For the European Central Bank to fulfill its vision of full harmonization and standardization across the eurozone, the single euro payments area (SEPA) must succeed. If SEPA is to succeed, it will need to be embraced by corporates throughout Europe. Corporates are among the biggest users of euro payments and if they don’t use the new scheme, which is to commence from 1 January 2008, it could quickly be rendered irrelevant.
Cash transactions across the eurozone have been possible since euro notes and coins were introduced in 1999, but cashless payments between the euro countries remain difficult. SEPA is intended to allow consumers and businesses to make intra eurozone cross-border non-cash payments in euros as easily and at the same cost as they make domestic payments.
Recognizing how important corporates will be to SEPA’s success, in its fourth SEPA progress report in January 2006, the European Central Bank (ECB) said, “The introduction of the euro as the single currency of the 12 countries of the euro area will be completed only when… SEPA becomes a reality, i.e. when individuals and corporations are able to make cashless payments throughout the euro area from a single payment account anywhere in the euro area using a single set of payment instruments as easily, efficiently and safely as they can make them today at the national level.”
Reasons Behind Lack of Corporate Involvement
Corporates have so far sat back while the European banking industry takes the lead in shaping SEPA. One reason why they may not be fully engaged could be because the European banking industry, organized into the European Payments Council (EPC), has been charged with developing the SEPA schemes. As part of its remit, the EPC has defined credit and debit schemes, which are due to go live in 2008.
To speed up the process, the EPC limited corporate involvement in the scheme development; hence, the credit and debit schemes may not meet the needs of corporates. There is a requirement for information to be passed with the payment, and while a placeholder is available in the scheme, will there really be sufficient corporate engagement for agreement on requirements and protocols before the deadline for implementation of the schemes?
For the banking industry to ensure their efforts are not wasted on developing a platform the corporate users don’t want, it should consider if it is doing enough to communicate to corporate customers the urgency of participating in the discussion about the framework around SEPA.
The EPC has attempted to consult corporates but the process was criticized by some corporate treasurers as haphazard and rushed. In 2005, national banking associations (acting on behalf of the EPC) consulted members of the European Association of Corporate Treasurers (EACT) on the SEPA rulebook. But the EACT has said it is so far “disappointed” with the consultation process and argued that “in some countries it failed to happen and in all cases the time allowed was inadequate.”
Corporate Participation is Crucial
In order for SEPA to succeed – and the European Commission and European Central Bank have shown every sign that they want and expect it to be a success – the needs of the corporate community have to be taken into account in a more thorough fashion. Take-up by corporates is only likely to happen if SEPA takes a form that they will find more useful, and commercially viable, than the current national payment systems. With less than four years before the ECB wants significant take-up of the SEPA schemes, corporates need to get involved now.
The slow progress of the framework development means that many corporates do not want to make expensive and potentially disruptive changes to their infrastructures until they know what they will be required to do.
The ECB has said it recognizes that implementing SEPA is likely to be complicated and costly. As a result, it called on the EPC to ensure cost and complexity do not prohibit corporates from implementing SEPA, and called on banks providing SEPA payment services to ensure the new standard includes innovations to allow companies to ‘effectively improve their internal processes’.
At this late stage, however, many corporate treasurers are still unsure what SEPA will mean for them.
What Are Treasurers Saying?
In January 2006, JPMorgan brought together a group of senior corporate treasurers to discuss SEPA and its impact.
Of the corporate treasurers who attended, fewer than half (40%) said they have already begun to change their business practice to comply with SEPA, even though it is to be implemented in less than two years. In addition, 30% said they didn’t plan to change business practices until 2008, the date that the EU Commission wants take-up to have begun by, with 10% expecting to change their business practices in 2006 and the same percentage planning to make changes in 2007. Another 10% said they did not expect to change their business practices at all as a result of SEPA.
Perhaps of more concern is that 90% said they were not aware of the legal framework around SEPA. Educating corporates about what SEPA will mean for them and what they will have to do to be compliant is crucial to ensure it is in the best possible format. To date, the flow of information between the corporate community and the EPC appears to be stagnant.
Yet it is not just the banks that need to improve communication. Corporates have to find their voice and do more than ask for better consultation by the banks. They need to tell the banks that are tasked with developing the SEPA schemes what they would like them to include in order to ensure their participation.
Cost Savings and Opportunities
Corporates stand to be among the biggest winners once SEPA is implemented, because payment costs are likely to decrease once they are standard across the eurozone. The European Commission estimates that the implementation of SEPA will reduce the cost of payments from 2-3% of GDP to 1%. The cost savings benefits will accrue to about €119bn per annum for the EU15 and €161bn per annum for the EU25.
At JPMorgan’s corporate forum, 82% of the treasurers said they believed banking costs would be lower as a result of SEPA. Nearly 70% said another benefit they expected to derive from SEPA was faster end-to-end payment systems, while 62% said SEPA would reduce the costs of financing trade.
Cutting the cost of making payments is not the only benefit of SEPA to corporates. An early impetus was the expectation that, together with the euro, a single payment area was likely to lead to more cross-border trade within the eurozone, thus increasing Europe’s economic strength and competitiveness. While there is an obvious benefit to the companies that would do more business, banks would also benefit from any increase in cross-border payments that would result from an increase in intra-eurozone trade.
Participation and Co-operation
In order that the eurosystem’s vision of a euro area in which all payments are ‘domestic’ is fulfilled, customers, corporations, retail merchants and central banks all need to participate in the project to reflect a consensus on the need for its implementation and success. The successful implementation of euro notes and coins in 1999 was a project with a similar constituency, which can be used as a model for the implementation of SEPA.
A complex project like this needs clear involvement from all users, and not just financial institutions, with an agreed governance model to tackle the inevitable problems that will (and have) cropped up, and to ensure proactive management of future developments.