SEPA's Impact on Current Cash Management Trends
Current trends in cash management, and corporate treasury strategy more generally, are being shaped by the twin drivers of technological advances and the objective to fully utilise substantial investments made in standardised ERP solutions, such as SAP and Oracle, as well as other treasury systems. In terms of regulatory changes, the single euro payments area (SEPA) has, of course, been the key issue. In order to meet the challenges faced by changing standards, however, as well as leverage the maximum benefit from technological developments, a strategy of centralising, standardising and automating treasury functions continues to underlie best practice in corporate cash management.
While treasury centres across different corporates will certainly take different strategies in their respective roles- depending, for example, on their industry sector or whether the business as a whole has a cost-led or profit-led approach to treasury management- two related needs will underline the work of almost all: achieving cost reductions without sacrificing service delivery or functionality and efficiently managing working capital and various risks.
While tension can sometimes exist between these objectives, this need not always be the case. A strategy based around the three themes of centralisation, automation and standardisation should yield benefits from both a cost reduction and working capital/risk management perspective.
Centralising treasury functions in order to minimise the duplication of processes has certainly been the dominant trend over recent years, as reflected in the explosion of interest in financial shared service centres (SCCs) and related structures such as payment and/or collection factories. Grouping services together in one back office location can allow for task specialisation and improved division of labour while allowing the rest of the business to concentrate on core activities. And this will certainly yield cost benefits through developing economies of scale.
The centralising/SSC approach should play a role in terms of managing risk and complying with more stringent regulatory controls. For example, centralisation will certainly increase the visibility of transactions and other processes, allowing for the more consistent and comprehensive application of controls across the range of treasury activity. And this will also provide a single, standardised source for the measurement of key corporate metrics.
In terms of costs, significant savings should be made through rationalising the number of banking relationships that a corporate needs to maintain. Centralised transaction processing taken through to the level of an ‘in-house bank’ will mean- as long as the corporate’s banking partner can offer the requisite access channels- the possibility of shrinking transaction banking relationships down to very few.
Certainly, SEPA has been key to driving activity in this area. The first stage of the initiative, the SEPA Credit Transfer (SCT), which went live in late January this year, has allowed corporates to significantly reduce the cost and complexities of their transactions within the eurozone by opening up the possibility of using a sole account for the entire region for euro payments. It is the next stage of the initiative, however, the launch of the SEPA Direct Debit (SDD), that could have the bigger impact.
This instrument will provide for the first truly standardised pan-European collections system, greatly increasing the utility of the collections factory model. As well as allowing for the radical restructuring of funding and liquidity models, the SDD should also stimulate pan-European competition by lowering some of the barriers to entry into new markets: corporates will no longer need to set up separate collections structures for each of their national subsidiaries.
The ability to increase the automation of processes- which should reduce the time and cost invested in them- will certainly be accelerated by any efforts to centralise them in one location. And while, for example, efforts to dematerialise processes through the use of fully integrated ERP/treasury platforms have been ongoing for several decades, they have certainly gained pace in recent years.
In terms of continuing to gain benefits from automation in the future, a key focus will be improving seamless IT interfaces and data exchange. Rationalising and streamlining formats and communications channels will certainly yield benefits in this respect and the ultimate goal should be eliminating manual intervention in transaction processing all together.
Of course, the pursuit of automation and improved straight-through processing (STP) will be aided by a comprehensive programme of standardisation, also made possible through improved centralisation. And, again, SEPA represents a significant step forward in this area. Indeed, if corporates- and their banking partners- prepared adequately for this year’s roll out, they should have been in a position to capitalise on the opportunities offered from day one of implementation.
While the roll out of SEPA began several months ago, the implementation is still ongoing and a key concern for corporate treasuries at present should be their level of preparedness for the next stages of the initiative. While some have realised the potential benefits from the early stages, there still remains a perception by some corporates that this is not an initiative that affects them to any great extent for the time being due to long-lasting migration of local transaction types and clearing systems to SEPA.
Indeed, SEPA should be shaping the attitudes of all corporates, even if they currently have minimal volumes of cross-border flows. Considering how the initiative will affect their strategic and tactical choices in the future will be prudent and, of course, benchmarking cash-management strategy against the leading corporate indicators- rather than merely on a domestic level- is likely to constitute best practice should corporates not wish to get left behind in terms of the leading solutions available.
Making the case for the SEPA to those corporates who have so far been lukewarm, however, should only form one part of a strategy to ensure that the initiative is a success. Equally important will be wrapping up the outstanding areas of uncertainty that remain. The most crucial aspect in this respect will be ensuring that the Payment Services Directive (PSD) is implemented on time across the EU. This will ensure that the legal foundation for the remaining stages of SEPA- most notable the SDD- is in place. In addition, there have been concerns expressed regarding other areas such as the issue of central bank reporting requirements and tools for converting domestic account designators to the international bank account number (IBAN) and bank identifier code (BIC) formats. Thankfully, work on both of these issues is ongoing from both regulators and the banking community and it is likely that solutions will be in place soon.
While it is key that corporates adapt to the changes that regulatory initiatives and technological advances bring, there are also issues with the level of preparedness among some financial institutions. Indeed, a key issue for many will be increased costs associated with maintaining payments infrastructure coupled with price compression that has reduced the fees associated with transaction processing. The former comes from the fact that much of the payments infrastructure maintained by banks is based on technology that is several decades old. And, as volumes continue to increase and new standards are adopted, the level of investment required to maintain these systems may become too much for some institutions- especially at a time when budgets for investment are likely to come under pressure.
At the same time, these banks require increasing volumes of transactions in order to cover the fixed costs involved in maintaining their ageing infrastructure, while initiatives such as SEPA are encouraging corporate clients to reduce the number of accounts they operate and bank interactions that they make. This situation will likely lead to a decrease in the number of banks that can remain actively involved in this type of business, as well as expediting consolidation in the transaction banking industry. As a result, corporates would be wise to look carefully at the long-term strategy of their transaction banking provider, as only those with the scale, adequate technological capability and financial strength will be able to sustain direct involvement without relying on the outsourcing services of their competitors.