Using SEPA to Drive Centralised Receivables

Until recently, sellers have predominantly had to hold
in-country collections accounts to facilitate incoming payment from buyers.
There have been broad technical, regulatory/tax and market reasons for this:

  • Local restrictions on depositing certain collection instruments
    (cash, cheques and other paper instruments).
  • A lack of centralised
    regional or global collection instrument types such as initiated cross border
    collections in payment markets (cross border direct debits did not exist in
    Western Europe until SEPA direct debits (SDDs)).
  • The requirement for
    organisations to hold local residency status for tax purposes.

Common obstacle denominators include collection instruments that have been
largely fragmented in terms of uptake and governed by different national rules
and bodies in each market. Consequently a direct debit in country X is very
likely to be different to one in country Y.

Moreover, sellers in many
instances lack the desire or the negotiating power to dictate payment types or
terms of trade unless they could participate in a seller-driven market. In
addition, subsidiaries have naturally possessed more local specialist knowledge
on the fragmented collection instruments used in each particular market and
awareness of local buyers’ behaviours. Some collection instruments required
local manual handling and manual reconciliation, hence the crucial need to keep
local country teams as well.

For all these reasons, it is clear why
centralising accounts receivable (AR) processes might seem like an
insurmountable task for many organisations. It explains why the focus for
treasurers and SSC managers has always been to tackle accounts payable (AP) and
liquidity processes to quickly reap organisational efficiency gains and
standardisation. As a result, days sales outstanding (DSO) continues to suffer
and working capital remains not optimised.

Does SEPA Present the
Opportunity to Turn a Corner?

However, as the payment landscape
is changing together with buyers’ behaviours, we are seeing an opportunity for
organisations to transform once again. With banks switching customers to the
new SEPA payments instruments since the beginning of 2008, many of the previous
pre-requisites required to centralise AR are now being partially or fully
enabled and businesses can avail themselves of an opportunity to review their
AR processes in conjunction with SEPA. Given that the adoption of SEPA before 1
February 2014 is an official regulatory requirement, organisations should
ensure that they choose a migration strategy that will be sufficiently flexible
and scalable to meet the time requirements and set the correct building blocks
to centralised receivables processes in order to unlock maximum SEPA benefits
in the very near future.

Organisational_Transformational_Treasury.gif

Why does SEPA Offer the Right Framework for AR
centralisation?

According to the World Payments Report
2013
from Capgemini and RBS, the most recent full- year figures (2011)
show that non-cash transactions grew by 8.8% globally, continuing the growth
impetus from the previous year, which stood at 7.1%. This points to a strong
trend, driven by buyer convenience, to take up electronic payment (e-payment)
methods, which is making it easier for sellers to collect more efficiently and
avoid having to handle local paper instruments where possible. This is a
conducive to achieving centralised receivables. 

On the European
regulatory front, the Payment Services Directive (PSD) has set the common legal
ground needed to harmonise and simplify the cross regional European e-payment
space in order to align differences between national payment schemes
transacting what is, in essence, the same euro currency. The PSD enabled the
commercial and technical framework to be developed for SEPA, which presents a
real opportunity for organisations to utilise standardised regional collection
instruments for a centralised receivables management strategy.

Technically, SEPA credit transfers (SCTs) and SDDs are standardised
instruments operating under the same technical payment rules across 33 SEPA
countries. Cross border-initiated euro direct debits are now possible with SDDs
and the market has seen a number of organisations already choose to implement
this new instrument. For all SEPA countries there are consistent rulebooks and
standards regarding, for example, execution timelines; treatment of charges;
mandate management flows; reject and refund codes; and refund rights, and so
on. In addition, central bank reporting is due to be phased out by 1 February
2016 in the SEPA zone.

In summary, SEPA allows organisations to
form one regional AR team covering Western Europe or more, providing a great
foundation for a scalable end–to-end AR model manageable from a central
location through a consistent technology platform that manages tasks such as
collection initiation, mandate management for direct debits and cash
application reconciliation matching tasks. Needless to say, this is an
efficiency driver for multinational corporations (MNCswith footprint in many
countries.

How can SEPA be Used as a Centralisation
Catalyst?

To achieve true receivables centralisation, it is
recommended that organisations open a dialogue with their bank partners on
first taking steps to adopt a hybrid model for centralisation that takes
account of local and other requirements. This would mean moving accounts to a
strategic, centralised location, exploiting SEPA’s account portability feature,
and keeping in-country accounts for remaining markets that still have local
restrictions such as a need to facilitate paper instruments. This flexible
modular approach would enable the centralisation of the remaining AR accounts
at some later stage.

To optimise even further, organisations can then
take the next step to evaluate how they can adopt a receivables-on-behalf-of
(ROBO) structure, whereby collecting entities are different from invoicing
entities. Again, SEPA is technically different from legacy collection
instruments and can support additional fields in the instructions files, such
as the ultimate creditor field, that can be used for a ROBO structure. A key
benefit of a ROBO structure is that it allows a collection factory to own all
the operating bank accounts needed for the wider organisational group and hence
eliminate surplus accounts.

For maximum benefits from account
centralisation or rationalisation, organisations will also need to ensure that
they have completed an extensive impact analysis with relevant tax, legal and
IT partners, taking into account the following centralisation
considerations:

Citi SEPA table 

How can SEPA Data
Points be used to Optimise Auto Cash Application Rates?

SEPA
offers a rich range of standardised reconciliation match data that can be used
to automate centralised cash application in euro markets with the right system
adjustments on the seller side to capture and handle the new information. As
opposed to legacy instruments such as the bank identifier code (BIC) and
international bank account number (IBAN), for example, which are already
standard requirements for all SEPA transactions. Citi has issued more
reconciliation information as part of its countdown
campaign
.

What is more, SEPA transaction amounts must be credited in
full, with any charges being deducted separately from the principal amount.
Deductions are allowed from the principal amount if agreed between the
beneficiary and the beneficiary bank.

There is one final thing to note.
SEPA does not resolve more complex buyer behaviour situations, such as
facilitating one payment for multiple invoices or where exceptions management
is common. For these scenarios, organisations may need to continue to look into
specialised cash application tools to aid their overall cash application.

Conclusions on Using SEPA to Drive Centralised
Receivables

SEPA provides a fruitful growth environment, in
terms of technical framework, regulatory foundation and now market critical
mass, for organisations looking to centralise their historically troublesome AR
processes. In practical terms, organisations can use SEPA to form a regional AR
centre of excellence team, rationalise their account structures and optimise
automated cash application rates. Centralised receivables is, and should be, an
important item on an organisation‘s working capital optimisation agenda.

As the market is moving to meet the 1 February 2014 SEPA deadline,
organisations should look to ensure that they choose a migration strategy that
has been considered in tandem with a centralised receivables strategy. The
priority should be to make the deadline in time, but to also allow flexibility
to reap benefits of re-engineered AR process at a later stage.

The
recommendation for organisations is firstly to evaluate adopting a hybrid
centralisation model, to break down the task at hand, and eventually seek to
move the remaining processes into a fully centralised AR model and, if
suitable, a ROBO structure. Further details on SEPA can be accessed here

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