An overview of the current status of the single euro payments area (SEPA) shows that corporations have not been sufficiently involved, or educated, and will refrain from taking any step beyond the minimal requirements for compliance. This will typically reflect in adapting their administration systems, such as the general ledger, receivables and payables, to the IBAN and BIC codes.
On their side, banks are quite silent on SEPA, as the lack of adequate incentives to shift to SEPA-related products still makes them wonder about the possible inherent benefit to their business, consequent to a full SEPA adoption strategy. In reality, research shows that banks can offset the (inevitable) loss of revenues by offering, at a premium, additional optional services (AOS) that integrate the basic functionalities of the payment schemes presented by the rulebooks.
However, the immaturity of banks in proactively approaching the SEPA business scenario is gauged by a mounting argument by corporations, who do not want to pay for already acquired (and tested) services. As a matter of fact, the shallow reach of the schemes provided by the SEPA rulebooks, when compared to the currently adopted domestic payment schemes, convinces organisations not to invest in technical and organisational adaptations that will lead to services with a lower quality than currently achieved.
The controversy is increasing, to the point that the AITI – the Italian Association of Corporate Treasurers – suggested that each national corporate and bank community should define two levels of added value services:
- Services that banks commit to deliver in response to a simple user request. These services cover needs already performed by existing – and already functioning – domestic instruments. Such services should be named ‘additional’.
- Services activated by the decision of a bank, as a consequence of an increased offering of its portfolio of services, and aimed at satisfying new, or latent, customer needs. These would be ‘optional’ services.
The current approach of IT providers is to ‘wait-and-see’. While traditionally banks have heavily customised their software applications, or even built them in-house, they are now looking with interest at packaged applications that automate mission critical processes and technically comply with industry standards. And banks, like corporate clients, do not want intrusive solutions. Application software vendors are selling mainly to banks and financial players (e.g., processors). This lines up with the demand from banks to adapt their existing systems to the basic SEPA rulebook process directives and to the incumbent UNIFI XML ISO 20022 standard.
Banks are facing a tectonic shift in the way they approach standards. While they were more used to ‘impose’ the adoption of proprietary protocols, they are now faced with corporate customers who strongly demand interoperable solutions.
Application software is offered to mainly cover two streams of the SEPA payments landscape:
- Mapping of company-specific payment data structures into equivalent ISO 20022 XML format.
- Workflows to route payment flows.
Concerns of Corporates
Among the first areas of concern remains the expressed impression that the embracement of SEPA will ‘not bring any direct and substantial business benefits’ other than some efficiency that derives from automation. The reduction in costs, by the way, is not so evident and straightforward. As a matter of additional concern, a study commissioned by the European Commission (EC) quantifies in a 5% increase in the operational costs of corporates that will have to handle dual payment systems (i.e. current domestic and SEPA) during the transition. With little promotion from banks and almost zero uptake from corporates, this will lead to an overall loss effect to corporates, estimated by the study, in approximately €27bn during the period between 2006 and 2012.
The lack of adequate incentives to shift to SEPA-related products is another constraint for corporate users, which also underlines the inability (when not a calculated indifference) of banks to promote SEPA.
The level of attention and acceptance by corporate users is very little, almost non-existent. As already mentioned, one of the major worries feared by corporate users is that, by decommissioning the domestic payment schemes in favour of a holistic and pan-European payment system, they will lose the benefits of well-tested and already proven processes. By no means are they willing to accept a step backwards from the acquired enhancements, achieved throughout time, experience and investments. Users want political imposition before moving forward.
One of the major (and positive) impacts of SEPA is the adoption of a clear set of standards. Unfortunately, also corporates face some issues in this domain. Historically, corporates have done their homework to enable the introduction and adoption of the ISO 20022 XML protocol. But, under pressure from large banks, the European Payments Council (EPC) has reduced the changes needed to accommodate the corporates’ requests. The finally published SEPA ISO ‘standard’ is not as complete as expected by the corporations involved. They are now questioning why they should look at SEPA with favour if their recommendations have not been accepted. The major reproach to the EPC is that, once jointly decided, standards should be applied as such.
