Single payment area: priceless

FINANCE DIRECTORS are never short of acronyms to grapple with: you update your business processes and IT systems to accommodate one and along comes another. This time it’s SEPA: the Single Euro Payments Area. Some will be ahead of the curve on this.

There are organisations that have already completed the planning phase and their SEPA implementation will be underway; perhaps migration to SEPA is already complete – perhaps not. As the February 2014 deadline for SEPA migration looms closer, survey after survey seems to indicate that many of the corporates that will be affected do not yet have migration projects in progress – and some have yet to put plans, teams or budgets in place.

“A year ago, I didn’t know what SEPA was. Now I am worrying about how much it will cost to get our data ready in time and how much it will cost if we don’t,” says one FD who wants to remain nameless.

Knowing that she is not the only FD to be taken by surprise is small comfort. “If we had started earlier, we could have consolidated our banking relationships and centralised cash management,” she says – streamlining processes and perhaps saving money. “Now our strategy is to take the least-cost option and do the minimum to become SEPA-compliant in year one” – outsourcing some processes and using file conversion services, then re-evaluating this approach and exploring other options at a later date.

How much your state of readiness matters depends on a number of factors. These range from whether you view SEPA as a compliance burden or a strategic opportunity, to when and how much the EU regulations on SEPA will affect your particular organisation (see box: Legislative drivers).

“Some finance directors may think that the 2016 mandatory migration date for non-eurozone EU countries seems a long way off. But if you have subsidiaries, branches or even bank accounts within eurozone countries, you will need to be SEPA-compliant in less than 12 months,” says Tony Virdi, VP and head of banking and financial services for the UK and Ireland with Cognizant, a global technology service provider.

From 1 February 2014, national payment products denominated in euros will be replaced by the SEPA Credit Transfer and SEPA Direct Debit (see box: Payment schemes) in most EU countries, and their national clearing houses will migrate to an integrated pan-European payment infrastructure. This means that transactions will no longer be processed automatically when the Basic Bank Account Numbers (BBAN) and clearing numbers or branch codes are provided. Instead, the payer will have to provide the International Bank Account Number (IBAN) and the Bank Identifier Codes (BIC) will often be needed too (see box: Standards & services) – and these will need to be correct.

“Non-compliance implies potential delays in processing, unnecessary reparation costs and increased operating costs, with potentially serious cashflow consequences,” warns Sebastian di Paola, global head of corporate treasury solutions at PwC.

Data hygiene
Inaccurate and out-of-date account information will be a major issue for corporates migrating to SEPA standards, but the costs associated with failed payments are difficult to predict. If the Experian estimate of €50 per transaction turns out to be accurate the cost of failed transactions could soon mount up. At the moment, many banks provide exception handling free of charge, but there is an expectation that they will be unable or unwilling to absorb these costs when the volume of SEPA transactions explodes.

“The move to SEPA represents a huge opportunity and challenge for corporates,” says Garry Young, IP solutions director at CGI, a global IT and business process services firm, “and good data hygiene is critical to migration.”

Vendors such as CGI and banks are offering outsourced services for mandate management, file conversion and validation, and ‘payment hubs’ to handle incoming and outgoing SEPA transactions, and if they are to meet the 2014 deadline, many corporates will need to use these services. They have speed on their side, and they can minimise the demands of SEPA migration, along with the up-front costs and the disruption to existing business processes. It’s an approach that can work well for smaller businesses with minimum to medium level exposure to cross-border euro transactions, according to Virdi.

“Some larger corporates may be able to become fully SEPA compliant quickly using existing systems capability or with vendor upgrades or minor systems changes,” says Virdi – some may not. “Corporates can re-engineer legacy systems to accept ISO 20022 (the ISO standard for financial services messaging) formats. However, this can be costly and time-consuming,” he suggests, adding that using message transformation to insulate the internal systems translating between ISO 20022 and the legacy format can be achieved in quicker timescales and be more cost effective.

But SEPA casts a shadow across numerous back- and front-office applications and processes, and organisations will need to check that these are compliant even if they have opted to use the ‘conversion’ infrastructure provided by banks and other vendors.

Bank interfaces and master data will be affected in systems used for bank communication, customer relationship management, in-house cash and liquidity, payroll, treasury, as well as accounting and enterprise resource planning systems. Point-of-sale and other customer-facing (and often industry-specific) systems may also be affected – likewise warehouses and shared service centres, inside and outside the enterprise, in public clouds and in private clouds.

