SEPA's Impact on the Financial Supply Chain
Interest in automating the financial supply chain1 (FSC) remains high among the corporates. Banks are also waking up to the resulting new business opportunities that may be created. The level of interest comes as no surprise considering the amount of money that can be saved with a more integrated and efficient financial supply chain. A recent survey published by the European Commission2 revealed that e-invoicing alone (which is just one element in the financial supply chain) could save enterprises and government organisations in the EU in excess of 250 billion euros a year. Evidence that this is not just a hypothetical projection is demonstrated by the experiences of the Nordic countries; frontrunners in financial supply chain integration. According to the EC survey the introduction of an e-invoicing system for public sector firms in Denmark is already saving an estimated 100-134 million euros per annum.
Such an active interest in the financial supply chain is not just a recent phenomenon. More than 20 years ago, enterprises, banks, governments and other organisations involved in the financial supply chain, implemented initiatives to improve financial supply chain integration and related efficiencies. These initiatives ranged from defining standards on business processes, message formats, security protocols as well as the setting up of communities to facilitate (secure) data exchange between FSC participants.
Despite all good intentions, many of these initiatives took place in isolation from each other, with limited mutual alignment. Incompatibilities between the various standardisation initiatives meant that only part of the full potential of efficiency improvement and corresponding cost savings could be realised as the required widespread adoption by suppliers did not materialise.
In order to stimulate the internal EU market, the European Commission started plans for the single euro payments area (SEPA). The main objective of SEPA is to increase the efficiencies in payments processing in the so-called SEPA zone (EU + Norway, Switzerland and Iceland) and lower the barriers of new payment service providers. With the introduction of SEPA the distinction between domestic and cross border payments within the SEPA zone is disappearing.
In order to achieve this, a complete new (legal) payment framework with unified payment instruments, scheme rulebooks and corresponding standards have been defined under the flag of SEPA. The new wave of standardisation that comes with SEPA not only has a positive impact on the payments area, but also on other parts of the financial supply chain.
For a well functioning and integrated financial supply chain the standardisation of the message formats that are exchanged between the FSC participants is often cited as the most critical success factor – and frequently put forward as an excuse to remain inactive. Until today, the financial supply chain has been characterised by a large number of different message formats.
In the 1990s, the majority of the messages exchanged in the financial supply chain were based on ‘standards’ such as Edifact/ANSI X.12, SWIFT, domestic clearing formats as well as supplier specific formats (e.g. iDoc from SAP). And if that was not enough, out of these standards a large number of variations or subsets were created, for instance per country or industry sector. A good example of this development is the Edifact message PAYMUL. Started as a global standard under the control of the United Nations (UN/CEFACT), an increasing number of subsets (variants) emerged. The result was that large enterprises that used more than one bank needed to send their payments in different PAYMUL variants to these banks.
The adoption of XML did not improve this situation. It resulted in the proliferation of yet more new message standards. Although XML based messages can be mapped more easily, the introduction of every new standard leads to an increase of integration costs rather than the decrease that was hoped for.
We are now in the fortunate situation that the various bodies involved with the standardisation of (financial) messages, such as TWIST, SWIFT and IFX, have come together and merged the various initiatives into one common standard, ISO 20022, also known as UNIFI. The messages that are prescribed within SEPA are based on this UNIFI standard.
The expected result is that in a couple of years all banks in the SEPA zone will be able to receive payment instructions in the UNIFI based message formats from their corporate customers or other banks. This means a significant simplification (and associated cost reduction) in the way enterprises can send payment instructions to their banks.
But the strong emphasis of SEPA on UNIFI based messages also has a positive influence on messages that are out of scope of the SEPA rulebooks, such as bank statements. Enterprises utilise bank statements to reconcile the open items in their accounts payables and receivables systems. Nowadays, banks utilise a large variety of message standards to report bank statement information to their customers, such as SWIFT (MT94x), Edifact, domestic clearing formats as well as bank specific formats. The consequence is that enterprises need to implement specific interfaces for each format to enable automated straight-through processing (STP). In many cases, the quality of information received from the bank is not sufficient for STP processing at the enterprise side.
