What Will 1 February 2014 Bring?

However, this blog will address those who already purport to be ready for SEPA. Much focus is put on the internal aspects of SEPA. Are treasury’s systems compliant? Has the master data been updated? Are the direct debit (DD) mandates correctly administered? Have SEPA direct debits (SDDs) been tested with the company’s banks? If all of these questions can be answered with a firm ‘yes’, treasury can be assured that it is ready for SEPA, right?

Unfortunately this is not necessarily true. A company can be in perfect shape to make SEPA payments but this does not guarantee anything about its counterparties. What will happen at and around 1 February 2014 if it is able to successfully execute all its SEPA payments, yet unable to collect all receivables because some customers suddenly appear not to be SEPA compliant? As regards payments the latest statistics show that as of November 2013 around 64% of standard payments in the SEPA area are executed as SEPA payments. It is highly unlikely that this number will rise to either reach or approach 100% within three months which makes it likely that a significant number of payments made by the company’s counterparties will fail once SEPA is a reality.

But the same might also be true for collections using SDDs. Many corporates have tried to replace existing local DD mandates with SEPA business-to-business (B2B) mandates. It is important to remember that when such a mandate is agreed upon, the customer has to register the mandate with their bank. Should the customer fail to do this, the SDD will fail at the customer bank. It should therefore not be assumed that, once the B2B mandate has been signed, the DD will be successful!

Next to that, the treasurer should also bear in mind that SDD migration still stood only at 26% as of November 2013. Some corporates might be ready with regards to SDDs but might intentionally not yet execute them. However, even if the SDD statistics exponentially improve over the last remaining months it is still unlikely that the migration figure will come close to 100% as of 1 February. As such, the treasurer has to ask the question: ‘How likely is it that my DD collections will fail?’

Calculating the Odds

One of the key aspects of treasury is to anticipate and prepare for whatever might be expected in the future. As such, treasurers and cash managers who receive funds that will be transferred/collected using SEPA credit transfers (SCTs) or SDDs must assess how much of these collections stand the chance of not arriving at the expected dates at and shortly after 1 February 2014. Given the current SEPA adoption rates this is likely to be anywhere between 5% (some receivables might not arrive on time) and 100% (all collections via SDD fail). It can then be assessed whether there is sufficient headroom available to use for a possible shortage of liquidity.

But it is also important to look at the wider perspective. In today’s economy where liquidity is a scarce commodity many – especially small to medium-sized companies – are running on very low cash reserves. This might mean that a potential liquidity shortfall, which might occur during the SEPA ‘go-live’, could also be the final straw that triggers the collapse of some businesses. This will obviously impact the supply chains that these firms are part of and, in turn, affect all companies that are part of these supply chains. It should also not be forgotten that the SEPA adoption rates show great differences between different regions, which means that the potential liquidity impact could be felt much harder in some countries compared to others.

Treasurers should therefore consider two things as 1 February approaches. First they should consider the likelihood of their cash flows being affected and the resulting. If necessary, headroom could be extended to ensure that a potential shortfall in cash does not disrupt day-to-day business. Second, they should consider the potential impact of disruptions in the supply chain, as key vendors or customers might be adversely impact by SEPA.

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