SEPABank StrategySEPA for Corporates – Are You Taking the Right Approach?

SEPA for Corporates - Are You Taking the Right Approach?

It is a truism that 80% of success comes from preparation, and preparing for SEPA is no exception. There are a lot of ways that corporates can get ready for SEPA, and not only survive but thrive in the new environment.

The first thing you need to know is where the challenges are coming from, and corporates are facing increasing challenges in three principal areas: cost pressures, regulatory demands, and increasing competition.

In the banking context, cost pressures stem partly from the regulatory control that the European Commission places on the fees that banks can charge for SEPA-related services, so there’s not much that can be done in that regard. In fact, this limitation brings more emphasis to the need to control other operating expenses, and there are other areas where costs can be better managed. Banks are also incurring new competition from the likes of Western Union and other companies that have new technology, and are increasingly participating in SWIFT.

Financial institutions are treating their SEPA rollout in two different ways: those that are taking a strategic, long-term approach, taking larger market share and growing their business; and those that are more tactical in their compliance approach, doing the minimum required. This last group is practicing ‘wait and watch’, the minimalist approach. They may survive in the short term, but they will hardly thrive. Corporates also need to be proactive, strategic. A lot of new technologies are available, but many companies are not taking that approach. They’re going minimalist.

As more corporates are joining SWIFT, it is becoming a new world. If their back-office systems are 20 or even 30 years old, which is sometimes the case, there may be a need for a total replacement, more than an overhaul, of these inadequate systems. Banks as well as corporates will benefit in the long run. And SEPA will be a very long run, indeed. So, then, what are today’s business drivers that corporates need to consider both in general and in the context of SEPA?

  • Global trade and competition. There is a reason for SEPA, and it goes far beyond the European community. Globalisation of business activities is a reality, and removal of barriers to international trade has both opened the door to business opportunities just as it has increased competition. As with all other species, the rule of survival of the fittest applies to business.
  • Need to support higher volume due to M&A. In order to compete, global mergers and acquisitions are becoming more typical. They help open markets and face the reality of global trade and competition. Corporates need to support sudden increases in business activity.
  • Competitive pressure on margins. Increase in competition from BRIC and other emerging economies has put considerable pressure on profit margins.
  • Compliance and risk management. ‘Regulatory compliance’ may be the most daunting business/financial concept of the 21st century. Its umbrella spreads across business relationships and the financial supply chain. Internal audits and regulatory requirements mandate greater control of financial transactions and management of risks and exposure.

In this context, corporates need to consider the vision of what SEPA will look like not just in January 2008, but in three to five years. Connectivity to the banks will be the norm, and they may be using new solutions to accomplish this. Pan-euro and global corporations will finally be considering Europe as one whole territory, enabled by – and necessitating – SEPA compliance.

Phasing-in SEPA

For some, the transition may be slow and can be achieved step-by-step. But, everyone must start with immediate issues.

The first step is SWIFT connectivity, in particular with the Standardised Corporate Environment (SCORE). SWIFT describes SCORE as ‘a new, more straightforward, corporate access model’ than the MA-CUG. SCORE will benefit corporates by enabling more efficient communications with their banks. One of its primary functions will be to enable greater opportunities to manage working capital and initiate transactions.

The next step is connecting to multiple banks, with a single payment gateway. This single window enables corporates to manage all their transactions in a uniform manner, resulting in both simplicity for the user and security for the transactions.

The third phase is integrating the physical and financial supply chain, automating purchase orders, invoices, payments, credit transfers, direct debit, etc. The litany of applications in fact is tempting to interpret as one; but there are marked differences in the functionality and the sophistication of, say, confirming a purchase order and settling a payment.

In order to manage this scenario properly, careful, systematic (automated) integration is the only way to go. This means handling realtime information from banks, online statements, accounts, and cash flow updates. Corporates will want to know balances in realtime, so they can optimise their cash flow; some large corporates have saved millions of dollars through cash flow optimisation.

The ultimate achievement, the one that is furthest out on the timeline and with the greatest benefits, is the consolidation and centralisation of treasury operations. In order to connect to SWIFT and SEPA, corporates need their own back-office system to provide overall management.

This is not just at one site; globalisation means multiple sites, with multiple back offices, all over the world. Corporates will be dealing with multiple banks, and to complicate matters further, each country may have its own system. Thus, we have the raison d’etre for a single window for connecting to SEPA, to the US, and to other countries with their own local payment systems.

In order to thrive with SEPA, corporates should consider a vision that includes a centralised payment hub, a payment gateway. It is inadvisable to connect back-office systems to SWIFT directly. Rather, the payment gateway will allow a complete global view into your statements, and an ability to manage cashflow more effectively. In this business, money equals information and managing the flow of information equates to managing the flow of money.