The recently defined UNIFI based bank statement messages can hold a large number of new structured data elements, such as remittance and charges data. These improvements in the amount and quality of machine readable information all contribute to direct savings for the corporates where many manual tasks can now be automated. Corporates also greatly benefit from timelier and more accurate information leading to reductions in working capital requirements.
The new UNIFI based payment initiation messages are unique in that they enable the exchange of information related to elements of the financial supply chain that had not existed in previous standards.
At the originating side, for example, the new initiation messages can make a distinction between the debtor (debit account owner), the initiating party (the entity that has sent the payment instruction to the bank) and the ultimate debtor (the final trading partner to be debited as this is not always the debit account owner). At the receiving end, a distinction can be made between the creditor (credit account owner) and the ultimate creditor (the final trading partner to be credited as this is not always the credit account owner). In the case of a direct debit, the sides of these roles are reversed.
These new roles are a major improvement to meet the requirements of (large) enterprises with a corporate “in-house bank”, “payment factories” or ‘treasury centre’ constructions. The absence of these roles in the current message standards makes automated reconciliation of payments very difficult or even impossible.
One of the most common complaints from enterprises is that reference and remittance information included by the payer in the payment instruction is not carried in Separate fields through the entire chain and therefore not returned in either payments reporting or bank statements.
Due to restrictions in the (existing) payment infrastructures this reference information is often truncated within the processing chain and not reported as a separate field, but included as a free format transaction description. This has a significant impact on the levels of STP and dramatically reduces the corporate’s ability to reconcile payments automatically against invoices and unfortunately means that processes that should be automated remain manual.
The UNIFI based messages provide a platform for major improvements to ‘close the loop’ between the physical and financial supply chain. Through the use of an end-to-end reference in the complete payment processing chain and SEPA compliant payment infrastructures, it becomes possible to carry a unique reference with the payment all through the chain and report it back to the payer and beneficiary as a Separate machine-readable field.
Another feature of the new UNIFI payment messages is the ability to include comprehensive structured and unstructured remittance information within it with the same amount of detail as with the UN/CEFACT defined PAYMUL message. Apart from detailed remittance information it is also possible to include references to other (physical and electronic) documents and messages, such as invoices and remittances.
The European Payment Council (EPC), the body that is responsible for the specification of the SEPA compliance rulebooks, has decided to restrict the amount of remittance information that is carried with the payment throughout the complete chain to 140 characters. For certain countries, such the Nordics, where the domestic payment infrastructures already support unlimited remittance info, the move to SEPA therefore represents a step back. But for most SEPA countries it constitutes a significant improvement even with the 140-character restriction. Due to restrictions in many domestic (non-SEPA compliant) payment infrastructures, remittance information can currently only be included in free format fields resulting in manual processing and associated penalty charges.
In addition to new standards, SEPA also introduces new payment instruments, such as the pan-European direct debit, better known as the SEPA Direct Debit. This enables the settlement of cross border trades (in the SEPA zone) via a direct debit instead of a credit transfer that had previously not been possible. In combination with electronic invoicing, the direct debit can become a very useful and efficient payment instrument for trades within the EU. This is particularly relevant for smaller and middle-sized enterprises that have not integrated their ERP systems in the financial supply chain as well as the large enterprises.
SEPA as an initiative driven by the European Commission to stimulate the internal market not only lowers the costs of payments in the EU, it also constitutes a major driver towards a better integrated and more efficient financial supply chain. The adoption of the UNIFI (ISO 20022) standard for all SEPA related messaging between the various participants in the financial supply chain results in more standardisation and a better alignment between the various links in the financial supply chain. This ensures higher levels of STP in the exchange of electronic messages and an associated reduction of manual interventions and repairs along the financial supply chain.
A welcome and important side effect of SEPA is that it has stirred up an increased interest in the financial supply area, resulting in new pan-European initiatives such as e-invoicing and e-identity. This can only prove to be a positive move for the industry.
1For the purposes of this article the financial supply chain can be defined as the total number of activities required to ensure that all financial aspects related to the physical supply chain are taken care of. These typically start with the request for a quote, quote and order, followed by a confirmation and invoice and finally the payment and reporting with all kind off possible additional steps in between.