The fundamental change that the single euro payments area
(SEPA) brings from an operational perspective is the standardisation of euro
payments through the ISO 20022 XML messaging standard and the payment schemes
harmonising service conditions for credit transfer (SCT) and direct debit (SDD)
execution across Europe.
Although SEPA was initially launched in
2008, since 2012 the European Commission (EC) has issued a SEPA migration
roadmap with legal deadlines accelerating the migration of all payment market
infrastructures in Europe to the new SEPA standards. The eurozone group of 17
countries in Europe using the euro as domestic currency has to complete the
migration by 1 February 2014.
The rest of the SEPA zone grouping of
15 countries, which are either part of the European Union (EU) or committed on
voluntary base to adhere to the SEPA schemes, has to migrate no later than
February 2016. Altogether the SEPA market unifies more than 500m citizens in
33 countries served by a community of more than 5,000 banks processing roughly
more than 90bn electronic euro payments per year, based on European Central
Bank (ECB) figures for 2012.
The great benefit of the SEPA payments
schemes is that all businesses making euro payments, including euro businesses
outside Europe, can do so using a single euro account processing all
SEPA-compliant payments within the eurozone by 1 February 2014 and with the
rest of the SEPA zone by 1 February 2016.
SEPA Migration: A
Strategic Opportunity for Entities outside Europe
Initially, those financial institutions (FIs) and corporates headquartered
outside Europe which have operations in Europe may simply view SEPA migration
as a European compliance issue with limited relevance to them, thus leaving it
up to the European affiliate to deal with the compliance deadlines.
However, from a more strategic perspective, SEPA offers an opportunity for
corporates and banks to achieve greater benefits by rationalising payments
practices, enhancing processes and reducing the cost and risk of euro payments
processing. One major reason for FI’s ability to achieve these benefits is that
SEPA will enable them to make all their euro payments out of one account,
significantly reducing the number of bank accounts and simplifying the clearing
and settlement structures and relationship with European counterparts.
Corporates and banks can even use a payment-on-behalf-of (POBO) model for
SEPA payment model to make payments for their entire group from one single euro
account and go for a SEPA cloud processing model to minimise the impact on
their IT infrastructure and resource, hence accelerating their readiness and
business agility in complying with the tied SEPA migration deadlines.
In a nutshell, compliance of the euro payments workflow with SEPA means that
the euro payments and collections in the SEPA zone have to apply the SEPA
operation rulebooks for credit transfers (SCTs) and direct debits (SDDs), as
European Payments Council (EPC).
The SEPA operations rulebooks
for SCTs and SDDs are a common set of conditions and operation rules from a
legal, formatting, processing and end-user service conditions point of view.
Since one single account per legal entity is enough to reach and be reached by
the entire SEPA financial community, FIs have the ability to simplify their
account structures and operations, which means they can reduce their risk and
further lower the cost of payments.
Today, SEPA migration is a
reality for millions of customers and thousands of corporates and FIs and
progressing steadily. According to the ECB’s monthly monitoring of SEPA
migration and the volume of SEPA payment processed across Europe, more than 35%
of the total volume of SCTs in Europe is already SEPA compliant and
in some countries the
percentage is steadily approaching 100%
Banks outside Europe
with multiple euro accounts and multiple European counterparts across the
eurozone can gain significant assets from streamlining their euro payments so
that they use one account per legal entity to make and receive payments in the
Several FIs and corporates from Asia, the Middle East
and North Africa, although not tied at all to the legal SEPA migration
deadlines in 2014, have nonetheless joined of the SEPA schemes, implemented
SEPA workflows for euro payments and are already grabbing the operational
benefits of optimised euro payments.
Using one euro account
concentrates funding and liquidity for euro payments, thereby reducing the need
for physical and or notional forms of cash pooling, simplifies the process of
managing liquidity and enables better operational risk management.
