The Payments Pause: What can Corporates do with SEPA’s Extra Six Months?

Then last month on 9 January treasury departments learnt that the European Commission (EC) and European Parliament (EP) had agreed to introduce a six month extended transition period for migrating to SEPA instruments. This deadline extension until 1 August 2014 was no doubt gladly received as a late Christmas gift by some. The EC used statistics from the European Central Bank (ECB) to explain their decision, saying that low migration rates indicated a lack of readiness that could cause significant disruption to the payments system were an extension not to be granted.

Other businesses might not recognise themselves in this picture however. Many large European corporates have been preparing for SEPA for some time and are beyond the point of no return in their migration projects. The move to new payment instruments has been long foreshadowed and they have put in place a project management plan, dedicated resources to the programme and made significant investments of time and money. The ECB’s statistics do not break down readiness trends by size or sector of company, but over 90% of Bank of America Merrill Lynch’s (BofA Merrill) own large corporate clients had migrated to SEPA credit transfers (SCT) by the middle of January.

Just because there has been a pause in the European-wide regulatory process, it doesn’t mean corporates should press the pause button on their migration programmes. BofA Merrill has been bullish on SEPA for many years and believes it could lead to tangible and positive developments in the payments industry. Being SEPA-ready on Day One is just the first step in a much broader process. The earlier companies migrate the quicker they can move to the next stage, which is dealing with any teething issues, and ultimately to the last stage, which is reaping the full benefits of what the move to SEPA can bring.

While there has been much focus on being ready for SEPA on Day One less attention has been paid to the hours, days and weeks that immediately follow. The bank expects issues to arise at this point in time, particularly as a result of variations in payment and collections rejects and returns.

For example, if a collection instruction in this new SEPA direct debit (SDD) format is returned, it’s important that the treasury team finds out the reason for the rejection so that the transaction can complete and the process can be automated the next time this collection is made. However, this will be dealt with differently in each country. For instance, some rejects will be due to insufficient funds in the counterparty’s account. In Belgium, the Netherlands and Germany, privacy laws mean that this will not be disclosed and the reason code will be unspecified, whereas in other countries, a clear code will be given. In some instances rejects will simply be returned labelled as ‘unspecified’.

With SCTs too, rejections could be because the international bank account number (IBAN) is incorrect, or because the account has closed. One take-away is that if a corporate and its treasury department is active in several countries, it’s important to learn all the reason codes and the nuances behind them so that payments are processed effectively. Banks will be able to help investigate these issues on behalf of their corporate clients. But more broadly, this example shows that migrating to SEPA instruments ahead of the new deadline will allow corporates to spend time and resources investigating issues in a live situation.

Also on the ‘to do’ list

Before the new deadline of 1 August 2014, there is also the contingency of reverting to legacy instruments if unforeseen circumstances create problems with making payments to staff or suppliers; an option which will not be available subsequently. Issues could arise as a result of banks using variations between SEPA instruments for instance. The regulation mandates that banks adopt SCTs and a core version of SDD, but business-to-business (B2B) direct debits are optional. Corporates may put the latter in place, but find that the banks their clients use have not done likewise, and so will need to revert to the core direct debit (DD) instrument instead. Resolving any such delay is critical to ensuring that liquidity continues to flow and that a corporate’s working capital position is not impacted by kinks in the payment system. In this way, staying on track with SEPA migration can be considered as a form of risk management.

It’s not a case of simply putting SEPA instruments in place and then walking away. Establishing a virtual command centre for the go-live will help ensure that issues are spotted and escalated in a timely way. What this actually looks like will differ from one company to the next. Some treasurers already look at transactions on a real time basis, while others with lesser volumes may monitor incoming and outgoing payments only a couple of times each day. These firms may wish to allocate extra resources in those first weeks and monitor transactions more often in order to spot issues and respond quickly. Banks and service providers are likely to have extra resources in place to support investigations and will be able to support their clients through this transitionary period.

It’s vital that corporates stay on track with their migration plans and make full use of the resources in place now. Some businesses might pause for breath, and take a couple of extra weeks in early February to migrate now there is less pressure to be live at the start of the month. Some may take the time to continue their work with payroll providers, to ensure that payroll files are in a format that all parties can accept and process after 1 August. Other companies operating in multiple countries may find that national regulators are implementing earlier end dates, and so they will definitely need to keep up momentum to be ready before the summer. At the time of writing, for example, Ireland and Belgium had announced an extended transition period of only two months.

Challenges can and should be expected with SEPA implementation, even with the extended deadline. Being ready ahead of time will allow corporates to resolve them and move onto reaping the full benefits of greater standardisation and automation ahead of the rest of the field.

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