Don’t just jump on a bandwagon with one connection. The initial design will fail if it is only point-to-point consideration; there must be scalability, and that is more than vision: it takes appropriate technology, right from the outset.

Managing SEPA: The Technology

Systems exist for managing under the new SEPA environment, and properly conceived and implemented they mean accelerating the evolution of information flow and transaction handling. The implications include:

  • End-to-end straight-through processing (STP): elimination of manual processing and integration of financial and physical supply chain transactions.
  • Global vision and control: Need to oversee, control and manage all financial transactions worldwide for optimal cash management.
  • Single window access to financial institutions: To reduce risk, manual processes, errors and connectivity overheads, a secure multi-FI platform is desired.
  • Future-proof: flexibility, scalability and reliability: In the world of continuous change and improvements, a system should be flexible and scalable to accommodate new requirements and function in a reliable manner.

Corporates should have the option of in-house and outsourced. In the latter, they should look for service that has both SWIFT connectivity and the business solution, such as seen in the figure below.

Figure 1: Corporates: A Typical Solution

source: ACE Software Solutions

For corporates to thrive under SEPA, their systems, for back-office and connectivity, must have these capabilities (see graphic for how it all ties together):

  • Automatic translations (FIN, Domestic, EDI, Proprietary & XML).
  • Automatic payments validations, routing and enrichment.
  • Processing of urgent/high-value and retail/low-value payments.
  • Automated repair and IBAN and BIC processing. Most transactions will go straight through. Some messages will go to exceptions, and must be secure and efficient. The payment gateway must have a robust exception processing capability, handling critical exceptions so they don’t get lost or forgotten.
  • Configurable exception processing workflows (2-4-6 eyes).
  • Back-office connectivity (FTP, MQ, Files, DB, SOA, http).
  • SWIFT connectivity (FIN, FileAct, InterAct) via SCORE or MA-CUG.
  • Secure multi-entity, profile based worldwide user access.

Having said all of the above, the business that installs such systems is now free to ignore them. That is, rather than worrying about these systems, worry about your business. That’s the whole point of automating and integrating these processes.

Talking to Worldwide Players

SEPA requires centralisation across Europe, but forward-thinking business practitioners know that this really translates to worldwide benefit, a wordwide view. Centralise the processing, providing a single view on the whole global cash and treasury status worldwide. Global access must be provided for customers no matter where they are, and in a secure manner. And it must be handled in a uniform way. The global vision means that the overall objective must be uniformity.

SEPA will require systems talking to many different players. A payment gateway between back-office and network connection will be essential. EDI, XML, etc., should all be supported, as all will co-exist. That burden should not be passed on to the back-office system but to the payment gateway. Several approaches exist to achieve these goals. Corporates must choose one that fits both their needs and their personality.

In-house system

The benefits of an in-house system under your control are clear. These systems can be developed, installed, tested and maintained to support your requirements. However, system installation, technical expertise and maintenance overheads are a concern.

Outsource SWIFT activities to service bureaus

Corporates outsource the complex and sometimes tedious management of SWIFT connectivity to various SWIFT Service Bureaus. However, the decision is a matter of balancing the costs and time versus security, confidentiality and control.

Outsource payments processing to service providers

Some corporates and government departments have outsourced their complete payments and salaries processing to payments service providers with strict service level agreements. The main reason for this decision is that normally secure management of these financial transactions and the mastery of the associated technologies is normally not within their business case.

Since corporates need to be looking to the future, how should their systems be evolving? For one, they must support – or be committed to supporting – all these initiatives:

  • Matching and reconciliations, perhaps so obvious that it need not be mentioned. On the other hand, this belongs on any checklist.
  • Advanced global payments routing for all payments, least cost routing. Your back-office systems should not have to worry about this, it should be handled by the payment gateway.
  • e-Invoicing, e-Billing and e-Reconciliations.
  • Integrated credit transfers, Direct Debits and cards processing.
  • Integrated SWIFTNet business solutions.
  • Real-time cash reporting, exceptions and investigations.
  • Workflow with business process management and business activity monitoring.

The results of this vision mean benefits to corporates that employ the technology to the fullest. These benefits are predictable and certain, and they include:

  • Increased processing capacity: a solution can increase the transactions volume processing capacity due to high STP and reduction in manual overheads.
  • Significant reduction in bank charges, especially after introduction of new SEPA products.
  • Working capital optimisation: improved visibility and centralized management of cash can enable corporates to efficiently manage liquidity and earn additional interest revenues.
  • Risk reduction and compliance: improved visibility and control help in reduction of operational risk and support internal compliance measures. And in this new world, compliance is not merely an option for thriving, it is a requirement for survival.

The pain of technical and functional SEPA compliance does not need to be severe. The goal should be to achieve this without modifying other internal systems, thus guaranteeing a rapid, low risk implementation. Planning can make it so.

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