In the near future, it is expected that the European Parliament (EP) will vote positively on the compromise text of the ‘Proposal for a regulation establishing technical requirements for credit transfers and direct debits in euros and amending regulation (EC) No 924/2009’,or ‘Single euro payments area (SEPA) end date regulation’ in shorter terms.
In December 2011, a compromise was reached between the EP and Member State negotiators on the contents of the proposal of the European Commission (EC) of December 20101. One of the key elements included in this text is the long awaited deadline for credit transfers and direct debits in euros to comply with the ‘technical requirements’. In other words, the decommission date for the usage of current domestic payment products in euro countries. This date set is 1 February 2014.
With this date being set, it is time for detailed planning and execution of all stakeholders. This article focuses on the possibilities for corporations to reap benefits, while providing a status update on the readiness of banks that offer payment services.
Banks have been working on SEPA for years now and have gradually expanded their SEPA capability and service offering. These have been positioned alongside the current domestic payment product offerings offered by these banks.
In some countries, for example in Belgium, the SEPA Direct Debit (SDD) business-to-business (B2B) product had positive characteristics for creditors leading for demand for this product. Keeping the eye on Belgium, an active push of the government to use the SEPA Credit Transfer (SCT) product has proven to lead to relatively strong take-up.
Although more examples of successful SEPA migration strategies exist across Europe, no country has migrated all current domestic credit transfers and direct debits to SEPA as of yet. With the upcoming deadline, this has to change. Banks therefore have to finalise ,and in some cases intensify, their efforts to complete their desired SEPA capability and service offering to have a compelling service offering for their current and future customers. Next to that banks have to develop and execute a SEPA migration strategy through which customers will be supported in the migration from domestic payment products to SEPA equivalents.
The activeness of banks on the latter aspect shows a diverse picture across Europe. Not all banks have fully started SEPA migration programmes yet. This is undesirable since 1 February 2014 is quite close, therefore starting up a dedicated SEPA migration programme as soon as possible is strongly advised.
In addition, a diverse picture exists the operating model side. With the start of the SEPA journey banks have chosen for different implementation strategies. Some have taken a ‘wait and watch’ approach, where others have taken a ‘strategic’ approach. With the deadline nearing it is time to re-visit whether the chosen strategy still fits the need and is effective and efficient. While a lot of banks are embarking on this, a key trend that Capgemini sees developing is the implementation of so called payment hubs. Often package based implementations of the payment processing space in bank with a goal to minimise costs combined with greater control and flexibility.
As can be seen from the above, a lot of choices and work lay ahead for banks in the coming years, of which the timing is primarily driven by legislative developments. The big question therefore is: what choices and options corporations have in the coming years?
Corporations’ Possibilities for Improvement
Since the Regulation stretches beyond the bank space, corporations will also need to change. Just fulfilling the requirements of the Regulation brings a lot of impact in terms of effort and money ánd limited possibilities for improvement. The checklist for corporations, as published earlier on gtnews, gives an indication of the magnitude of activities to undertake. As extensive changes are needed in payment operations in any case, it is wise to see whether this effort can lead to benefits other than being compliant.
Corporates could kick-off this exercise with a holistic analysis of the financial supply chain. Some of questions for which answers have to be sought are:
- How are diverse order-to-cash (O2C) and procure-to-pay (P2P) value chains set up?
- What are our incoming and outgoing payment flows?
- Is working capital management set up adequately?
- Are diverse payment flows managed likewise, or do differences exist?
- How is my performance compared to industry best practices?
Based on the results of this analysis, hypotheses based opportunity studies can be executed to identify the feasibility of possible benefit scenarios. The outcomes of these studies will supply guidance for the actual implementation of desired changes and will be the building blocks for the business case.
Next to the above mentioned strategic investigations, possible benefits may be achieved on more tactical and operational levels. To assess these possibilities and plan for changes a detailed overview of the current operating model is needed.
The operating model assessment should address different elements. Some of them depend on the results of the strategic assessment undertaken. As a minimum the following elements should be addressed. This should be done in an end-to-end view from customer intake to the actual execution of the payment processes and reconciliation processes.