Corporates and banks outside Europe can achieve further gains by analysing
the cost of payments across the SEPA zone, and re-evaluating where it will be
most cost-effective and efficient to make their euro payments. For instance, a
bank that has a large payments volume in a specific European country where
payment processing is expensive could shift payments to a lower-cost location
in Europe and take full advantage of the single SEPA competitive market.
Along with replacing their current set of complex structures for euro
payments with fewer accounts, corporates and banks outside Europe have the
opportunity to reconsider their business relationship with European
counterparts and the potential for working with banking partners who offer the
best conditions for SEPA. While it is not necessary to change banking
relationships for SEPA, all the FIs in the SEPA schemes will essentially have
the same reach across the SEPA zone from a payment point of view and corporates
and banks outside Europe can take advantage of a single SEPA partner to
instruct and collect payments across the whole SEPA zone.
than just leaving SEPA migration to European affiliates as a local operational
and compliance issue, corporates and banks outside Europe with operations of
any size in Europe can benefit from focusing strategically on how best to
rationalise their entire payments and collections process and practices during
a bank has decided on joining SEPA schemes and its strategy for SEPA migration,
the implementation process has to be defined. The bank will have to perform a
technical analysis of their back office and treasury systems to determine their
ability to send and receive SEPA-compliant euro payments, as well as evaluate
process improvements to streamline payments. They can then develop an
implementation plan for any changes that are needed to rationalise bank
accounts and banking
Since SEPA migration
affects the market infrastructures of 33 countries in Europe, of which 17 use
the euro as their domestic currency, any corporate or FI in the Middle East,
Asia or North Africa which initiates euro payments in SEPA markets need to
ensure that their plans include all payments in all markets that need to be
While the time required to adapt euro payment
workflow to SEPA may vary depending on the back office and enterprise resource
planning (ERP) complexity and level of compliance (minimum requirements for
interoperability or full schemes options implementation), typically it can take
from six to nine months to become compliant using internal resources.
The duration of the migration can be significantly reduced when the bank
partially or totally outsources that SEPA migration effort to a service
provider and/or a technology provider. Going for a ‘SEPA POBO’ or ‘SEPA in the
cloud’ service might help to reduce the migration time to just a couple of
The cost of implementation and technology also varies,
depending on the level of sophistication and the size of the corporate or FI.
The cost savings, however, will usually far outweigh the cost of
implementation. Many corporates and FIs operating globally beyond Europe that
were early adopters of SEPA from 2010 onwards have already today exceeded the
original break-even point of their business case to invest in SEPA-compliant
infrastructure. The EPC has published case studies and success stories of SEPA
migration in many countries.
Corporates and FIs outside Europe
processing euro payments should challenge their existing banking partner at
a strategic level to use SEPA as a key driver in assessing their current
structure of euro accounts in multiple countries and determine how best to
rationalise their euro payments operations.
Their banking partner of
choice for SEPA migration should be able to provide them with advice at a
tactical and operational level on switching euro payment workflow and
accounting practices to meet SEPA compliance requirements.
The Risks of Non-Compliance
Following the SEPA
migration deadline of 1 February 2014, legacy systems that the EU affiliates in
the eurozone use for instructing and collecting euro payments may no longer be
usable. From an operational perspective, the risks of not meeting the deadline
for SEPA compliance could range from simply being non-compliant with the rules
and risk sanctions from the national financial watchdog in the EU country
monitoring SEPA migration and compliance to payment service disruption,
declinature or rejection for some customers. The operational cost of an
increasing volume of rejection, return and exception handling for euro payments
is also an important component of the business case justifying largely the
migration to SEPA schemes.
Although corporates and banks outside Europe often regard SEPA migration as a
European operational headache, the potential benefits go far beyond simple
compliance. Those based outside Europe that process a significant volume of
euro payments with counterparts in Europe can take competitive advantage of
SEPA migration to rationalise euro account structures and enhance payment
processing efficiency to reduce costs, complexity and risks.
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.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
The banking industry will meet the challenge of the new era introduced by Europe’s Payment Services Directive, but it is up to its individual members to determine whether they sink or swim.