SEPA, You Said?
On 28 January 2008, it will become possible for the first time to make a single euro payments area (SEPA) payment. This is a milestone in a series of far-reaching changes aimed at permanently removing the internal borders within the EU for euro transfers. These changes will have major consequences for banks, private individuals and the business community. Remarkably enough, many organisations are scarcely aware of this. There is a huge need for corporates to prepare themselves. Money transfers may not seem like a high priority but, nonetheless, payments are extremely important. Furthermore, the changes are inevitable.
Over the past few years, it has become considerably easier to convey goods from one European member state to the other. However, the same does not apply to the settlement of the corresponding trade transactions. After years of preparation, the European Commission and the European Parliament passed the Payment Service Directive (PSD) in April 2007. This guideline is part of the Lisbon Agenda and must be incorporated in the national legislations of the member states by November 2009.
Parties wishing to make cross-border payments still have to deal with hidden fees and a wide range of codes, systems and national legislations. The PSD will put an end to this. With the introduction of the PSD, the European internal borders for money transfers will disappear. The PSD creates a single ‘payment zone’ for the entire European market, where euro payments, direct debit payments and giros will all function in a similar fashion. Transferring €100 to Milan will be identical to making a transfer between two cities in the same EU country.
Over the past few years, banks and clearing institutions in Europe have also collaborated to make the new European payment system reliable and efficient. In the name of SEPA, these organisations have worked towards the standardisation of processes, formats and systems. In the transitional period until the end of 2010, SEPA-compliant payment products will be offered side by side with existing national and international products. After 2010, the term will be decided within which existing products will be phased out. Although the phasing out of existing products has been made dependent on the realisation of an as yet unspecified ‘critical mass’, we must work under the assumption that SEPA is irreversible. As far as SEPA is concerned, it is better to develop your scenario for ‘when’ rather than for ‘if’.
In recent years, the financial sector has made enormous investments. Ultimately scale will determine who stands to gain and who will lose out. The various institutions do not necessarily all follow the same strategy. You will see banks merging or increasingly working together at the rear door in order to realise bulk advantages and to benefit from lower transaction costs. Interpay has already merged with the German processor Transaktionsinstitut to form Equens, in a strategic move to become one of Europe’s leading clearing houses.
The users of payment services are required to adapt their systems. SEPA formats that comply with the ISO 20022 standard differ from, for example, ClieOp03 and the interfaces will have to be adjusted accordingly. In addition, the use of the IBAN standard is compulsory for a SEPA-compliant transaction – and this also applies to transfers within one country. Furthermore, transactions will only be processed the day after they have been offered to the bank. Banks will no longer be allowed to engage in value dating. The stored-value card will be discontinued. The biggest change, however, may well be in the terms and processing of direct debit payments. As of November 2009, the management of mandates will be centralised and consumers and companies will have up to six weeks to reverse a direct debit payment.
The introduction of the PSD and SEPA will have a considerable impact – and not just for financial institutions. SEPA is often viewed as a purely technical adjustment. However, it also affects the competitive relationship between banks, as well as the fundamental cash management processes within organisations. This creates opportunities for everyone. Companies will be able to concentrate their euro transfers within Europe at one bank branch in, say, Amsterdam, Paris or Düsseldorf. It will soon become possible to simplify European cash pools at European level within a single bank branch. This creates an opportunity to make considerable savings on operational costs. Please consider, the cost of simply maintaining a bank account is easily €2,000 per year. Furthermore, such centralised cash pools allow extra liquid assets to be freed up. And finally, because competition between banks will increase, companies will have stronger bargaining powers.
Many banks view their investment in SEPA as a foundation for expansion of their range of services. A lot of banks position themselves as providers of financial supply chain solutions. Banks are on the active lookout for solutions to use SEPA’s ‘four corner’ model (payor, payor bank, payee bank and payee) for electronic billing. In the long term, this could increase the efficiency of transaction reconciliation processes, as well as present opportunities for invoice-based financing such as factoring and vendor financing. This can reduce costs for net working capital – on the one hand thanks to lower financing costs and on the other because fewer liquid assets have been locked in.
Many entrepreneurs are still waiting to see how SEPA will work out, but this is not the best approach. There’s no alternative to SEPA. The existing payment products will be phased out. In other words, you need to have a game plan. Soon you will be incurring ‘repair costs’ for transactions that are not SEPA-compliant. Corporates should start taking measures now, in order to prepare their systems for SEPA. In most cases this will amount to an upgrade of your company’s administrative systems. Quite often, this involves long-term processes that require timely planning. Start by making an inventory of your systems. Establish to which extent you use transaction types that are not SEPA-compatible. Also review which matters possibly need to be adjusted or can be adjusted. Then try to determine what you stand to gain from the switch, for instance by closing expensive and redundant bank accounts. Analyse whether the SEPA strategy of your preferred banks fulfils your needs and determine whether it makes sense to invite tenders for your European payments.
The arrival of SEPA is inevitable and its impact extends far beyond the simple adaptation of a bank interface or the introduction of a new payment package. Those preparing too late in the day are sure to lose money as a result, as well as being forced to work under pressure. Right now, there’s still enough time to allow SEPA to hitch a ride with other projects – an ERP upgrade scheduled for next year, for instance. Corporates need to start making plans now because, before you know it, another year will have gone by.
This article is based on an interview with Zanders Magazine.