Corporate Cash Management: Are You Ready for SEPA?
There are just eight months left until the single euro payments area (SEPA) is introduced on 1 January 2008. At this stage in the process, it is vital that cash managers and corporate treasurers understand exactly what SEPA will mean for their existing structures and relationships, and also what new opportunities SEPA will create in the area of cash management and working capital.
Before discussing how corporates should be preparing for SEPA, let’s first consider the advantages that SEPA will introduce for corporates. It is these new opportunities that will encourage corporates to make the necessary changes to their systems and operations, and also justify the investment needed.
Automation, centralisation and reduced costs – these factors are the buzzwords in the corporate world and what every treasurer and cash manager works hard to achieve across their organisation. Through the standardisation and harmonisation of processes and payments instruments across Europe, SEPA will accelerate all of these trends.
According to Anton Stadtbaeumer, senior manager, treasury and finance control at Epson Europe BV, which provides printers and imaging products, transaction costs will be reduced and corporates should be able to use more standardised formats in their communication with banks (i.e. sending payment instructions to banks and receiving information related to inflows). “Companies will also benefit from easier and faster transfer of funds as well as the ability to more easily centralise payment processes through payment factories and to close local bank accounts in some countries,” he adds.
For instance, corporates will be able to perform all of their financial transactions centrally from one bank account using the new payment instruments. The handling of payments will also be simplified, as all incoming and outgoing payments can use the same format. This will significantly reduce current complexity in Europe in terms of the number of payment instruments (and their unique features from country to country), data format specifications and bank/account identifiers, accounting platforms, legal framework and clearing systems that currently exist. By consolidating their payment and liquidity management into one location, corporates will not only save costs but also two other precious commodities – their time and effort.
In addition, there is general opinion to support Stadtbaeumer’s view that SEPA will facilitate the rise of shared service centres (SSCs) and payment factories. SEPA will improve conditions for large corporates and multinationals because setting up a payment factory is really the first step for any corporate that wants to become more centralised and improve efficiencies. For instance, SEPA will allow them to much more easily consider the option of consolidating bank accounts and moving accounts to a central location. It will also enable smaller corporates, who do not currently have the economy of scale, to establish their own payment factory.
Finally, SEPA will create the right environment for value-added services – leveraging the core SEPA payments rules and standards – such as e-invoicing and reconciliation, which will help companies to further optimise their end-to-end handling of accounts payable and receivable.
Of course, in order to enjoy these benefits, corporates must be ready for SEPA, so what do they need to focus on?
If they haven’t already started preparation for SEPA, corporates should begin by analysing their use of non-SEPA instruments (if they are multinationals this should be done on a country-by-country basis) to determine where migration is possible to reap the full range of SEPA benefits. One example is changing the use of cheques to credit transfers or changing their national collection instruments to SEPA direct debits, which depends on the clarity around the legal provisions of the EU Payments Services Directive, commonly known as the PSD and recently approved by ECOFIN.
There is also full account consolidation to consider, which is not possible in countries where specific national instruments continue to be used. In these cases, usage of SEPA instruments to the full possible extent, i.e. partial consolidation within these countries, will be an option.
Secondly, corporates should start to assess the use of dedicated data reference fields and structured remittance information throughout their financial supply chain in order to benefit from efficiency gains as soon as possible.
Thirdly, corporates should now be at the stage of completing their international bank account numbers (IBANs) and bank identifier code (BIC) databases for all their European business partners. For national payments, IBANs and BICs will eventually become the only account identifier and, therefore, the relevant data of each business partner will have to be completed. The importance of this cannot be stressed enough, as corporates may face penalty charges if they do not supply the correct IBAN and BIC information in their payment messages. Banks and technology providers can offer support in this area, as getting suppliers and vendors to cooperate is recognised as a difficult task.
Finally, corporates should conduct a first analysis to determine which systems are likely to be affected by the new formats and data elements and also which ones will be compatible with them. While electronic banking systems, ERP and treasury software will be adapted by technology providers and banks to accommodate changes; corporates should be aware that there might be proprietary developments that require adaptation on their side.
