All corporates making and receiving payments in euros will be affected by the single euro payments area (SEPA), even if based outside the eurozone. Businesses who trade extensively in euros across the EU should eventually be the principal beneficiaries of SEPA.
It is often claimed that one of the main benefits of SEPA will be lower bank charges for corporates. This is true in terms of the actual price of cross-border euro payments, which is being driven down by regulation, and corporates making many cross-border payments will see the cost benefit provided they use the correct instruments, such as validated international bank account numbers (IBANs) and bank identifier codes (BICs).
Reducing Bank Charges
On closer inspection of ‘best practices’ in cash management, however, the more sophisticated large corporates with the highest volumes of euro payments and collections across Europe have already found other ways of reducing their bank charges, motivated by the high cost and inefficiency of cross-border payments. This is one of the reasons why some large corporates are not currently too excited by SEPA. Many years ago, European multinationals realised that local payments and collections are much cheaper than cross-border instruments and have therefore adopted a range of techniques, such as the following:
- Maintain multiple in-country bank accounts to make bulk payments and collections using local banking instruments.
- Only use cross-border payments where necessary, such as funding (or sweeping) in-country accounts or where volumes do not merit in-country accounts.
- Deliver payment files to one or many local banks.
- Operate netting of intercompany invoices.
- Consolidate multiple invoices into one local payment per vendor/payee.
For this reason, their bank transaction charges are considerably lower than today’s standard cross-border payment fees. Indeed, this structure of in-country accounts for making payments and collections throughout the EU also explains why European cross-border payment statistics (usually quoted as just 2 per cent of overall EU payment volumes) are so low when compared with huge trade volumes between member states. This is because large volumes of payments, which are really cross-border transactions ‘disguised’ as domestic payments in order to achieve lower bank charges, are excluded from EU statistics on cross-border payments.
So, as they have already minimised their bank charges, the real benefit of SEPA for large corporates will be to consolidate the large numbers of disparate electronic banking systems, each requiring proprietary formats and processes, which they have deployed to manage their cash on a pan-European basis.
The Real Benefit of SEPA
The multitude of different systems and interfaces has often led to a high cost of implementation and support, as well as frustrating integration problems with the corporate’s host systems. This scenario is already changing with the migration towards SEPA. But this is an evolutionary process and there is a need to ‘future proof’ by retaining flexibility in structures. This should help minimise the upheaval and cost of change. The opportunity to streamline these multiple systems and interfaces should prove to be a key benefit of SEPA in terms of improved security, efficiency and control.
The migration to SEPA, combined with other changes in the payments landscape, such as Faster Payments in the UK, look set to make lowest cost routing a valuable capability, whether offered by a bank or managed in-house by a large corporate wishing to control this important aspect of its payments and collection flows through multiple banks.
The standardisation of payment types (credeuro, prieuro and PEDD) will be accompanied by an increase in the choices over which payment and collection channels these new instruments can be sent through. Corporates will want to select the most suitable channel, or even auto-select, based on business parameters regarding destination, urgency and value of the payment, as well as the currency.
In the case of euro payments and collections, it is now generally accepted that we will not have just one single pan-European ACH (PE-ACH), but instead we will see the emergence of several SEPA compliant regional ACHs who will operate alongside the purpose built PE-ACH, STEP 2. In addition, banks will have bilateral file exchange arrangements in place with partner banks to handle particular concentrations. These enlarged regional ACHs include Interpay of the Netherlands, whose merger with the German payments processor, Transaktionsinstitut, and probable future consolidation will give them competitive advantages in terms of pricing, efficiency and richness of functionality, such as direct corporate access and near real-time clearing cycles. This could make regional ACHs such as Interpay a first choice processor, at least in those areas for which they provide direct coverage, and perhaps also for their EBA Link and planned interoperability with other regional ACHs.
Conclusion
The key is to retain flexibility and it is likely that SEPA and Faster Payments will lead increasing numbers of corporates to conclude that, in order to achieve lowest cost routing, they will want direct corporate access to a number of clearing systems, such as BACS, Faster Payments and Interpay for pan-European euro payments, as well as multi-bank connectivity (probably via SWIFT’s new corporate access multi-closed user group), all from a single web-based payment factory platform. This will make it easier than before for a corporate to establish a single pan-European shared service centre (SSC) for payments and collections, which is likely to be an important growth area over the next five years.
These payment factories need to be able to ensure pan-enterprise visibility, security and control, acting as a hub for the multiple ERP/host systems which many large corporates have to contend with, rather than the luxury of a single instance of an ERP. Similarly, a payment factory needs to incorporate validation tools covering IBANs, BICs and UK sort codes to ensure ‘clean’ data is produced for the bank or payments processor, hence attracting STP charges, and minimising the risk of bank repair charges.