Corporate TreasuryCentralisationGeneralThe Transition to SEPA: a Practical Guide

The Transition to SEPA: a Practical Guide

The aim of the single euro payments area (SEPA) is to harmonise payment instruments across Europe by mandating extensible markup language (XML) ISO 20022 formats and standardised payment and collection methods within the SEPA region. The project extends to a total of 32 countries, comprising the European Union (EU) members plus Switzerland, Iceland, Monaco, Liechtenstein and Norway. A broad range of national payment types are within its scope, including SEPA direct debits (SDD) and credit transfers (SCT).

Depending on the type of payments used in different countries, the impact of SEPA will vary. More complex modifications will be required by companies where direct debits are used, as not only will the formats of payments change but also authorisations for direct debits. So mandates will have to be enriched to remain valid under SEPA, and will also have to be stored by the corporate initiating the direct debits. In addition, the procedures and period within a direct debit that may be revoked have been standardised, which has significant implications. For credit transfers, corporates will need to change the formats of outgoing payments into the SEPA XML ISO 20022 formats. The order to cash (O2C) cycle is impacted by the change of information captured within the electronic bank statement, leading to issues and changes required in the accounts payable (A/P) and accounts receivable (A/R). Otherwise, the reconciliation system might not recognise the formats, creating an increased manual workload.

A Major Undertaking

Regulation (EU) No. 260/2012 forms the basis for the migration end date for SEPA and banks are obliged to accept local payment formats until next January. As of 1 February 2014, however, corporates are only allowed to exchange payments and collection formats in the SEPA XML formats in the eurozone countries. Non-eurozone countries must migrate by the end of October 2016, but in reality many will meet the earlier deadline. If corporates have not yet geared up for SEPA they will need to get moving now in order to maintain smooth operations after this date.

Companies and their treasury teams should not underestimate the amount of time required for analysing all the corporate departments and processes that will be affected by SEPA and how they will be impacted. Considering how many projects incur delays from various reasons, time is even more pressing to start SEPA projects in order to achieve the full transition within the next 12 months. This is what corporates must take into account when planning their SEPA migration. They need to get a good team together and start talking to their banks, business partners and their system providers. Let’s review the effects of SEPA and what the corporate SEPA project team needs to tackle when gearing up for the new payments formats and processes.

Impact of SEPA on Direct Debits

The use of direct debits differs widely across SEPA member states at the moment. For example, more than half of all payments are carried out via direct debit in Germany and Spain (in 2010 it was over 60%), and direct debits are also an important payment means in the Netherlands (over 40 %), Austria (around 30 %) and the UK (approximately 20 %). In some countries, such as the Czech Republic and Hungary, no direct debit scheme existed prior to SEPA, so corporates wishing to adopt it need to implement an entirely new payment method and mandate management supported by the SDD core and business-to- business (B2B) schemes. This means an even greater effort for corporates in these countries than those where direct debit schemes are already in place.

Knowledge will need to be gained, new systems and procedures must be set up, and SEPA mandates gathered for the first time. In countries where existing methods need to be migrated to SDDs, corporates will have to update and modify their direct debit processing to meet the SEPA regulations.

Among the key changes, mandates for direct debits need to be enriched to be SEPA-compliant. SEPA mandates must include two new items of data: a creditor identification number and a mandate reference number.

Moreover, the creditor has to inform the debtor by pre-notification of the debit dates and amounts. SDDs need to be submitted to the paying agent at least five days prior to the due date (SEPA core direct debit for private customers) for initial direct debits and two days (or just one day in a handful of SEPA countries) for subsequent direct debits, and one day prior to the due date (SEPA B2B direct debits for business customers).

Previously, private customers could reverse direct debits within six weeks (35 days in the Netherlands) after submission. Under SEPA the reversal time has been extended to eight weeks, and up to 13 months where the debit is not authorised. Mandates are no longer unlimited; they automatically expire 36 months after the last initiated direct debit. International bank account numbers (IBAN) and bank identifier codes (BIC) replace the previous data for specifying accounts and banks.

Choosing the Right Technology

Corporates that have not already done so should analyse whether their existing systems are fit to handle the new SEPA mandates and explore the optimisation potential of specialised solutions that are easy to integrate into the corporate enterprise resource planning (ERP) system and deliver SEPA-compliant mandate management. The solution should enable the central management of all SDD mandates across their entire lifecycle, allowing for a corporate-wide overview and control of mandates. Moreover, the solution should support easy enrichment of existing mandates, provide templates and standardised procedures for new mandates, and include a central database of all business partners in order to centrally maintain all master data, including the new IBAN and BIC information.

Maintaining a central overview and administration of all mandates will prove challenging, particularly in cases where corporates have to process many direct debits and need to collect mandate information across multiple entities and systems. Thus if a mandate management solution is fully embedded into the ERP solution and includes a feature for automatically utilising existing direct debit mandates as SEPA-compliant SDD mandates, corporates will benefit from efficient and automated processes. Organisations do not need to invest in updating old host and sub-ledger systems, but can instead control all direct debits with a centrally-installed new solution.

Impact of SEPA on Credit Transfers

The format of credit transfer payments will need to be changed into the new SEPA format based on XML ISO 20022 messaging so that greater harmonisation in payments processing can be achieved across the SEPA region. In EU member countries that have not adopted the euro as their main currency, no changes need to be made to the local payment formats. Nevertheless, migrating to the XML formats of SEPA for SCTs will bring additional benefits to corporates, both within and outside of the SEPA region, due to the standardisation of formats. This will help reduce costs and also the time needed for processing payments.

In advance of 1 February 2014, corporates should check whether their systems are capable of processing the necessary SEPA formats (cash management (CAMT) and payments initiation (PAIN) messages). In an ideal scenario, the existing system can be easily customised to meet the new requirements, but often the reality is a diversity of systems being used by different units within a company. In such cases corporate treasuries are best advised to seek a solution that, in addition to offering fully SEPA-compliant payment formats, is also able to automatically transform payments generated in the old formats to SEPA-compliant instruments. With such a solution, corporates will be better-prepared for the SEPA migration end date. If the solution can be fully integrated into the central corporate ERP system, not only can payment processes be optimised but also all other corporate areas affected by SEPA, such as human resources (HR) and/or the legal department.

Benefits of SEPA

SEPA will be particularly beneficial to organisations with cross-border sales within Europe. SEPA will standardise payment formats, and the high costs of inner-European payments will be history once the full scope of SEPA becomes a reality. Where direct debits have not traditionally been a widely-used payment method, corporates will be able to benefit from the introduction of SDDs, both core and B2B, as they can extend their reach to potential new customers.

With SEPA it will be possible, for the first time, to initiate cross-border direct debits across SEPA member states. Thus, the range of European cross-border transactions has been extended by a comfortable method of payment. Corporates, both within the SEPA region and beyond, will profit from more transparent and streamlined processes and lower costs as increased centralisation will be possible. However, in order to be prepared and to reap the full benefits, the task of migration should not be underestimated.

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