This is a major landmark moment, although a more appropriate analogy is that it represents a milestone. Rather than the final destination, SEPA is part of the journey towards the standardisation of payments systems across Europe and, in fact, beyond. Given that it is a milestone, a strong question at this stage should be: what now? What constitutes the next milestone, or milestones? And how can they be achieved?
There is no uniform answer to these questions, as the next steps taken by corporate treasuries will depend on their own individual strategies, as well as their particular starting points and operational set-ups. Most recognise that compliance with the SEPA credit transfer and direct debit schemes (SCT and SDD respectively) – in addition to the obligatory move to the extensible markup language (XML) payment format for SEPA transactions – is far from the end of efficiency-generation in treasury management. Yet many have yet to finalise their future objectives in this respect, let alone settle on a strategy.
Exploring the Boundaries
The potential of SEPA should now be on everyone’s radar although, practically speaking, exploring the boundaries must wait until the move to the SCT and SDD – ‘step one’ of SEPA – is complete. Although many are not yet through this barrier, attested to by the six month extension, those that have passed it can immediately begin the assessment of how SEPA-principles can be both deepened, perhaps within the SEPA zone and even applied outside its borders.
Starting within the SEPA zone, the initiative’s establishment of a uniform set of payments laws, regulations and systems can serve as a building block for the establishment of payments (and perhaps collections) factories. These centralised units execute payments on behalf of (POBO) one or more subsidiaries, and thereby enhance visibility and control over liquidity and cash management. They also reduce transaction cost and risk.
Meanwhile, SEPA can promote further efficiencies for those already utilising payment factories by providing the opportunity to rationalise the number of bank relationships, and subsequently reduce the operational complexity they can entail. In time, corporates could reach the stage where a single euro account is required for the entire jurisdiction: the ‘Holy Grail’ of the SEPA process and the ultimate in efficiency and transparency.
Of course, this can be a complex process that brings with it potential concerns over a lack of granularity with respect to payment-related information. For many corporate treasurers, the ability to monitor each payment made and received from individual branches is vital in order to ensure disparate operations are within budget or meeting targets, and the loss of such control is undesirable.
However, this need not be the case with the XML payment format. Whereas it was often the case that the data that enabled the denotation of payments would become truncated in local clearing systems, XML files are larger than their domestic – and global – counterparts: meaning they can provide all of the payment-related information treasurers require.
This makes XML an excellent tool when it comes to promoting further treasury efficiencies; particularly when considered alongside SEPA’s centralisation and rationalisation benefits, as well as the fact that XML is fast-becoming the format of choice for all payments, and not just SEPA transactions. Yet this must be communicated to corporate – meaning that banks are required to both explain the benefits, and develop XML-based solutions to go hand-in-hand with advisory support.
Virtual Accounting: The Art of the Possible
One example of the ‘art-of-the-possible’ with respect to SEPA-inspired innovation is the rationalisation of bank accounts via ‘virtual accounting’. As with a payments factory, payments in and payments out come into a single banking hub – although in this case it is a single, centralised (euro), company account. Virtual accounting, meanwhile, divides the single account into particular branch or profit-centre streams – enabling branch managers and group treasurers to still view the accounts’ undertakings on a branch-by-branch basis.
Payments can be handled from centralised hubs in SEPA countries, with local accounts retained for national-specific payments such as tax. Otherwise, both payments and receipts are routed centrally, although with local reporting still possible via the attachment of local identifiers: thus providing the clear advantages of a single account (including cash and working capital optimisation) while losing none of the local functionality.
Such developments represent the next step for the SEPA process, and can even add further functionality by including, say, payments in a foreign currency (maybe for a particular branch – perhaps in sterling or Swiss francs) before reconciling it to a single euro account: taking virtual accounting to its logical, but still functional, conclusion.
Why Stop at the SEPA Zone?
Of course, SEPA-thinking need not stop at the SEPA-zone. If one accepts that SEPA is a process – with the adoption of a single payments area no more than a milestone towards a fully-integrated international payments system – then it’s possible to place all the world’s payment systems along a trajectory: with SEPA simply the most advanced area (a notion the US dollar payments area might challenge).
Certainly, the same combination of factors that made SEPA possible can be applied further afield. Virtual accounting is no more than a part one of SEPA’s potential, as the future of payments should envisage a system of seamless cross-border banking right across Europe, and beyond.
This may be achieved by single banking ‘portals’ that can authorise, validate, convert (into various payments formats and currencies) and then route payments. As a result of such portals, payments are becoming borderless – at least from the perspective of the company making the payments: a strong example of the application of SEPA-thinking well beyond the SEPA zone.
Such high-level functionality is currently available only from specialist cash management providers – particularly those with extensive knowledge of the SEPA-zone, non-euro markets within the SEPA-zone and neighbouring (non-SEPA jurisdiction) geographies. Indeed, the effort required to understand and navigate such complex individual legal and regulatory systems makes this a laborious process – although worth it where the payment volumes are justified, such as between the EU and eastern Europe.
Bringing Russia Into the Fold
One particular jurisdiction – Russia – is worth focusing upon, not least because such a major country is unlikely to become part of the SEPA zone in the medium term, making any cash management efficiencies in this respect all the more remarkable. Nonetheless, strong demand exists within Russia for improved cash visibility – a demand that can be satisfied via cross-border cash pooling facilities for Russian-domiciled entities.
Russian cash pooling facilities require the navigation of the country’s complex legal and regulatory system, although banks such as Unicredit have fulfilled all the legal audits and requirements in this respect – allowing cross-border pooling to go live. It has also automated the services, resulting in Russia having its first cross-border pooling capability. Indeed, the bank is also able to directly handle request-for-transfer (MT101) messages, which is a major step forward in a Russia where previously only domestic organisations were authorised to act on behalf of MT101s. That SEPA spirit is, indeed, seeping out.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?