Could Corporate Apathy Undermine the Benefits of SEPA?
The introduction of the single euro payments area (SEPA) is possibly the most wide-ranging and fundamental development in European cash management since Y2K combined with the introduction of the euro. Once implemented, it should offer significant efficiencies in payment processing in Europe, not only in the raw per transaction charge, but also in the customer’s ‘all-in’ cost of paying or receiving funds.
Although banks in Europe are dedicating substantial time and effort to making SEPA happen, their customers seem to be more ambivalent. According to research from JPMorgan Chase (January 2006), only around 40 per cent of bank customers are actively reviewing their business practices today – why is this? Has the European Commission misread the market in blind pursuit of an ideal or are customers about to miss the chance to enhance competitiveness?
Changing an established infrastructure is undoubtedly a complex task that – perhaps in the early stages – was slow to get started. The EU Payments Council (EPC), the industry body responsible for creating SEPA, is planning a 2008 initial start date for early adopters and a 2010 target for reaching a critical mass of users.
In a June 2006 interview, European Central Bank executive board member, Gertrude Tumpel-Gugerell, acknowledged that the 2010 timescale was unrealistic. “Of course the project will not be finished by then, but it’s important to get momentum and make the investments profitable,” she said (Tumpel-Gugerell is in charge of payment systems and financial market infrastructure at the Central Bank). Meanwhile, Charlie McCreevy, the European commissioner for financial services, has repeatedly said that if the industry does not make more progress on SEPA the Commission will introduce legislation to speed up implementation.
The official aim of SEPA is to create a ‘euro area in which all payments are domestic, where the current differentiation between national and cross-border payments no longer exists.’ Although the main focus is on high volume/low value payments (SEPA credit transfers and direct debits), the project extends to a single euro credit card area (SEPA cards). Since these are the major commercial collection and remittance tools, it is of paramount importance that banks’ customers are involved in the SEPA build, and that the EPC recognises their input.
What will the introduction of SEPA mean for the customer? In practical terms, the key deliverable from SEPA is that, for a business transacting euros in Europe, the country in which payments or receipts are made will become irrelevant. There will no longer be the need to establish interoperability between systems, payment or receipt mechanisms, or bank or account selection, which are commonplace today. Instead, there will be a unified framework so that whatever works in one country will work overall; and there will be no barriers to managing cash across the entire area.
Furthermore, once the common framework is established, companies will have the opportunity to rationalise their systems, knowing that what works in existing markets will work in new ones.
The more progressive banks see SEPA as part of a ‘once-in-a-generation’ change and link it to a harmonisation of infrastructures and possibilities for e-invoicing. SEPA should give corporates a real opportunity to improve efficiencies by streamlining systems. With a unified commercial payment and receipt infrastructure across Europe, only one interface needs to be designed between a corporate and its banks locally, rather than the country-specific interfaces that exist today. As a result, procedures can be rationalised and provide the opportunity for more efficient system and database administration; data and payment processing; improved control; and a reduced error rate.
In addition, ERP systems really could become ‘enterprise-wide’, and true straight-through processing (STP) should come a step nearer. The treasury industry’s Transaction Workflow Innovation Standards Team (TWIST) initiative is looking at STP to investigate how the corporate user can derive the most from the SEPA-standards and similar interfaces. The European Association of Corporate Treasurers (EACT) is also assessing the best forms of standardisation across areas, such as remittance information, digital identity and account portability, electronic and digital signatures and e-invoicing. It is also agreeing a standard ‘invoice header’ for summarising invoice details for trade financing.
Raffi Basmadjian, deputy treasurer of France Telecom, who is part of the EACT project team, explains: “The EU Commission is expecting vast efficiency savings for business, but in reality these will come from the wider streamlining of e-business over and above the basic improvements in payments processing.”
As part of the overall SEPA project, the EPC is also planning to reduce the degree to which cash is used in Europe. Most would agree that despite its flexibility, cash is expensive to handle and inherently insecure. The SEPA initiative should, in the long run, enable cash-dependent businesses to gain efficiencies as the market encourages customers and suppliers to use more efficient electronic remittances.
At the most fundamental level, the EPC project team is confident that SEPA can be delivered on time and that it will work. However, unless customers use it, the full benefits will not be realised. There is a real risk that SEPA standards will become open to interpretation at the customer/bank interface. For an organisation that wishes to take advantage of SEPA’s efficiencies, this could mean that it becomes either more difficult to do so (as numerous interfaces still have to be written from the ERP system to each bank locally); or that it becomes more difficult to move business due to the need to rewrite interfaces.
Practitioners already recognise the fact that multiple standards are a hindrance to corporate automation, and it is important that SEPA succeeds in achieving standardisation rather than further fragmentation.
Although end-users are being encouraged to contribute to the design of SEPA, it is being designed and led by banks. Unless customers make an active contribution to the debate (as the ACT and EACT among others are now doing), SEPA risks being substantially for the banks’ convenience and of little use to the corporate customer. As far as the success of SEPA goes, there is a real risk of corporate apathy. By definition, businesses already have appropriate payment and receipt mechanisms in place in Europe, and the underlying infrastructures are set to remain in existence.
Until SEPA is up and running, it is hard to perform a meaningful analysis to evaluate the costs and benefits of changing from existing systems. Unfortunately, there is a ‘catch-22’ situation here: unless corporates invest time and effort now, there is far less chance that SEPA will work for them but, until SEPA is in place, they will not know what it is capable of for sure. Meanwhile, on a day-to-day basis, corporates are dealing with more pressing issues than SEPA, which still seems far off in the distance.
“For those involved with cross-border payments in Europe, the need for central bank reporting (CBR) and the variety of different requirements are major headaches. Sadly, nothing in the new SEPA proposals will do anything to alleviate this administrative burden,” claims Bjorn Carlbom, vice president, Phillips corporate treasury, Phillips. “If changes to CBR could be made as part of the SEPA implementation the popularity and speed of take up by corporate customers would dramatically increase.”
SEPA will, of course, only apply to euro payments; transactions in other currencies or domiciles will not be affected. It remains to be seen whether this will be a serious limitation on SEPA’s usefulness, particularly on systems, interfaces and procedures. If using SEPA means tacking on yet another interface without dismantling others then this would erode the benefits. Alternatively, one could speculate that the payment schemes for other currencies in common use may, over time, change to follow the SEPA specifications for euro payments.
On the other hand, the Payments Directive – the legislation that will harmonise the legal framework for payments across the whole of Europe – will apply to any electronic payments in Europe, irrespective of currency. There has been some debate over the potential €50,000 cap in the Payments Directive which would mean that many corporate payments would not benefit from the mandatory rules on matters, such as value dating and time cycles. This is likely to disappear from the final Directive but, either way, the EPC has confirmed that the rules within the SEPA credit transfer and direct debit schemes would not include any cap (although it would have to allow some sort of differentiation on the protection for retail customers).
Corporates and corporate treasury associations must maintain the dialogue with the EPC to maximise the potential benefits of SEPA for users as well as the banks. Corporates should benchmark their current payment and receipt processes in the SEPA area on an ‘all-in’ cost basis and consider how these might be affected post-SEPA. They should also consider whether there are aspects of the SEPA design which they require or which prevent them taking advantage of the new infrastructure, and lobby for these either directly to the EPC or via their national treasury association and the EACT.
This article is based on the conference report from the ACT’s talking treasury event in Prague in March 2006.
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