SEPA is also looked upon with concern by finance directors, since the claimed benefit of reducing bank accounts, by introducing SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD), might hamper established relationships maintained with banks for services other than payments (i.e. credit facilities, financing). Another area of careful scrutiny relates to the impact that the adoption of SEPA will have on contracts. What happens if a company chooses one particular bank and the contract signed with a large client (especially in the government sector, i.e. energy, telecom, defence) is not in the country of the selected bank?
The European finance director of a large multinational food industry has bluntly admitted that the only approach he has decided to take was to modify the structure of the bank account, in the ERP and bank software, for all their vendors, “and that is about it.”
Business Case
In its premises, SEPA is an initiative aiming at harmonising the system of cashless payments in the extended eurozone, creating a coordinated environment of rules, standards, and procedures. The endorsing European policymakers hope that the rules and principles, condensed in the rulebooks, are the foundation that will allow market dynamics and open competition to contend on the same baseline, leading to a natural reduction of prices paid by consumers and end corporate users.
If we consider the huge price variations of providing basic payment services related to a bank account in Europe, such arguments are very promising. Research shows that prices vary between Member States by a factor of 1:8, i.e. from €34 a year for the average customer in the Netherlands to €252 in Italy. It is not only on price show large differences between Member States. For example, in some Member States payments are executed in real time or same day, but in others three days or even longer is the rule.
From the answers received to a survey question “If a bank offers you a SEPA-related service, would you be willing to pay for it?,” it emerges that even though 62% declared that the perspective of paying banks is not appealing, a significant 28% is ready to pay a premium once a business case is clearly articulated. The remaining 10% of the panel is ready and available to pay for SEPA-related services from their bank.
Interestingly, almost half of the ‘no’ respondents declared to know little, or absolutely nothing, about SEPA. Such a position can be the cause, but also the effect, of the low-profile approach adopted by banks towards the SEPA initiative. We believe that once banks start providing a solid wealth of information and education about SEPA’s return on investment (ROI), the number of favourable respondents will increase, adding to the already existing group of 38% positive responses.
This belief is reinforced by the observation that also among these were the ones who declared to know nothing of SEPA and which generally work in non-finance units. According to our analysis, these individuals, who work in operations, are used to dealing with third-party providers of outsourced services that impact business processes (e.g. transportation, warehouse management and contract manufacturing), and perceive that somehow SEPA could impact their business processes significantly. They are aware they know very little of it, but are willing to pay to get external support to sustain and improve any initiative that promises to bring financial benefits, particularly if the initiative is connected to swifter ways of managing operations (i.e. payments) that often constrain the regular flows of the physical goods. Too often the physical goods move faster than the corresponding financial and administrative flows. If the clerical paperwork has not yet been processed for some bureaucratic captious objection or simply because the data reported in the payment differs from what is declared in the invoice, means that the material remains blocked in a warehouse,
Other observations from customer interviews register that corporates, especially ones operating on a multi-country scale, will accept the costs related to SEPA and participate in the migration under the condition that SEPA must allow a high degree of end-to-end straight-through processing without national deviations.
Impact of SEPA on the Supply Chain
One of the first conclusions of the research is that SEPA will surface on the corporate executives’ agendas once it becomes evident its tight connection with the financial supply chain. Concerned with the loss of revenues in some parts of the payment business, banks have targeted the financial supply chain, in particular the transactions between corporates, in which they have paid only a minimal part until today.
If the corporate can automate its back-office, it will be able to gain more accurate information about its treasury operations, thus reducing the risk of its processes. It should also be able to get better finance and credit deals because these will be based on actual positions instead of estimates from historical data. The information resident in the supply chain can be truly exploited only if straight-through processing is present along the entire chain.
