How Can Corporates Prepare for SEPA?

By introducing the single euro payments area (SEPA), the EU Commission is now set to achieve its ultimate goal: a single euro payments area on an operational and legal basis. This consists of four cornerstones: SEPA instruments, price uniformity and transparency, an infrastructure for processing payment orders and a uniform legal framework. SEPA will have a major impact on the entire financing chain.

Credit transfers, direct debits and card payments (ATM and POS) will be standardized throughout Europe. Where only a single operative account will be necessary for the settlement of payments in the EU/EEA area in future. This will inevitably lead to complete price transparency, as customers will have to decide whether they want to pay more or less for the same service just to maintain an account in their own country. When considering price development on its own one can assume that, under SEPA, payment processing products will take another step towards becoming an ordinary commodity, but that specialists will still be required to provide services and advice.

As it is unlikely that all the necessary legal steps will have been completed by the start of SEPA in 2008, this process will be delayed until full price transparency is also achieved. As of this date, however, the ‘one-account model’ will (at least theoretically) be possible. Tax and legal aspects play a major role in this regard. For example, the laws of a particular country might require that an account is still maintained in that country. One can assume that retail customers in particular will profit from lower costs, greater price transparency, faster processing and higher security as of 1 January 2008. The question that arises then is: what does the introduction of SEPA mean for corporate customers?

Implications for Corporates

There are two sides to SEPA for corporates: on the one hand, it entails risks and great effort but, on the other, it will provide opportunities.

The risks include:

• ‘Sudden’ time pressure for (technical) implementation.
• Unclear requirements at present (e.g. EPC Rule Book or translation of the new legal framework into national law).
• Costs incurred as a result of investment requirements and change-over effort.

The opportunities include:

• Simplification of the pan-European infrastructure.
• Reduction of the complexity and cost structure (medium- to long-term).
• Clear overview of the European product range in payment processing.
• Elimination of barriers to market entry.
• Greater flexibility in payment formats (e.g. replacement of national standards by SEPA instruments).
• New product developments.
• Differentiation at product level according to customer segments (i.e optimum products for each customer group).
• Competition for market shares in payment processing in the entire euro area.

Does Every Company Have to Deal with SEPA?

Ultimately, SEPA will lead to national payment processing systems being discontinued by 2010. One can expect the EU Commission to politically determine a final deadline should SEPA fail to meet with adequate acceptance from firms and banks. National payment processing systems, e.g. DTA in Germany or ETEBAC in France, will no longer exist by the final deadline. Any enterprise that makes or receives payments will thus be forced to face the issue of SEPA sooner or later in order to prevent being put under immense time and cost pressure.

Banks should therefore start preparing their customers for SEPA. For instance, HVB is providing information about SEPA and advice on measures, which is divided into three areas:

1. Organization and structure

• Appoint those responsible for SEPA and start the project.
• Request IBANs and BICs from each supplier and debtor to store in a database.
• Ensure exchange on the issue of SEPA with trading partners and identify effects on daily financing procedures: pay attention to special features of different markets.
• Are there any changes to structures and processes in finance management? Ask the following questions: where will data be prepared in future? Is it possible to use standardized formats instead of local formats? Should there be standard handling of processes and standard documentation of payment processes?
  Are gains in value dates or maturities endangered or is there potential for improvement? (This is particularly relevant to foreign countries).
• Is it possible or advisable to handle payments for Europe from Germany as a central base in future?

2. Operational procedures and processes

• What internal operational procedures (particularly in terms of the SEPA Direct Debit) are affected? For example, mandate administration, customer application, customer contract, invoice, reminder and written correspondence referring to account data.
• Management of accounts receivable/payable: what is changing or what requires adaptation?
• How/where/through whom is the mandate managed?
• Will direct debit authorizations be actively exchanged for mandates?
• Will only the new mandate be used after 1 January 2008?
• Is it necessary to take into account the parallel operation of the former national procedures and the SEPA schemes in processes?
• What does the workflow imply for handling returns/cancellations in back offices? Bear in mind that very soon six different reasons for returns will be possible.
• Is customer acceptance to be expected or not?
• Will customers completely block their accounts against foreign direct debits?
• Is there a danger of long return periods of up to one year?

3. Systems

• In which databases and systems are SEPA data elements to be implemented?
• Ability to depict in ERP and treasury system: is there XML compatibility?
• Plan the required software releases: contact with software suppliers.
• Does software comply with the new requirements?
• Implications of parallel operation of former national procedures and the SEPA scheme.

Conclusion

As a result of the effort entailed in terms of organization and technology, business enterprises must ask themselves whether the introduction of SEPA enables their own group to centralize payment processing, the treasury and accounting, or whether the advantages of a decentralized organization justify the additional expenses required for adjusting operations under SEPA. Irrespective of the decision that an enterprise makes on this issue, i.e. centralized or decentralized processing, the decision should not be left to chance under any circumstances. Analysis must be conducted on what the introduction of SEPA means for each individual enterprise in order to understand the opportunities and risks.