SEPABank StrategySEPA: A Co-ordinated Approach is Key

SEPA: A Co-ordinated Approach is Key

The January launch of the single euro payments area (SEPA) has created a single European marketplace and corporates stand to gain significantly from this. Banks will now have to work harder to retain business as consolidation of payment functions and processes enables corporations to slash the number of banking relationships required to make transactions across Europe.

Forward-thinking corporations are seizing the opportunity presented by this increasingly competitive landscape to initiate new partnerships with their banks. This is the primary challenge for corporations – not just complying with SEPA, but using the regulation as a key business driver to transform their IT infrastructures into centralised, function-rich and secure banking systems more aligned with long-term business objectives.

As such, businesses are demanding from their banks transactional and financial management systems fit not just for SEPA and corporate-to-bank connectivity, but for evolving regulatory and business requirements.

However, businesses should be wary not to rely solely on banks for support in developing systems and products for the post-SEPA marketplace. While some leading banks have invested tens of millions of pounds in developing proprietary IT systems, software already exists that could do a better job for corporations at a fraction of the cost.

If SEPA is to be used as a positive agent of change in the payments industry, a coordinated approach involving banks, their customers and software providers should be adopted.

Bank Strategy and Technology

Most banks lack the necessary understanding of the capabilities of technology for reducing complexity in transactional and financial management systems. This is not surprising – corporations rely on banks for their expertise in managing investments, liquidity, credits and payments, not their IT expertise.

Added to this, is the fact that in recent years, banks have focussed much of their attention and resource on unprecedented levels of cross-border mergers and acquisitions. This has generated additional technology challenges for banks in terms of system migration and taken resource away from SEPA preparation.

That’s not to say that banks don’t have an important role to play at this juncture. It is my view that even now there is still a lack of clear understanding amongst corporations about the real benefits and potential of SEPA. For the regulation to be a success moving forward, banks have to secure the buy-in of corporations and therefore have the critical task of articulating the benefits of SEPA to their business clients.

These benefits included simplified cash management structures, improved liquidity management and visibility, and the opportunity to streamline processes for ongoing efficiency, to name but a few.

Banks need to provide customers with clear guidance on how to manage the impact of SEPA and support business objectives such as straight-though processing (STP) with the right combination of technology and industry expertise. However, currently, there is a gap among the banking community in its knowledge about what IT systems are capable of.

Corporate-to-bank Connectivity

In order to effectively advise their corporate customers, banks need to understand the role of legacy applications in the organisation, and the place that corporate-to-bank connectivity has in that framework.

There is a pressing need for standardisation of corporate-to-bank connectivity. Corporations require payments systems capable of sharing information in a range of formats with a number of banks as well as other areas of the business. Corporations need – and are increasingly demanding of their banks – a cash management system that is bank neutral and integrates with their back-office financial management systems, or ERP (enterprise resource planning) systems as they are known.

It is here that an integrated approach to SEPA could help both banks and corporates. ERP vendors can offer corporates a SEPA ‘IT health check’. This will pose the questions: Do corporates have the right technology in place to fully capitalise on SEPA? If so, are they using their existing functionality to its best advantage? Or on the flip side, are they struggling with time consuming and cumbersome multiple bank connectivity options that are out of step with the technology already available?

Once these questions have been answered, the ERP vendor can work with corporates and their banks to recommend an appropriate course of action, if indeed, any is required. ERP vendors have the IT knowledge that corporates need and businesses are missing a trick if they don’t effectively utilise this resource.

One of the key SEPA issues for corporates that can be addressed with technology is the need to understand and comply with the requirements of the interbank convention on payments’ BIC and IBAN for STP.

Banks now print BIC and IBAN account numbers on all customer statements, and businesses hoping to receive SEPA payments must include them on all invoices. This is an issue for businesses largely due to the fact that BICs are not codes they have previously encountered, and not all of their systems will necessarily be able to recognise, use or repair the codes.

As cash management departments typically comprise multiple banking relationships, connectivity protocols, file formats and back-office systems, any difficulty in processing payments as a result of errors with a BIC and IBAN can cause significant and extremely costly delays.

The financial implication for business is not simply one of repair charges. Corporates also face interest costs if the beneficiary does not receive funds on time due to a stalled payment.

I fear that many corporates have underestimated the significance of these costs. Those that have may be in for a nasty surprise when they receive their quarterly charges at the end of March and again in June, by which point they could be looking at substantial fees.

Corporations can overcome this difficulty by working with the provider of their ERP technology to develop a central payments hub within the organisation itself. This enables the company to pool information on liquidity from their multiple banks, view the status of their payments and complete the necessary BIC and IBAN validations in-house for all payments.

Benefits of a Financial Gateway

This corporate-to-bank solution comprises a central payments factory hub product – a financial gateway – that integrates with a business’s existing multiple ERP systems (regardless of vendor), as well as with the cash and payment systems of its many banking partners. The financial gateway supports STP by providing different ways of capturing payments originating from ERP systems, including web services.

It provides integrated liquidity management through one application, negating the need for the corporate to be tied into banks’ proprietary Internet banking products. SEPA-compliant, it enables corporations to manage all their payments from a single platform and facilitates the formatting, validation, approval and release of clean payment instructions to banks and external payment systems. A SWIFTnet gateway is an option for businesses requiring direct corporate access. The solution is available directly to enterprise or could equally be provided by banks on a ‘white labelled’ basis, where corporate customers would receive this functionality as part of their Internet banking proposition.

Typical business processes such as centralising payments across multiple systems into a payments factory, formatting payment files, dispatching the files to banks and processing acknowledgements from banks can be orchestrated through business process execution language (BPEL) technology. A BPEL process manager can capture instructions from ERP systems and those posted to the financial gateway. The financial gateway then dispatches the payments to the banks using one of its connectivity options.

If the technology is available to address SEPA compliance and meet corporations’ business requirements, then it is worth examining why these solutions are not paid sufficient attention.

Conclusion

For coporates, SEPA is essentially about better business. The regulation hasn’t been experienced as a big bang, instead it is incremental and there is a long way to go. However, the regulation already presents far more opportunities for positive transformation than many corporates seem to appreciate.

In fact, SEPA presents a wealth of opportunities for progressive businesses to integrate payments systems with business management systems, improve liquidity management and automate payment processing. While for the banks the opportunity lies in the development of cash management and liquidity services that truly meet the demands of business.

It is vital that the banking community builds on its relationships with the leading software vendors and develops the necessary understanding to capitalise on these opportunities for the benefit of their customers. Only then can a truly integrated approach to SEPA occur which will enable corporates to transform their operations for long-term gain.

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