The importance of ‘getting SEPA right’ is reflected in the Celent survey, where 40% of the respondents believe supply chain management and finance should jointly cooperate to introduce and implement SEPA.
This has even greater resonance once managers from the operational departments are made aware of the possible repercussions that SEPA principles will bring to their daily activities and business processes. Treasury and finance were nominated as the key responsible functions of conducting SEPA. This confirms that ensuring compliance to SEPA guidelines is considered an administrative duty. However, as soon as mention is made to the impact of SEPA on the payment of goods, the potential benefits that could derive from it shift the attention to a stronger consideration of its positive influence on business processes.
Corporate executives are tasked with generating working capital in most efficient ways, and endeavour to find solutions that optimise cash flow, cash cycle days, and cost. In order to improve effectiveness and efficiency, they are actively considering instruments that finance all aspects of the supply chain, such as payables, inventory, and receivables. The notion of an electronic invoice (e-invoice), connected with payment flows, can be the element that triggers the interest of corporates for a single standard. It becomes extremely important that banks take into account the instances of integrating payments systems and commercial cycles. Our belief is that the concept of e-invoicing can attract the finance director’s attention, which may otherwise be not so interested in payments operations.
SEPA can provide the basic standard protocols that will activate the automation of the supply chain. Banks, which will be presenting an e-invoice as the bridge between payments and the physical supply chain, will work to integrate the invoice documents with payment systems through the SEPA standards.
What Needs to be Done
The main request coming from the stakeholders (i.e. banks, payment processors and corporations) is the provision of a clear business case. This must correlate the incurring costs with the derived benefits, both tangible and intangible. Our research confirms what previously mentioned, which is that SEPA benefits accrue from a tight connection with the financial supply chain (e.g. working capital optimisation).
The immediate following action item is to continue pressing on regulators to achieve a true, and legally binding, harmonisation of payment schemes. Stakeholders must avoid the trap (yet very compelling) of ‘cutting corners’ by adopting local schemes.
The lobbying initiative must parallel another challenge of making policymakers establish a clear – and final – deadline for the adoption of the Payment Services Directive (PSD).
Until concerns are resolved, companies must not play a passive ‘sit and wait’. Rather, they should prepare their IT systems and organisation to the introduction of the SEPA payment schemes, reviewing the level of SEPA-readiness of all the elements of the financial supply chain: business and operational processes, working capital management, payments, cash management, and risk mitigation.
Corporates should consider reviewing, and, where needed, take the advantage to re-engineer existing inefficient processes. A valid exercise could be to consider concentrating domestic and cross-border payments within one single channel and one single IT system, in various countries, evaluating the resulting cost-benefit profile.
It is absolutely important for each company to ensure that the existing banking communication channels are capable of handling SEPA transactions. If not, they should either switch to a SEPA-compliant channel, or demand from the bank a clear roadmap for compliance.
A significant push that could ensure a virtuous cycle of SEPA adoption derives from the uptake of SEPA schemes by multinational corporations and public sector organisations. These players must absolutely overcome the ‘not in my back yard’ (NIMBY) debate as to who should be the first to start. The public sector, particularly, will play a pivotal role in opening the way to the full adoption of the incumbent SEPA credit and debit payment schemes.
In terms of pricing the SEPA products and services, banks must adopt disciplined customer segmentation. The creation of a portfolio of SEPA-related products and services is the first step towards a structured offer that follows the guidelines of a product lifecycle management (PLM) practice. Across time, and dependant upon the customer segment through which it is channelled, a SEPA product/service lives spans the steps of initial conception, development and prototyping, first launch, first mover adoption, mass delivery and utilisation, and end of commercial life and phase out.
IT players must focus on offering ‘plug-and-play’ platforms that leverage service oriented architecture (SOA) principles, enabling the management and execution of payment business process.