SEPA's Impact on Liquidity Management
The primary benefits of SEPA for corporates come from the ability to make and receive payments within the eurozone with the same ease as within their own country. However, an important additional benefit of SEPA for some corporates will be the potential impact on liquidity management – the process of using cash balances in multiple countries and currencies for effective short-term investment with a view to maximising yield or as a means of ‘recycling’ group cash for cheaper, internal funding.
Traditionally, corporates have had accounts in each country in which they operate, often resulting in multiple banks. This means that companies are faced with different operating practices and different terms and conditions, which reduces the ability of corporates to manage their liquidity effectively. SEPA will eradicate this lack of standardisation and should allow companies to consolidate transaction processing with one bank and perhaps enable them to use one central account. However, while one account might sound like a desirable option, companies need to ask themselves if it is a realistic outcome. The answer will differ greatly from company to company.
The other big question relating to liquidity management benefits as a result of SEPA is which types of companies are likely to benefit first. Many of the largest multinationals have generally already adopted centralised liquidity management structures using one bank. For companies that operate shared services centres or payment factories, it could be easier to adopt a single account model as they have the enterprise resource planning (ERP) technology to manage intercompany loans, etc. But what would they gain from it? There would be some savings from reducing account fees or the cost of an overlay liquidity management structure but it is questionable whether the savings will be sufficient to encourage adoption.
Existing shared service centres will have set up a local account structure, giving a further disincentive for multinationals to take advantage of SEPA to set up a single account structure. This is because they are already benefiting from processing payments and receipts in the most efficient way and have built a liquidity management structure on top.
For companies that do not operate shared service centres or payment factories, SEPA could prove a boon to liquidity management. However, the nature of companies must again be taken into account when considering the potential benefits of adopting a single account to process transactions across the SEPA region.
Those companies with a straightforward business model will benefit from centralising accounts. Typically these companies have a lot of non-resident accounts to manage import and export activity and it would be relatively easy for them to reduce those accounts to just one: they don’t have the issue of segregating balances by separate legal entities in each country. However, even for these clients there may be a commercial rationale to keep local accounts because their clients may prefer to make local payments. Insisting on a payment using a SEPA instrument forces the counterparty to include an international banking account number (IBAN) and bank identifier code (BIC) data, which are not always necessary in local automated clearing houses (ACHs), plus there is also the question of the cost of a SEPA transaction versus the cost of a local transaction.
For companies with decentralised, complex multiple legal entity structures, the logic of moving to a single account structure is weaker. Where you have a situation where local subsidiaries are responsible for local payments, the challenge of moving to a single account is even greater. SEPA provides an impetus for centralisation but it is unlikely to justify the necessary ERP technology spend and change in working practices required by this level of centralisation.
SEPA should get corporates to ask themselves why they currently have local accounts, what purpose those accounts are serving and review them in light of these issues to establish whether they have a future in the SEPA environment. Banks have a role to play in helping their clients understand these issues and companies should be engaging with them sooner rather than later. Regardless of a company’s size, operating environment or structure, SEPA provides a good reason to review their account operating model for opportunities to enhance efficiency.
SEPA is a further evolutionary step affecting how companies will manage their liquidity in the future. Although there has already been a considerable level of centralisation of liquidity management; SEPA will potentially simplify euro liquidity management further and will take its place alongside other regulatory initiatives and changes that are driving the trend for companies to extend the range and scope of existing practices to encompass multiple currencies and countries outside of Europe.
There are issues to consider when moving to a centralised SEPA-compliant regime. For example, proposed SEPA clearing cycles are often less advantageous than the local ACH’s, although this remains a topic that is heavily debated. If these clearing cycle scenarios persist, this may justify maintaining a local account to ensure that days sales outstanding does not lengthen, leading to a deterioration in the availability of funds and a consequent reduction in interest benefit.
Similarly, companies with significant volumes of country specific transaction instruments, which are not currently covered by SEPA, will still need local accounts to manage such transactions unless companies can negotiate other methods of payment with their trading counterparties.
The same can be said for certain types of payment. For example, in some countries tax payments must be made locally because of the requirement to provide supporting data, although there are moves at EU level to make public authorities embrace SEPA.
In addition, there are ongoing discussions surrounding existing requirements for central bank reporting. If these remain unchanged, depending on the country and residency, the adoption of a single account in a certain location could result in increased reporting obligations when compared to the alternative of keeping accounts in individual countries.