In order to make sure they take the necessary steps forward, cash managers and treasurers must stay informed and updated on all SEPA-related developments – and there is a real sense that corporate awareness around SEPA is growing. Corporates want to structure their business in order to be SEPA compliant and they expect their banks and business partners to help them do this. “We work with several banks and Deutsche Bank, in particular, has provided us with important information about SEPA from an early stage,” says Epson’s Stadtbaeumer. “We also receive information through treasury publications but we mainly rely on our banking partners to keep us updated about developments.” Deutsche Bank, for example, holds regular SEPA sessions with clients as well as sending out a quarterly newsletter and producing a SEPA dedicated website.
While it is clear that there is a lot that corporates can do now in their preparation for SEPA, we must also acknowledge the fact that there is still uncertainty around SEPA, which hinders progress to some extent. The following section discusses some of the key issues that still need to be addressed.
The European Payments Council (EPC) published a letter on 9 March 2006 (see #gtnarticle(6672)#) where it stated that the delay to the original schedule in the adoption of the PSD remains “a source of risk, cost and uncertainty to the SEPA programme”. For instance, with the expected delay to the SEPA direct debit scheme, as a result of the late ratification of the PSD, it is difficult for corporates (and banks) to know at which precise date in 2008 or 2009 the SEPA direct debit can be fully launched across all SEPA countries. However, looking at the draft Directive and the contents of the SEPA direct debit scheme rules, it is obvious that there are only a few parameters, such as the actual maximum refund period where the PSD may require adaptation of the EPC scheme rules. This means that preparation for launch can continue unchanged.
Leading banks are well advanced in their implementation projects and are ready for launch at the start of SEPA’s introduction with the actual PSD ‘transposition’ date being one of the very few ‘unknowns’ right now. There is likely to be more clarity on this now, however, as it has been finally approved by EU ministers. In the meantime, banks will continue to support existing practices and systems until they are fully replaced by the new schemes without a ‘big bang’ approach for corporates.
Deutsche Bank fully supports the harmonisation of tax laws across Europe but, as a bank, we are dependent on the European Commission and member states for further progress on this. It is an issue that is likely to be addressed on a local basis going forward.
Central bank reporting requirements are a contentious issue for many corporates. In Brussels, there is discussion about introducing a minimum threshold but – if the threshold is zero – this might affect some corporates’ decisions in their preparation for SEPA.
This is a burning issue that will really affect efforts towards European harmonisation. There are discussions about this at EPC level but it needs the involvement of the European Commission, national governments and other national central banks to resolve it. Hopefully, this will start as soon as possible.
There is consensus that there will be consolidation in the payments business as a result of SEPA and this is a factor that is also contributing to corporate uncertainty around their preparation for SEPA. Who do they partner with/outsource to in terms of their payments business, for example?
Post-SEPA, two types of cash management bank will exist in Europe: transaction banks and distribution banks. A transaction bank will continue to do sales and services for cash management but also product management including development of cash management products, processing and clearing. A distribution bank will focus on sales and services, but outsource its back-office functions to a transaction bank. Deutsche Bank is investing in order to further strengthen its position as a transaction bank.
Despite the uncertainties and challenges described above, from next January, SEPA will be a reality and banks must help clients get on board. So what should a corporate expect from their bank in their migration to SEPA?
A SEPA bank should ideally have a worldwide banking network that covers Europe and the rest of the world – not just the SEPA countries. Expertise in different regions and therefore understanding payments specifics on a country-by-country basis is a definite advantage. If a bank operates in various countries across Europe it can already support existing delivery formats and build on these capabilities to transform domestic delivery formats into the new SEPA formats and minimise the impact on customers.
Corporates should also expect their SEPA bank to invest in technology and facilitate the transition by providing value added services. Deutsche Bank will be SEPA compliant as of 1 January 2008 and the bank’s pan-European SEPA platform will be fully functional by the end of 2007.
In addition, corporates will expect their bank to have the scale and cost efficiency to provide them with competitive pricing, as well as high service level standards in order to maintain customer loyalty.
Underlying all of this, a real SEPA bank must take a holistic view by creating value across the whole financial supply chain.
Corporates should act now, especially large companies, because SEPA will radically transform payments in Europe and it will be the front-runners who benefit most (and in the shortest timeframe). In order to make the right decisions, corporates need accurate and timely information about SEPA and all parties involved with SEPA must play their role in this:
The introduction of SEPA within the next year is a challenging and exciting prospect for Europe. With the right strategic partnerships in place, the migration to SEPA need not be a daunting task for corporates.