RegionsEEAWhat Happened with SEPA?

What Happened with SEPA?

The political drive towards harmonisation across the eurozone, embodied in the Lisbon Agenda, pushed the European banks to create the single euro payments area (SEPA) project, which began as a self-regulation initiative to head off enforced legislation coming from Brussels.

In line with the harmonisation concept, SEPA aims to make payments more efficient with greater straight-through processing (STP) and standardisation – and ultimately cheaper for users through the elimination of the distinction between cross-border and domestic payments within the union. For corporates, increased standardisation will facilitate the harmonisation of internal processes and thus lead to cost savings and improved liquidity and cash management.

The project has been rolled out in two stages: on 2 November, the SEPA Direct Debit (SDD) scheme will launch; this was preceded by the launch of the SEPA Credit Transfer (SCT) and the SEPA Cards Framework (SCF) in January 2008. But as of July this year, 18 months after the SCT scheme was introduced, only 4.4% of all credit transfers used SEPA standards. Today, the number still stands at just under 5%. A colleague from a Finnish bank estimated that, at this rate, it would be 2050 before Europe has completely migrated to SEPA. It is also worthwhile to mention that, to date, almost all SEPA volume is used for cross-border payments, with only a fraction being used for domestic payments.

This article’s headline is derived from the realisation that the SEPA project hasn’t started to walk yet, let alone run – or, as summed up in a session at the recent Sibos conference, “it hasn’t reached cruising altitude”. Even the European Commission (EC) seems disappointed with the lack of enthusiasm around SEPA.

The public sector, in particular, has been slow to implement SEPA instruments, despite the fact that the EC seemed to be counting on this sector to act as a trailblazer. With nearly 50% of EU gross domestic product (GDP) and around 20% of all cashless payments, the public sector has not played the leading role it should.

Consequently, on 10 September, the EC laid out a six-point plan for achieving the full implementation of SEPA, which includes fostering migration, increasing awareness, promoting SEPA products, creating a sound legal environment, and ensuring necessary standardisation, interoperability and security.

This is the clearest sign to date that the EC aims to step in and give more direction to the SEPA project.

Obstacles to SEPA Adoption

A few obvious reflections can be made in terms of what has happened and hasn’t happened with regards to SEPA. There are a number of concrete factors that have combined to put a drag on implementation.

First, taking a high-level global view, the extremely quick downturn in the economy and the unfolding financial crisis that has coincided with the implementation of SEPA and the Payment Services Directive (PSD), obviously stole the limelight – and resources – for some time.

Sweden was the first country to announce a delay in the implementation of the PSD and received a lot of criticism for this. However, as it stands today, only a third of the countries will have implemented the legislation by 1 November.

Pre-dating the financial downturn, another issue is that the process itself has not been very inclusive. Those parties that have driven forward the SEPA initiative haven’t been as proactive as they could have been in asking the payment users, such as the corporate community, what they needed. Also, the consultation process didn’t actively involve the enterprise resource planning (ERP) vendors. Many ERP vendors are thus lagging behind in terms of developing upgrades and adaptations to current and future releases in order to facilitate the uptake of SEPA instruments.

And lastly – identified as one of the main problems – is the lack of a clear end date for legacy payment systems. Only recently has there been any serious movement among regulators and the EC towards setting an end date.

In the September communiqué mentioned above, the EC set two important deadlines to drive forward public sector SEPA adoption: the migration of European institutions by June 2010 and the migration of national public administrations by the end of 2010.

Then on 30 September, the EC published the results of its public consultation, which showed that a large majority of respondents support the idea of setting some deadlines to stimulate migration to SCTs and SDDs. Many users, in particular, underlined that some conditions should be met before such end dates could be set. These conditions include the need to enhance the quality of the SEPA schemes to fully meet users’ needs and to give users enough time to become acquainted with the new products.

The consultation also found that:

  • A majority expressed the support for having separate end dates for SCT and SDD in order not to delay the end date for SCT, which is a more mature product.
  • The end date(s) should be set at European level, according to most of the respondents, but with some flexibility allowed at national level to set earlier end dates in order to take into account the specificities and degree of readiness of each market.
  • A majority of respondents also indicated their preference for a EU regulation so as to provide a clear signal to market participants that SEPA migration was now irreversible. Some emphasised the need for greater involvement of all stakeholders in the decision-making process.

Internal market and services commissioner, Charlie McCreevy, said: “The SEPA project holds much promise in terms of improved efficiency, dynamism and competitiveness of the European economy. Offering both the legacy and the new SEPA products in parallel would prove a costly business for payment providers. In addition, setting clear deadlines for the migration to SEPA would send a strong signal that SEPA is an irreversible process. It would provide certainty and predictability and act as a strong incentive for both industry and users to speed up migration.”

Corporates Need a Strong Business Case

Looking at SEPA from a corporate’s perspective, the business case is not that attractive, especially in the short term. Some corporates thought that the implementation of SEPA would allow them to squeeze their banks in terms of renegotiating bank charges, forcing the banks to lower their commissions on payments. But very quickly corporates realised that it was not just the banks that would have to change their systems in order to accommodate SEPA-compliant payments, but they too needed to upgrade their interfaces and adapt to new formats, such as XML. When they realised that they were facing an investment of up to €150,000 for a savings of €30,000, they quickly retreated.

