debits (SDDs)? As it stands, arguably this is a purely subjective and unknown value.

Secondly, it assumes a trend on rate and increase in percentage compliance based upon a single month’s change. Given this brief comparison it would be unwise to extrapolate figures, given that most financial organisations (and very likely corporates) have system freezes for most of December and into January. So, this could simply be an artefact of the natural tendency for multiple code changes to be put into production in the first week or so of December. It doesn’t necessarily mean that the same will happen in January. Indeed, although the markets tend to leave compliance to the last moment (the reasons for which are discussed below) in general, if there is time to allow a reversion back to plan A, firms do so. This suggests that figures for January 2014 might not reflect the big increases hoped for.

Lastly, even if there is a continued increase in adoption, one could just about believe that in the area of SCTs to reach ‘vast majority’ adherence lies within the realms of possibility, depending on what that definition is. However, in the SDD domain it stretches credulity that one can extrapolate from 26% to vast majority via 41% in a single month. That is a significantly hockey-stick-shaped graph!

A justified decision?

So was the EC justified in their proposed amendment to the regulation? Yes, but only up to a point. Given the systemic importance of payments – not just for financial markets but also impacted euro-based economies and the businesses within them that drive payment flow – the risk of serious disruption if providers simply refused payment instructions after 1 February outweighs forcing a deadline to save face. That said, it seems unacceptable for the decision to be left so late as to only be enforceable retrospectively.

Given the vast number of organisations impacted by the regulation, the compliance percentages that have been published and the sensible rule of thumb that the last 20% of any project typically takes longer/more effort than the previous 80%, a decision should have been taken several months ago. This doesn’t mean that the deadline
per se
should have been moved, but the additional six month transition period should have been couched in such a way to encourage adoption either before 1 February or as soon as possible thereafter by means of a sliding scale of known penalties with a final end date of 1 August. That way, organisations could have made their planning and expenditure decisions knowing all the facts while the regulation would still apply a strong incentive to not delay until the second deadline. As it stands, uncertainty risks stalling the process while people wait and see. With most listed companies needing to report to the market every three or six months, some might wish to hibernate projects in order to improve figures, especially where projects are largely sourced by contract staff.

Poor excuses

So given where we are, why are we here? There appears to no single answer to this. Some might claim there was never enough time, or that the market was poorly educated. With respect to timeframes it is hard to see how that excuse is justified, given that the scheme documents and associated message schemas have been published and evolved over many years. In addition, the vendor community have had SEPA-ready payment engine, mandate management and message transformation solutions for many years designed to accelerate adoption.

As for poor education there is some justification on the corporate side, which for many years did not believe SEPA was going to be its problem. However, the financial services vertical certainly cannot claim they did not have plenty of time.

Others have stated that the struggle to SEPA migration is simply a matter of scale and undoubtedly it does affect thousands of organisations. However, it is not the first time the eurozone has faced such challenges, as evidenced by adoption of the euro and the abolition of many domestic currencies. If that was achievable, what is different a decade later when IT is allegedly more flexible? Put simply, it was the common perception that the ‘what’ matters, but the ‘how’ less so. When your domestic currency is due to disappear on a specific date, not just in electronic form but also in purses, it tends to focus minds. Once the transformation has been made, the fact that a method of communicating information in that currency is going to change seems less demanding of concentration and investment levels. After all, euro payments have been effected perfectly well since the currency’s adoption. So while there are many consumer-based reasons for SEPA’s adoption in terms of transparency and lowered costs, at an operational level it tends to drop into the ‘why spend money fixing something that’s not broken?’ project list.

In addition an avalanche of other regulatory reform has affected higher profile trading activity, which traditionally attracts higher IT spend. Viewed in conjunction with the constraints of reporting financials on a three or six month basis, it is easy to see why adopting a wait-and-see or ‘who blinks first?’ attitude could prevail. Organisations do not spend money unless they have to in the reporting period. The defence that this was exacerbated by the financial crisis is a weak one; even when profits are healthy nobody throws money at projects they believe may not happen on time. The assumption being that if enough adopt the same approach, even if short of a majority, deadlines will move and the project may fall into a different fiscal year. For some, that bet may have paid off. It’s not beyond the realms of imagination that people were asked awkward questions on the morning of 3 February as to why money was spent in fiscal 2013 that didn’t have to be spent until 2014.

So once these six months are out of the way, will SEPA be a reality? Yes, as it’s unlikely to be extended further. Will the second phase of SEPA for non-euro countries suffer the same fate, or have organisations and regulators learned lessons? Well, this article is being safely backed-up, in case it is needed on Tuesday 1 November 2016.

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