SEPA: Get Ready in 2007
The introduction of the single euro payments area (SEPA) in 2008 poses significant challenges for both banks and corporates. Between 2008 and 2010, existing domestic payment instruments will co-exist with the new SEPA credit transfer (SCT) and SEPA direct debit (SDD) instruments in order to enable the gradual migration of end-users. This migration period will be an expensive time for banks. As a result, one of the biggest concerns among banks and other stakeholders is how to ensure the migration period is as short as possible and that consumers and corporates do actually adopt the new SEPA instruments.
In order to facilitate the early adoption of SEPA instruments there is no doubt that they must be better – or at least equivalent to – existing domestic products. Common sense dictates that end-users will not adopt products or services that are not as good as those they already use. To minimize the length of the migration period, banks, corporates and public authorities must all contribute to progress on SEPA.
Banks must provide the SEPA instruments on time with the right functionality and pricing to encourage adoption. The banking community has already made great progress, having agreed the rulebooks for the SCT and SDD in March 2006. This also created an environment for other large-scale innovations in areas such as e-invoicing, electronic bill presentment and e-signatures. In addition, SEPA (in conjunction with the new XML standards) will contribute to the standardization of financial reporting, particularly in the area of reconciliation. It is these developments that will drive the real benefit of SEPA for corporates – not just lower prices.
Providing the services on time is one task, but banks must also communicate and educate their end-users about these new products and how they will benefit from them. This is especially true from a consumer perspective where, in most countries, credit mandate driven models are in place for direct debit, which do not offer consumers a great deal of protection. The new SEPA instruments will address this problem. In addition, the debit mandate model within the SDD has much richer functionality compared to the equivalent domestic product (with its credit mandate driven model), which will generate less rejections and refunds and therefore provide better liquidity management and forecasting capabilities for corporates. The debate should not be compromised or polarized by discussions around the credit mandate flow (CMF) or debtor mandate flow (DMF); instead, the industry must aim for a robust, secure and future-proof model.
Public authorities also have a significant role to play especially as they will potentially be among the first adopters. To increase progress and reduce the migration period, the EPC is calling on public authorities to act as role models for end-users in their adoption of SEPA instruments.
Among corporates, there is evidence of increasing demand for information as well as raised awareness about SEPA and its benefits: this is a positive sign for further progress in 2007.
First and foremost, corporates should assess the impact SEPA will have on their business and operations. This assessment applies to all corporates: SEPA will affect small- and medium-sized corporates as well large multinationals across their payment activities including administration, technology and operations.
Corporates should discuss the implications of SEPA with their technology providers, which should further accelerate their understanding of the necessary changes and therefore their readiness for SEPA. ING expects SEPA-compliant models to be adopted in line with the lifecycle of corporate ERP packages. For instance, a multinational with interfaces to several banks in multiple countries will certainly be interested in an offering from its vendor that provides it with just one XML-based SEPA interface. As a result of SEPA, corporates will also have the opportunity to consolidate their account structures and banking relationships, which will have to be considered in the context of their existing operations and systems.
In order to make the necessary adjustments, corporates should include SEPA preparation in their IT budgets over the next few years. It is uncertain how many corporates have actually included SEPA in their budgets for 2007 though.
The fourth action point for corporates is ensuring that they include the correct IBANs and BICs on all of their invoices – this is already mandatory for cross-border payments.
Finally, all corporates should determine which bank has the expertise, infrastructure and ability to process all their euro transactions and then select the right bank to be their SEPA migration adviser.
In most countries, consolidation among clearing and settlement infrastructures will be accelerated by SEPA. Currently, ING recognizes the EBA’s STEP2 as a front-runner in establishing reachability for SCT and SDD. The services of EBA clearing have emerged as the de facto standard for banks to exchange their volumes directly between each other. There is also the European Automated Clearing House Association (EACHA), which is considering how European clearing houses can be interconnected to establish pan-European reachability.
Within the EPC’s framework for clearing and settlement mechanisms, there are different levels of reachability, such as an intra-group mechanism, bilateral exchange or PE-ACH. ING’s policy is to have an optimal balance between these mechanisms. Interoperability or ‘switchability’ will therefore be important and initiatives that facilitate SEPA end-to-end compliance should be encouraged.
The EPC banks have a moral commitment to actively offer the SEPA products within the stipulated timeframe, and banks will be ready for the first SEPA deadline in 2008 with their commitment to create reachability for SCT. For example, in January 2008, all of ING’s entities in the eurozone will be reachable for SCT and the bank will make its current offering for STEP2 indirect participants SEPA compliant. For SDD, banks are well on track but the rollout has been hampered by the fact that the European authorities have delayed the Payment Services Directive (PSD). ING will offer different options for the SDD as soon as the PSD is in place.
Despite the significant progress made last year, there is still much more work to be done in order to meet the SEPA deadlines 2008-2010. For instance, risk mitigation needs to be clarified within the SDD and further analysis of the competitiveness of the SDD from a price perspective needs to be carried out. As mentioned, the PSD will be vital in the further development of the SDD and as the PSD has currently been postponed this will also delay completion of the SDD.
Going forward this year, communication and interaction will be vital to progress and this is the responsibility of all stakeholders affected by the introduction of SEPA.