There is no doubt that the single euro payments area (SEPA) is going to happen. The European parliament approved the Payment Services Directive (PSD), which provides the legal framework for SEPA, on 24 April 2007 and it is expected to become law in all 13 euro countries by 1 November 2009.
- The SEPA data model has been developed by the SWIFT standardisation team and is based on the UNIFI ISO 20022 standard. This means the SEPA data model will be the reference for all European users and mandatory for bank-to-bank relationship. It will also be used within companies and bank-to-corporate relationships. In addition, future use of this standard in Europe will improve the efficiency of end-to-end transactions with full interoperability, based on STP integration with various information systems. This will further integrate the physical supply chain with the financial chain. The huge savings expected by public authorities will come from the intelligent use of the SEPA data model, rather than banks producing a new pricing model for SEPA instruments.
- The rulebookson the core payment instruments – SEPA credit transfer (SCT) and SEPA direct debit (SDD) – have been published. The SCT scheme rulebookwas recentlyupdated on 17 June 2007 and the market will be able to use the SCT, test the standard and the routing rules (i.e. BIC and IBAN). During the first year of implementation, the market will be in a position to evaluate which players are capable of handling the SCT and develop an offering around it. This will be the time to identify the scope of full reachability – something that is difficult to define right now.
- The SDDversion V2.2 (the official published version) provides a regulatory framework applicable to all players. This first version describes how the debtor signs the mandate, how the creditor authenticates the issuer and maintains proof of authentication for legal purposes. The creditor is also responsible for the circulation of electronic data between the creditor and debtor bank. In many countries, the new role of the creditor is a significant change compared to former legislation. For example, SEPA introduces an eight-week period to refute a transaction, which is much longer than existing legislation allows – in France, there is only a seven-day period.
As a result of such issues, it is important for the overall success of SEPA and the PSD that the national transposition of the PSD is monitored closely.
At the moment, lawyers are considering the differences between the PSD and the rulebooks because there are some differences in interpretation. The PSD needs to be adopted consistently and not become subject to national interpretation. For example, the Rulebooks and the PSD have to clearly define the ‘execution date’ compared with the ‘settlement date’.
Clearing settlement mechanisms (CSMs) is another hot topic. Most local clearing houses are moving to CSM and should be able to manage the new means of payments (i.e. SCT and SDD). What remains uncertain is how they will be connected to provide full reachability. For banks, CSMs need to be properly interconnected.
For domestic transactions, it makes sense to use an efficient CSM and retain a pan-European automated clearing house (PEACH) solution for cross-border payments; however, this is not really the aim of SEPA. Post-SEPA, the plan is to have just three or four players managing the huge volumes by increasing their local functionality into global capabilities.
For big players who have to offer cost-effective services, the focus now is finding the most efficient PEACH to provide the largest volumes. In this respect, the French CSM, Systèmes Technologiques d’Echange et de Traitement (STET), is currently BNP Paribas’s first choice but, at the same time, banks must remain flexible to allow clients to get the best new services. In theory, the large banks will be ready to deliver the SEPA products on time; however, we do expect a comprehensive offering from the main PEACHs in terms of full reachability and potential new value-added services.
The bank-to-bank relationship is well defined by SEPA unlike the corporate-to-bank relationship. In the latter, connections are not regulated or standardised by SEPA; the SEPA data model is not mandatory for non-bank users; and security has not been standardised.
With regard to the SDD,it is not completely defined and accepted yet. The new rules concerning the mandate have to be understood and accepted by end-users, such as the fact that their banks will not check mandates anymore. Moreover, countries have different approaches to the mandate.
Due to the new rules, some countries in southern Europe have asked for a new SDD version – the debtor mandate flow (DMF). The DMF will not be part of the core SDD offer but it will be provided as a value-added service associated with the electronic mandate offer under development. In fact, in countries where the creditor mandate flow (CMF) is unusual, the DMF version will be more popular.
Legal and tax issues should also be addressed. The PSD does not provide legal harmonisation for account holding, it is therefore difficult to propose the same account opening procedure in all SEPA countries. Similarly, the tax environment for cash centralisation has not yet been harmonised. Consequently, whether it is automated or not, the related cross-border flows are still subject to different withholding tax regimes in some cases.
Adapting to SEPA: Local Euro Markets
One of the most important issues in the discussion about SEPA is how countries will transform their national systems and instruments to comply with SEPA. There must be a harmonised approach and implementation of SEPA instruments across all 13 euro countries in terms of compliance and timeframe. However, different cultural behaviour makes it difficult to do this. Across these countries, different payments methods are popular: Latin countries, for instance, use SCT a lot.
Moreover, there are also three different types of markets: civil service-to-citizen (C2C) business-to-consumer (B2C) and business-to-business (B2B). The C2C market needs to offer simple and secure services (cards, SDD) to customers and small corporations. The challenge is to reassure the market about the new means of payment. In the B2B market, the methods of payment used vary from one country to another. In Germany, for instance, the SDD is popular while this is not true in France.
In addition, SEPA provides the opportunity for corporates to revaluate their organisations. For example, in fully understanding the benefits of SEPA, corporates can also rationalise their organisations at the same time. With the use of the new XML standard, corporates will have a common language to exchange and share information, and they will be much better connected and integrated. Everyone within the same company will receive and share payment information at the same time in the same format and this will improve efficiencies in the financial supply chain. The rotation of cash should definitely be improved as well as working capital.
To ensure the harmonised implementation of SEPA across all countries, banks must help to address and recognise the best way to adapt local needs and systems. BNP Paribas, for instance, has adopted a pragmatic approach to SEPA where the bank will first identify the needs of different markets and take into account local requirements. The ultimate goal is to propose a harmonized cash management service in Europe by using the XML standard and responding to local and global needs. In the short term, BNP Paribas will be ready to adjust to each market’s requirements. For example, BNP Paribas has the status of a retail bank in France and Italy, and will be able to migrate to SEPA payment instruments at the domestic level in these countries. As an international cash management bank, BNP Paribas will assist large corporate clients in their SEPA migration plans within the eurozone.
SEPA will be a unifying force within the eurozone but its implementation will, at first, be dominated by national migration constraints. SEPA is still evolving and, considering all the stakeholders involved, 2008 will be more of a ‘test’ year than a fully operational one. At the end of 2008, there will be a better perspective on how national markets have reacted to SEPA and it is important to ensure there are not several ‘mini-SEPAs’ in the EU by 2009. There is no doubt that SEPA is a huge challenge but the basic components are now in place and the market must adapt to the new SEPA environment with full support from the public authorities.
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