Changing to SEPA instruments does not have to have such a high price attached to it. For example, SEB supports SCT also via EDIFACT, and therefore the investment cost may actually be negligible for many of the bank’s existing EDIFACT clients.

However, taking a long-term view can give corporates a more strategic understanding of what they can gain from a SEPA project. Although it facilitates the road to the same objectives, such as process efficiency and best liquidity management, etc, SEPA also manages to give a boost to efforts around business processes consolidation, shared service centres (SSCs) and payment factories.

Most of our customers want to take the long-term view and work with us on a multi-year road map. These companies want to look at core business processes, e.g. accounts receivable (A/R), on a pan-European basis. For example, with 350 people working with A/R in 22 countries, is any way to leverage the market trends to make those processes more efficient? This is where corporates will see big cost savings.

A large corporate client of SEB did the maths and realised that it could possibly save €300,000 in bank fees over a certain period of time by switching to SEPA instruments. But digging a bit deeper into its organisation, it realised that it could probably save €3m by centralising the accounts payable (A/P) process across 20+ countries and that this centralisation process would be facilitated by SEPA. Now SEB is being asked to act as a partner in this project, as opposed to solely implementing a new payment instrument.

A public sector entity would have a similar perspective. Unless they see a clear business case for achieving savings or greater efficiency, they will not push SEPA forward on their own.

The Importance of Standards

Standardised formats are needed to get economies of scale and process rationalisation. However, standards are not everything. It is equally important that standards accommodate all relevant payment instruments and message types, and that these are appropriately designed in order to capture the relevant data needed to achieve process efficiency through true STP.

Many European banks seem to view the new ISO 20022 standard as a standard for SCT only. This is a development that SEB considers to be unfortunate, therefore we are working towards offering all payment instruments under the ISO 20022 umbrella. SEB believes that standardisation will help to centralise processes where potentially huge savings can be realised.

The lack of standards can be seen as one of the key reasons that e-invoicing hasn’t taken off, to date. The marketplace for e-invoicing is very fragmented, with big differences industry-to-industry and country-to-country, in terms of formats, standards and infrastructure. Compared with corporates operating in the automotive industry, for example, which were early adopters and have had sophisticated and efficient end-to-end invoicing solutions with their core suppliers in place for many years, many other industries are lagging behind and many corporates are at a loss as regards which direction to take.

In Sweden, the first e-invoicing initiative was launched 15 or more years ago and every year the anticipation has been that this year it will really take off. But it hasn’t – growth has been very slow. Although eventually it will be the only way to do things, it seems that it’s a very long process to get there, and I believe that part of the reason for the slow uptake is the lack of standardisation. From this point of view, it is somewhat unfortunate that ISO 20022 does not provide support for e-invoices.

E-invoicing has the potential to add more value to the overall business case, and banks have a role to play in this process because the invoice carries a lot of information that is relevant to the end-to-end financial value chain. For example, it could tie into financing solutions because if a bank’s customer issues its invoices electronically, it could be collateralised much faster. In today’s economic climate, even having visibility of their order flow may help a corporate’s ability to get financing.

The information carried in an invoice is also the same information used as a basis for hedging decisions. Therefore, there are some interesting services and solutions that can be defined around e-invoicing, which would enable a bank to support its customers in a more advanced way.

Conclusion

When this article is published, the PSD will be more or less in place, plus the first stage of the SDD scheme will be there, but it will be a limp offering. Very few banks will have a full-fledged offer, and there will be some serious delays among banks to deliver both the core business-to-consumer (B2C) and business-to-business (B2B) direct debit offerings to the market. It is obvious that every treasurer would love to have their collections on direct debit, but the reality is not quite there yet.

The updated Regulation 2560 requires that euro accounts belonging to consumers within EMU shall be reachable (for debits) from 1 Nov 2010, i.e. one year from now. The major French banks have stated that they will not launch the SDD product before end of 2010 and several other banks will most likely also be late.

Ultimately, reachability for B2B SDD is not even stipulated but voluntary. However, the major issue here is not reachability now or within a year, but the transformation and legal status of existing direct debit mandates. As no corporate would choose to run parallel direct debit schemes for any period longer than absolutely necessary, it is hard to see how the transformation will be handled in the case of millions of existing debit mandates that must be renewed, as in Germany.

To really drive adoption going forward, the EC and European Payments Council (EPC) must be inclusive and engage with more key stakeholders in the process of designing the system as a whole. They need to revisit the question of how the new landscape can be made attractive for corporates as participants in international trade.

Fundamentally, harmonisation is a good thing for all participants in the long run, even though it’s very costly and a hard business case for banks, corporates and public authorities at the moment. To make it a reality, the EC and regulators need to set down their collective foot and propose a proper end date – otherwise the payments industry is condemned to live in parallel worlds forever.

To read more from SEB, please visit their gtnews microsite here.

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