Most European corporates have been hesitant to migrate to single euro payments area (SEPA) instruments, and the reluctance to take action has been exacerbated by the long wait for a strict migration deadline from legacy payment instruments. However, with the deadline now confirmed as 1 February 2014, businesses across Europe face a limited timeframe to implement their respective SEPA projects, as highlighted in the box.
SEPA Regulation at a Glance
- Deadline of 1 February 2014 for both credit transfers and direct debits (niche products and direct debits based on read-outs of payment cards at the point-of-sale (POS) has a deadline of 1 February 2016 – for non-euro countries this is extended to 31 October 2016).
- Card transactions, mobile payments (m-payments) and other payment instruments are not in the scope of the regulation.
- By 1 February 2014, there will no longer be the need for payment initiators to deliver bank identifier codes (BICs) to address the counterparty bank within domestic payment orders (although EU Member States are allowed to push back this deadline by two years).
- ISO 20022 XML format will be used in the interbank (as well as in the corporate-to-bank) space for transfers which are not transmitted individually (e.g. orders with specific instructions).
- Existing mandates for legacy local direct debit schemes can be used for SEPA Core Direct Debits (SDDs Core).
- Using direct debits, consumers are allowed to block specified payees and to restrict the amounts and frequency of debits.
- Multilateral interchange fees for direct debits will be prohibited, but rejection/refusal transaction (R-transaction) fees will be allowed.
- The principle of equal charges for cross border and domestic payment transactions (EU price regulation) will be extended to all payment transactions, regardless of the respective amount.
- The government process of SEPA development will be reviewed to take greater account of all involved parties.
Payments standardisation is widely regarded as one of the key steps on the journey towards creating a truly efficient global treasury function – an aspiration for many corporates post-financial crisis, where the emphasis has increasingly turned towards compliance by heightened risk management, increased visibility and cash flow management. Certainly, a centralised structure for payments can help provide the liquidity controls and visibility into funding needs that will help treasurers with their investment decisions and ensure the optimisation of their working capital.
Yet one cannot discuss payments standardisation without considering the impact of SEPA. While there is a clear business case for payments standardisation regardless of SEPA regulation, it would be wrong to suggest that the initiative is not driving corporates to consider the issue more seriously. Corporates should refrain from focusing all their energy and resources on meeting these SEPA regulatory deadlines and instead approach it from a strategic perspective. Not only a ‘SEPA’ but a ‘SEPA+’ strategy is now needed.
Essentially this means that corporates should recognise the opportunity to move towards payments centralisation, standardisation of accounts payable (A/P) and accounts receivable (A/R) processes, as well as a single technical interface in terms of payment instruction formatting, not only for SEPA payments but for all kind of payment transactions (such as euro and foreign currency, legacy and remaining payment instruments, urgent and third party payments).
Undoubtedly, SEPA should make it easier to centralise treasury, cash management and payment functions for a wide range of incoming and outgoing cash flows of businesses in Europe. Of course, the road towards standardised payments is not without its hurdles, and it is accepted that the envisioned SEPA landscape may not necessarily translate into strategic advantages for all corporates in the short term. Certainly, a limited number of companies, particularly those that conduct the majority of their business within national borders, will derive benefits from being able to conduct all their payments under one SEPA banner. Yet the most progressive banks are adamant that migration should not adversely affect their business, and are thus working to provide pragmatic solutions to ensure a smooth transitional phase for all.
Advantages to Corporates of Payments Standardisation
Admittedly, there are immediate inconveniences of migrating to SEPA payments. For example, the need to change account administration to include international bank account numbers (IBAN), as well as BICs in some cases, and the necessary reorganisation of counterparty risk profiles due to new regulations regarding direct debit revision.
What is often over-looked, however, is the potential for initial cost savings, which can be garnered through adopting SEPA payments. For example, corporates can reduce outgoings by using low-cost markets for European payment transactions and can further substitute cross-border payments for SEPA transactions that are priced as domestic transfers only (the European regulation that a payment transfer within SEPA must not cost more than a national transfer will be extended to all payment transactions regardless of the respective amount).