Support for SEPA and the required XML format is already offered by some software and services providers, but approaches to compliance and timescales vary across vendors. Many systems (and processes) will need to be reviewed, and may need to modified or upgraded.

Do you know if all of the affected systems can store the required SEPA-related master-data (IBAN / BIC) for domestic third parties? How will you update third-party master data in source systems? Will your financial systems be able to auto-match the items reported on bank statements after 1 February 2014? Are you using (local) payment products that will be phased out from 1 February 2014?

Assessing the size of that SEPA shadow can be tricky. It touches numerous parts of the organisation and even more processes, and it creates practical challenges that extend beyond the enterprise. For example, just how do you ensure that clients will be able to pay you and suppliers will be able to deliver uninterrupted after 1 February 2014?

Strategic opportunity
It’s not all bad news. Payments should become easier and faster, and costs should fall, as the EU regulation on SEPA states that cross-border SEPA payments must cost no more than a national transfer (but the national costs do vary).

Approaching the SEPA migration as a strategic opportunity, rather than a compliance burden, also has the potential to deliver significant business benefits. It can make it easier than it would otherwise be to centralise accounts, streamline and standardise many of the associated payment processes and information flows, improving capital management and increasing revenue. Some corporates were quick to see the potential benefits of SEPA and almost as quick to make the necessary changes to their banking arrangements, business procedures and IT systems.

TUI Travel plc completed its migrations to SEPA Credit Transfer in 2010 and to SEPA Direct Debit Business to Business in February 2012. “Part of TUI Travel, the Accommodations and Destinations sector has a Finance Service Centre providing back-office services, based in Mallorca,” says Jordan Castellarnau, its treasury manager, who used SEPA to rationalise bank relationships, standardise mandates and processes and improve cross-border collections involving thousands of customers and suppliers in more than 80 countries.

“The company used to have fragmented direct debits for collection into local currency accounts in each market,” he explains. “Now collections are made into the Spanish entity FSC account held in London, which is linked to a centralised liquidity structure.”

Some of the organisations affected by SEPA will never be able to realise benefits on this scale and many of those that can derive significant business benefits from SEPA may struggle to do this during the first year of migration. Fortunately, being pragmatic and taking a tactical approach to compliance during year one does not preclude planning for a more strategic approach in the longer term – and non-euro EU countries do have until 2016 to become fully compliant.

Meanwhile, February 2014 looms large for corporates in the eurozone and for those doing business with them. If you haven’t already started, now might be a good time to focus on your own SEPA-readiness and that of your clients and suppliers. Time is running out.

LEGISLATIVE DRIVERS

The introduction of the Single Euro Payments Area (SEPA) is mandated by the European Union SEPA Regulation (EU) no 260/2012.

SEPA will affect all companies doing business with partners in the eurozone and sending or collecting payments in euros.

SEPA aims to simplify and harmonise euro bank transfers across the 27 European Union member states, as well as Iceland, Liechtenstein, Monaco, Norway and Switzerland.

Euro-in: the 17 EU member states that use the euro as their domestic currency must comply with SEPA by February 2014.

Euro-out: the 10 EU countries that use their own domestic currencies must comply with SEPA by October 2016.

PAYMENT SCHEMES

SEPA will eventually replace numerous national payment schemes with a single unified scheme that uses the pan-European payment instruments:

• SEPA credit transfer – SCT – used by debtors to initiate payments.

• SEPA direct debits – SDD – initiated by creditors to collect outstanding receivables.

SCT was introduced in 2008. Banks already provide it and corporates already use it.

SDD arrived later and uptake has been lower and slower. Estimates for SEPA-compliant direct debits range from less than 1% to 5%.

STANDARDS & SERVICES

SCT and SDD are based on standards in the ISO 20022 Universal financial industry message scheme (UNIFI) and defined as eXtensible Markup Language (XML) formats and PAIN (payment initiation) messages.

Businesses will need to send SEPA-compatible SCT and SDD to their banks using XML and settlement instructions must include the IBAN (International Bank Account Number) and BIC (Bank Identifier Codes), though the latter will eventually disappear.

Banks will provide customers with SCT and SDD payment instruments. Banks and other vendors are offering related services such as file conversion: timescales, costs and available resources for SEPA- and XML-compliant services and products vary.