SEPA: What Do Corporates Need to Do?

The biggest impact on corporates so far, as Europe moves towards a Single Euro Payments Area (SEPA), is the requirement to format their payments messages according to the main existing SEPA schemes – the Interbank Convention on Payments (ICP) and Credeuro. The full achievement of SEPA, from a corporate’s perspective, will be based on the new Scheme rules, which are presently the subject of national consultation (see box below on SEPA’s timeframe).

Further to the EU Commission bringing into effect Regulation 2560/2001, the European Payments Council (EPC) set out the conditions for how a euro payment in the EU could be achieved without deduction charges and established new pan-European inter-bank charging principles in its Interbank Convention on Payments (ICP). If a corporate fulfils the ICP’s requirements for its payments messages, it can be sure that the beneficiary will receive the funds in full, as well as a guarantee of the timeframe within which the beneficiary will receive those funds. In line with EU regulation 2560/2001, the requirements apply to all payments up to €12,500 (€50,000 from January 2006).

 

Impact of IBAN and BIC

The significant issue for corporates is adhering to the requirements of the ICP and the consequence of not formatting messages correctly. According to the ICP, the intermediary bank receiving the payment or the beneficiary bank is entitled to charge for the additional work resulting from transactions that do not meet the ICP’s prescribed STP standards. Such charges are generally referred to as repair charges and they can be applied by the receiving bank if:

• A message does not contain a valid IBAN in the correct field.
• BICs are not used in fields 52A to 57A.
• Fields 23E or 72 contain text.
• Fields 26T or 77B are used.

Though the repair charges are sent to the originating bank, ultimately, these charges will be passed back to the corporate customer. The concern for corporates is that the ICP has not defined an amount or upper limit for a repair charge. To be fair, it would have been difficult for the EPC to tackle the level of repair charges since the area of pricing is generally fraught with anti-competition issues. Neither is the timeframe within which a repair charge can be sent specified (it could turn up three months after the message was sent, for instance) or a maximum time limit defined. To make matters more complicated, there is also no definition around the reasons a beneficiary bank must give, or the format in which they must be provided, when it sends back a repair charge.

In addition to the ICP, there is also a BIC and IBAN Resolution, which will come into force at the beginning of 2006. This states that for intra EU/EEA euro cross-border customer credit transfers, IBAN and BIC will be recognised as the only beneficiary customer account identifier and bank routing designation. If there is no valid BIC or IBAN in the payments message, then regardless of the amount of the payment, a bank can handle the transfer as a ‘value added service’. In other words, a non-STP charge can be sent back. From the start of 2007, the Resolution states that banks will be able to reject any payment if it doesn’t contain a BIC or IBAN. Therefore, from 2007, the implication for corporates is not simply one of repair charges; it potentially becomes one of interest costs, due to the beneficiary not receiving their funds on time. An interest cost could be significantly more expensive than a repair cost and so the importance of collecting IBAN and BIC information should not be underestimated.

Credit Transfers

As part of the EPC’s Roadmap towards achieving SEPA, a new credit transfer scheme will be created – the SEPA Credit Transfer Scheme and it will address basic credit transfers. The Scheme is currently in national consultation and so one can’t be sure of its precise final content. As of 1 January 2008, it is intended that the Scheme will replace Credeuro and the ICP. Of particular interest to corporates will be the Scheme’s intention (at present) to be unlimited in value, ensure that there are no deductions from the principal of the payment (so that the beneficiary receives funds in full), ensure delivery of remittance data all the way through to the beneficiary, and ensure wide reach.

In response to the requirement for more urgent transfers, the EBA is likely to launch a Priority Payments Scheme. This will not be limited to payments settled through the EBA operated clearing systems. Given that the SEPA Credit Transfer Scheme is not limited in value, we are seeing the continued move away from the delineation between high-value and low-value payments to one between urgent and non-urgent payments.

Critical Issue for Corporates

The critical issue for corporates is to understand the ICP’s IBAN message requirements and be able to adhere to them in the use of their database of records and payments processes. Here, banks can lend a helping hand. Banks should communicate with their corporate customers and provide them with formatting guides to translate the ICP requirements into what it means to them. More coherence is also needed in the event of a repair charge. JPMorgan, for example, charges customers that don’t meet the requirements of the ICP scheme up front so there is certainty of timing as well as certainty of the amount charged, as opposed to waiting to see how much the beneficiary bank charges and then passing it back to the corporate customer. In addition, JPMorgan provides monthly billing statements that detail precise reasons for why a payment failed to meet the ICP STP criteria; this enables customers to avoid making the same mistakes again and amend their data. Taking action now will not only enable the avoidance of repair charges but will remove the risk of interest charges that could result after 2007.

For corporates, the interim period between 2007 and 2008 could represent a challenge. From 2007, IBAN and BIC is mandatory for euro cross-border customer credit transfers, however, domestic transactions can still operate using national account numbers. This will only represent an issue if one might need to make both a domestic payment and a cross-border payment to the same beneficiary, where the corporate’s ERP system can only maintain one account number for the beneficiary. One of the solutions in this instance will be to use a bank that is capable of deducing a domestic account number from the IBAN, then the corporate need only concern itself with maintaining IBAN data (JPMorgan plans to add this capability in 2006).

SEPA: Some Way to Go

Though it goes a long way in improving the payments landscape across Europe, SEPA will not magically solve all the problems within the payments sector. In theory, post-SEPA, a corporate could open an account in France and do all its payments through wire transfer or ACH to beneficiaries in Spain. In reality, there may still be corporate taxation issues and central bank reporting implications, for example, which could act as a barrier to a true SEPA.

Likewise, though the Scheme rules are being put into place at a high level, there is a clear separation between the Scheme and operators of the Scheme. The Scheme rules, therefore, are not intended to describe what the operators of the systems are going to look like or how they will change, neither do they explain how the infrastructure of Europe as a whole will change. These factors will be determined by market forces and while a single infrastructure that could be referred to as a pan-European ACH (PEACH) may not come into effect immediately, it is only a matter of time before it does through market forces.

Going Forward and Action Points

There are some milestones at the end of this year with the finalisation of the SEPA Credit Transfer Scheme rules and SEPA Direct Debit Scheme rules. The action plan for how these are to be implemented and supervised will be rolled out over 2006. The key role for banks is to make sure corporates feel as little pain as possible in achieving SEPA Scheme compliance and understanding. The responsibility of educating corporates about the SEPA Schemes is a collective responsibility between particular corporate industry segments, banks, infrastructures/ACHs and also the EPC.

Many small and medium-sized corporates deal mostly within their national borders so SEPA won’t materially affect them until 2008 when the national ACH schemes will start the conversion to the pan-European schemes. SEPA will, however, make it easier for them to expand and transform their business cross-border through PEDD (Pan-European Direct Debit), for example. For larger corporates dealing cross-border, they will already be facing the changes required by the ICP and EPC Resolution in terms of IBAN and BICs.

There is no doubt that corporates will benefit from SEPA, not just in the creation of a clear choice of payments types, but also in the ability to simplify their liquidity and cash management structures, and in being able to ensure that remittance information is accurately transmitted and received. The advantages of SEPA, however, will only be realised if corporates take action in becoming SEPA compliant.

In summary, for a corporate to position itself effectively for SEPA it should ensure that:

1. BIC and IBAN details are clearly placed on all its invoices.
2. It obtains IBAN and BIC details for all its counterparts.
3. It reviews its bank’s capabilities in being able to provide information in formatting payments to comply with the ICP, and in being able to provide services that will facilitate the conversion of IBANs to domestic account numbers.