Furthermore, via its adoption of the XML ISO 20022 standard – essentially a single financial messaging language between banks that is designed to replace local standards across countries – the initiative will save corporates having to deal with the technical inflexibility and complexities of handling numerous file formats. The reduction in expenses relating to format maintenance and system administration, particularly for those corporates conducting trade on an international scale, can be huge.
Uniform settlement periods and exception processes (e.g. returns) for all European countries will contribute to these savings by replacing cumbersome legacy processes. The transition to IBAN as the only permissible account identifier for SEPA transactions will also result in improved security, ensuring that corporates both transfer money to the right account and receive payments when due. What is more, these codes allow corporates to protect their accounts from theft and fraud.
Beyond the short-term cost, efficiency and security advantages, however, SEPA opens up a host of opportunities for corporates to expand their business, for example by increasing the feasibility of new trade routes powered by new payment instruments (such as SDD) and thus encouraging small and medium-sized enterprises (SMEs) to do more cross-border business within the eurozone.
For those corporates that already conduct trade on a European or global scale, SEPA will allow them to consolidate their bank accounts, enabling optimised liquidity management and perhaps the establishment of payment and collection factories. Ultimately, by standardising payments and providing a wider set of message information to be carried from payment initiation to reporting (via XML ISO 20022 and IBAN and BIC codes), SEPA can facilitate end-to-end automation and reconciliation, leading to higher straight-through processing (STP) rates and hence lower processing costs.
Easing the Transition
In general, the migration to SEPA is a strategic opportunity for optimisation of processes and structures in the cash and treasury management of business groups. However, for a limited number of corporates – usually those only settling domestic payments, with no foreign debtors or creditors – there will be no direct strategic advantages derived from migrating to SEPA payments. In these cases, the onus therefore lies with their bank to ensure that the transition is as smooth as possible.
Certainly, purely domestic-focused corporates have become used to the efficiency of national payments, which rely heavily on domestic bank identifiers, account numbers, clearing and settlement systems. Now, SEPA payments have to achieve the same level of efficiency, while adopting international identifiers for banks and accounts, as well as new clearing and settlement systems.
Given this, the transference of domestic payment codes to SEPA codes is a key task, yet it is a daunting one for corporates to execute on, particularly when they have little to gain from doing so. Tasks such as identifying errors in their transaction administration can be especially time-consuming. Indeed, many corporates may find that their actual data error rate is in fact higher than the percentage of rejected transactions they experience, as it is common practice for banks to fix these problems when settling payments unbeknown to corporates. And once they have identified errors in their existing data, they will then have to convert and validate IBAN information.
This need not be such an arduous process. Commerzbank, for instance, is planning to launch an ‘on the fly’ migration service, allowing corporates to conduct SEPA payments without sending the information in a SEPA-compliant format, thus taking the workload for conducting IBAN (and BIC) conversions off of the shoulders of its clients. Essentially, corporates can therefore change their payments schemes without having to worry about changing their payment formats.
The Need for Action
While corporates with global aspirations should be moving towards payments standardisation regardless of SEPA – or risk falling behind to more progressive competitors – the ruling by European lawmakers on the SEPA end date regulation has undoubtedly introduced an element of urgency into the situation. Indeed, a race has started to catch the best resources in the industry to support SEPA projects of corporates (and banks). Specialists in consultancies, vendor companies for electronic banking, enterprise resource planning (ERP) and treasury management systems (TMS), as well as experts in banks, will all be in high demand over the next few months. Time is running out; indeed, corporates have only 24 months to become SEPA-ready. There will be no extended warm-up, just a short, sharp cut-off.
With 2014 looming, corporates need to put in place a strategic plan for SEPA migration now. And one of the key elements of this should be the choice of a banking partner with the expertise to advise on wider SEPA strategy and adoption, as well as enabling the migration itself. Certainly, the right banking partner will be equipped to help corporates assess their existing operations against the new regulatory requirements and create the scope of their SEPA planning.
The speed of migration is also crucial. Having taken the first step on the road to being SEPA-ready, corporates should complete the remainder of the journey as quickly as possible in order to avoid maintaining two separate sets of data in parallel. The most proactive European banks are already helping their corporate customers by familiarising them with the upcoming changes and supporting them throughout the migration process, in order to minimise correction and rejection charges of failed payments. Yet given that there are a limited amount of banking resources in the market to help corporates migrate, it is clear that the time has come for corporates to act.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.