- The payment products used for diverse payment flows: what are the payment products used for initiating payment orders and receiving payment related information? Investigate both payables and receivables.
- The processes set up to support the payment execution: how are operational procedures set up for the various payables and receivables flows, including reconciliation and error handling processes?
- The IT set up for the execution of payments: in line with the process set up, what is the role of IT applications and systems in these processes?
Combining the results of this analysis with the full set of SEPA requirements and the results of the strategic analysis supports, you in finding possible areas of improvement. Some possible benefit areas are found below:
Payment product mix
The SEPA deadline offers a possibility to revise the currently used mix payment products. The introduction of SEPA offers new payment products with new capabilities, most importantly the SDD that offers cross-border collection possibilities.
Furthermore it should be analysed whether costly payment products or payment products that demand very specific operational processes can be replaced by others. Last but not least, it should be analysed whether the results of the strategic study demand changes in liquidity and cash management products. The analysis should be extended to include the products used for information purposes, mainly used for reconciliation purposes.
The analysis can be extended to include services offered by banks or other service providers that can exist during the upcoming migration period and thereafter. These services include mandate management services (also see below), conversion services for formats and IBAN account numbers and more extensive services, such as payment processing services. SEPA is an event to re-evaluate your current banking and non-banking partners for better capabilities, service and/or price.
Big corporations often have payment operations in multiple countries. SEPA is a trigger to investigate possible changes in this set up for at least the operations in the eurozone including a reduction in the number of banking relationships. These changes in set up can take multiple forms of existence from changes to cash management set up only to full centralisation often taking the form of financial shared service centres (SCCs). This also applies to corporations with payment operations in just one country. As such benefits can be obtained through standardisation.
If you haven’t started such a change yet it is unlikely that a full implementation will be finalised before the SEPA deadline. In such instances SEPA can be included in the broader change programme or act as an event to trigger this broader change.
As with banks, the corporations’ IT market offers opportunities for package based products for payments processing. Varieties exist ranging from financial modules that are part of broader enterprise resource planning (ERP) package, through specific solutions dedicated for payment processing to niche offerings only focusing on specific process steps.
Most of these services are offered through a variety of modern distribution models. These can be implemented within the corporation or implementations can be outsourced thereby effectively outsourcing parts of the payment process.
In outsourcing again different models exist including software-as-a-service (SaaS) and business process outsourcing (BPO) models. Capgemini for example works with respected partners to offer a full end to end payment factory concept.
Moving to a state of the art IT set up can lower implementation costs and future running costs thereby increasing flexibility for future changes.
When using, or wanting to use, the SDD product attention has to be paid on mandate management. In most countries the demands for the administration and management of mandates are more extensive with the SEPA product than what corporations are used to with the current products.
As such a solution needs to be found for mandate management. As with the payment IT set up, a wide range of possible implementation options exists. Choosing the right gives possible benefits with the implementation of SEPA.
After execution of these strategic, tactical and operational studies a detailed plan can be developed to plan for the SEPA deadline and beyond.
Although far from extensive, the items addressed in the article serves as a handle for possible benefit areas to be investigated when planning to reach the SEPA deadlines. SEPA is a topic that can be addressed in different ways than just compliance. Starting now gives some, although limited; time to plan for changes taking possible benefits into scope.
Thereby it should be noted that the impact spans beyond Europe. Compulsory usage of the ISO 20022 standard can be a catalyst for global roll-out. Furthermore banks and corporations doing business with and in Europe are impacted as well.
The following key phases in SEPA Migration should be planned for and executed between now and the SEPA end-date of February 2014:
- Start preparations a develop consensus on high level impact.
- Start identification of possible benefit areas and plan for execution of these, to be conducted in line with impact analysis execution of mandatory SEPA changes. On the latter pay special attention to:
- IBAN / BIC administrations.
- Mandate management for direct debit users.
- Message format and content changes.
- Changing timelines for payment file delivery.
- Communication to customers and suppliers.
- Execute changes identified in the impact analyses phase, including possible benefits that are targeted. Earmark sufficient time for testing.
- And last but not least: be compliant in time.
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