Migrating to the single euro payments area (SEPA) should have several long-term benefits for both banks and corporates. For example, banks are still operating with dual payment processes – one for cross-border and another for domestic payments. The introduction of the SEPA payment system for both cross-border and domestic payments will remove the costs associated with these dual payment systems. This should also serve to accelerate competition in the payments market and, in turn, corporates should shop around to get the best possible service from their bank. As part of this process, we could even see corporates putting pressure on their banks to pass on the cost savings made from changing to a universal payment system.
While the migration process to SEPA will vary in length and complexity for each corporate, particularly if they have a large number of retail customers, it is also an excellent opportunity to enhance the completeness and accuracy of bank account information, resulting in a higher straight-through processing (STP) rate, fewer errors and lower costs.
There are undoubtedly many challenges that corporates now face before they can realise these benefits. As part of their migration, corporates will need to use International Bank Account Numbers (IBANs) and Bank Identifier Codes (BICs) in order to initiate and validate payment instructions, as the mandatory international identification for all payments. Therefore if corporates want to be ready for SEPA payments, they need to be able to collect their IBANs and BICs to update their customer and supplier databases. If domestic details are not updated by the set end-date, incorrectly formatted payments could lead to errors in transactions and additional costs. According to the latest data1 drawn from Experian’s SEPA Data Conversion service, more than 20% of the records analysed were in an invalid format or contained errors. The most common problem was ‘bank or branch code not in use’, meaning that either data has not been kept up to date as branches close or invalid data has been supplied at the point of capture.
The data also showed that records containing one or more errors were at 13%. This is in contrast to the typical error rates reported by companies of between 2-10%. It is therefore clear that the domestic schemes are coping with some degree of error, whether this is manual error correction or automatic error correction, such as redirection of transactions for branches of merged banks, for example. As the IBAN data format is a relatively new standard, and it differs greatly between countries, correcting these payment errors will become more difficult and error rates are likely to increase.
We can therefore deduce that corporates still have much work to complete on internal systems used for payments origination, or in which payment instructions are stored, as they need to be modified to hold and transmit this information to other systems, and interfaces need to be amended. If either the IBAN or BIC is absent, erroneous or incorrectly formatted on a payment, it is likely to be delayed, rejected or penalised. Many corporates are yet to address these changes to their systems and will now have to do so ahead of the migration deadlines. Obtaining the correct IBANs and BICs is ultimately the corporate’s responsibility.
What’s more, systems, including customer-facing systems, such as websites for online retailing, will need to be able to support SEPA payments, including IBAN and BIC information. Corporates will need to decide whether to modify existing systems to capture and validate IBAN and BIC in the future or whether to continue to capture payments data in its domestic format and convert this data into IBAN and BIC retrospectively.
Three Practical Steps to SEPA
In terms of migration, there are three steps that corporates need to take. The first step is to assess the existing operations against the new regulatory requirements. Corporates need to investigate the countries in which they plan to operate and consider which countries they will want to make payments into and within, to create the scope of their SEPA planning. It’s also important to be fully aware of when each domestic euro clearing system will migrate to IBAN and BIC and what is required to comply. By understanding local migration plans, corporates can determine how and when SEPA will impact their payments processes and address this in their plans.
Secondly, having embarked on the migration process, it is important to complete it as quickly as possible to avoid having to maintain two separate sets of data in parallel. Usually, payment details originate from a number of systems, so the location and quality of bank account information needs to be examined and the relationship between data held in separate systems established. This will define the number of records that need to be converted, and how many of these are likely to need correction or enhancement to avoid errors.
The third step is to convert and validate IBAN information. This is a two-stage process – first, companies should identify these errors in the existing data. It is important to note that, as revealed by Experian’s data, some banks help their customers by fixing problems with domestic transactions without their knowledge. This means that the actual data error rate may be higher than the percentage of rejected transactions experienced.
While many banks are happy to provide BIC and IBAN details for their own customer accounts, some are reluctant to contact other banks in various countries to obtain and generate the details. However, 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.
Ultimately, the more proactive and supportive the banks are, the more attractive they will be to the corporates. This will create a win/win situation for both parties and be a positive result of the SEPA migration.
1 Data in the analysis comes from 55 data conversions scans performed between September 2009 and August 2010. The analysis covers a number of sectors: in the case of the banking sector, this relates primarily to payments on behalf of customers. The remaining sectors represent supplier, customer or salary payments.
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