Now that the new deadline has passed, is SEPA’s mission accomplished? In order to answer this question, one needs to consider whether SEPA ever had a single mission to accomplish. It is also necessary to put aside several exceptions to the SEPA scope and country specific additional optional services (AOS).
A number of payment types have been defined as ‘niche’ – meaning they will not be migrated until latest 2016 – or outside the scope of SEPA, in order to avoid complicating the national migration and make it unmanageable in the timeframe. In addition, many countries have their own version of the SEPA schemes (mini-SEPA), granted by SEPA as AOSs to preserve country-specific features.
SEPA Roots and Mission
The history of the SEPA project begins in 1990, with the publication of the European Commission (EC) report: ‘Making Payments in the Internal Market’. This document outlined a community vision of a single payments area and defined the original underlying SEPA mission. It stated that “the full benefits of the single market will only be achieved if it is possible for businesses and individuals to transfer money as rapidly, reliably and cheaply from one part of the community to another as is now the case within most member states.” The introduction of the euro in 1999 brought the vision a step closer. In 2001, the European Commission (EC) initiated the process by issuing regulation regarding cross border charges and draft Payment Services Directive (PSD), and in January 2008, SEPA was officially launched.
SEPA to 1 August
SEPA to date has been a top-down initiative – from legislative bodies, through to the central bank, individual banks and, finally, on to corporates and retail customers. The EC initiated the process, the European Central Bank (ECB) facilitated it and European banks – through the European Payment Council (EPC) – have implemented the strategy and put the scheme into production. The rules and platforms have been created, clearing and settlement mechanisms (CSMs) established and initial schemes for credit transfers and direct debits are in place and operational.
Banks have implemented processes and systems to support the schemes, and offer corporates and clients support with regard to SEPA. According to ECB figures, as of June 2014 there were 754m SEPA credit transfers (SCTs), representing almost 98% of credit transfers in the European area; likewise, there were 769m SEPA direct debits, representing 95% of the total possible direct debits.
Many small to medium-sized corporates focused on the domestic markets have implemented minimal changes to meet the regulatory requirements of SEPA. The majority have taken the tactical approach, adapting existing systems and processes to fulfil requirements, or have utilised bank services for transformation and enrichment to meet format requirements. Few initiated seemingly costly changes to legacy systems, as they could not see the benefits for many reasons including:
- Existing domestic schemes offered better settlement windows, timings and cycles.
- SEPA required changing established market practices and internal processes that were perceived as unnecessary.
- In several countries (e.g. Finland), electronic invoicing (e-invoicing), bill payment and cards replaced direct debits, making the SDD scheme seem irrelevant.
- SEPA refund processing, which mandates an eight-week, no-questions-asked approach, introduces significant business risk to corporates serving multiple clients.
- The burden of increased business data maintenance (e.g. bank identifier code (BIC)/international bank account number (IBAN)/bank data and mandate information)
In Germany, for example, there was a very low corporate adoption of SEPA products, particularly SDDs. At the end of 2013, Germany accounted for a 47% market share of European direct debit traffic, but only 11% of direct debits were SEPA-compliant. This was, in fact, one of the major reasons for the extension to the deadline as Germany was integral to SEPA’s success.
August 1st and Beyond
Small and medium-sized corporates migrated to SEPA due to regulatory requirements, rather than being driven by demand. As a result, their SEPA solutions have often been tactical and integrated within existing processes and networks without a strategic vision of applying SEPA benefits.
Now that the SEPA foundations exist, corporates need to move forward through improving tactical solutions and taking advantage of internal consolidation opportunities that SEPA offers. Many medium and large corporates, which operate in several jurisdictions, have historically maintained different account administration departments, treasuries, products and systems to support various countries’ market practices. With the introduction of SEPA, these corporates can now invest in cost reduction and efficiency initiatives, including:
- The consolidation and streamlining of processes (SEPA offers clearing and settlement mechanisms (CSMs) with similar cut-offs, products, clearing mechanisms and formats).
- The implementation of a centralised, Europe-wide payment factory.
- A shared service centre (SSC) to centralise charging, queries and investigations, and improve client/supplier relationships.
- The simplification of IT infrastructure, which can now be comprised of one clearing process and a single format.
- The consolidation of multiple bank accounts and maintaining fewer account relationships with banks, in addition to increased use of virtual accounts, offers simpler and more efficient reconciliation.
- All of the above, in turn, offer improved and more accurate cash management with information being focused in one place.
The EPC, ECB and banks may also improve corporate and customer buy-in to SEPA by convincing them of its benefits. This can be done by increasing services and expanding SEPA’s scope to reflect the rapidly developing markets and consumer demand.
Individual payment providers, banks and institutions can independently or jointly develop new SEPA payment products based on the established infrastructure and rules utilising advanced technology. These products may be national, in response to specific demand, or Europe-wide schemes. Currently, the SEPA card clearing initiative is underway. Other main innovations now being discussed include e-mandates, mobile payments (m-payments) and e-invoicing. In addition, reflecting a global trend for faster retail payments, another important area of discussion and future development is SEPA in relation to immediate/real-time payments schemes. There is also rising demand for utilising ISO 20022 and the cash management messages – camt.052, camt.053 and camt.054 – supporting the corporates’ reconciliation and adoption of ISO 20022 standards.
Revisiting the German example, corporates met the deadline with no major exceptions; thanks in part to the extension, which greatly helped achieve compliance. The German market has already moved on from credit transfers and direct debits, concentrating on ‘SEPA cards clearing’ (SCC). Germany has a large proportion of card-related payments (debit cards used at automated teller machines (ATMs), point of sale (POS) etc.). These card-related payments were not part of the scope of the initial SEPA migration and are still being processed within the legacy DTA scheme. The addition of SEPA cards clearing offers something quite similar to SDD, but provides specific scheme functionalities that are important to German consumers and corporates.
Along with the rising SEPA-indicators, Germany is seeing an increased adoption of the camt. messages. Corporates regard the ISO 20022-based account information as an opportunity to close the ISO 20022 loop in the enterprise resource planning (ERP) system. By receiving structured ISO 20022 account information (instead of the comparatively unstructured SWIFT MT940 formatted information), corporates can improve the straight-through processing (STP) rate of their internal reconciliation. With SEPA implementations in place, it is a logical step to harmonise the technical ERP landscape based on the ISO 20022 format.
As a result of all the efforts outlined above, has SEPA’s mission been accomplished? Perhaps it never will be, and rather serves as a moving target that is constantly being chased.
A key phrase in the original report in relation to SEPA mission was “as it is now.” It was then, and still is, understood that SEPA must constantly evolve to keep pace with current market needs, behaviours, and conditions. Technological innovations have been revolutionary over the past 25 years and innovations will still occur rapidly, changing the marketplace; meanwhile, the process of commercialisation and practical usage of new innovations are constantly offering new paradigms.
The introduction and expansion of the internet, social media, mobile communications and smart phones, and new payment providers such as PayPal have all changed the way consumers, corporates and banks conduct business. SEPA’s mission needs to reflect this today, and change continues into the future.
The SEPA mission is well underway and ongoing, with an established framework offering a solid base and many opportunities to build upon and expand its scope. August 1 2014 was not the end date for SEPA or the end of the mission, but it did mark the end of ‘Phase 1’. The core infrastructure is in place and it is time for the mission to move into a new phase – one driven by demand.
As it may never actually accomplish a set or defined mission, perhaps we should say ‘SEPA: Mission Established’ and keep our eyes on what is yet to be delivered.
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