Cash & Liquidity ManagementPaymentsAddressing the SEPA Migration Challenge

Addressing the SEPA Migration Challenge

With the 1 February 2014 single euro payments area (SEPA) migration end date now just months away, the countdown to compliance has begun in earnest. Yet it is only now – with such little time remaining – that many corporate treasuries are becoming aware of the many challenges associated with SEPA and of some of the complexities involved.

At this late stage in the compliance drive – following efforts from regulatory bodies and long-term supporters of SEPA to educate the wider corporate market, via the European Central Bank (ECB) SEPA Indicators and other tools – there are very few treasurers that do not know the main SEPA challenges. For example, it is now widely understood that the move to the SEPA Direct Debit (SDD) payment format is far more operationally complex than the implementation of the SEPA Credit Transfer (SCT); due to the well-known mandate management challenge and the need for standardised international bank account numbers (IBANs) and Bank Identifier Codes (BICs). As a result of this awareness of the need to get permission in some countries to move over to SDDs and to update datasets, companies are beginning (albeit rather slowly) to take the necessary steps to get to grips with the new data elements encompassed in the SDD.

In many cases, however, it is only as corporates look to address the ‘on paper’ challenges of SEPA compliance – particularly with regard to SDDs – that the underlying difficulties and niche complexities arise.

SDD Data Challenge: Code Confusion

According to the quantitative and qualitative findings of a recent corporate treasury survey and subsequent peer group discussion undertaken on behalf of Deutsche Bank by ‘Eurofinance’, there remain many areas of confusion. One such issue is that of IBANs and BICs.

Under SEPA’s new account identifier rules, the issuing of direct debit mandates requires both IBAN and BIC data. The difficulty in this respect is two-fold. First, there is the question of how best to obtain these codes – particularly for mid-tier and pan-regional companies as their acquisition procedure will vary between markets. While there are some third-party vendors that are able to help with this process, there is a lack of clarity in some instances as to precisely how they work, and if the outcome justifies the expense.

Indeed, one treasury services manager speaking at a recent peer-group discussion warned that third-party conversion services can be very expensive and that, before enlisting external help, it’s vital to “look at the price you are paying for your funds transfer pricing (FTP) transaction, against what you will pay them (the vendors)”. This is an area in which many corporates seemingly need guidance, alongside knowledge about how such services can add-value on an individual corporate basis, and what companies themselves need to do and what systems to have in place in order to optimise their effect.

A second source of BIC and IBAN-related confusion is whether or not both codes are required for the processing of domestic direct debits under SEPA. In theory, domestic banks should be able to process domestic direct debits without BICs but, if Deutsche Bank’s recent survey findings are anything to go by, this does not appear to be the market reality.

“Regarding BIC and IBAN,” said one head of treasury to me recently, who didn’t want to be named, “we have been in contact with banks about what is needed and we get different answers. Most are saying that IBAN is enough and BIC is not needed, but some banks claim that, until 2016, BIC is still required.”

This comment contradicts what an assistant treasurer had earlier been told me, which was that both were “absolutely required,” and transactions would not be processed correctly otherwise.

Given that corporates will naturally turn to partner banks and vendors for support throughout the SEPA migration process, these divergent views and lack of consistency is concerning, especially as it will not be helped by local country-by-country variations with regards to data elements.

The Issue of XML

As has been widely reported and discussed, XML ISO 20022 is the obligatory messaging format for all SEPA transactions. But this requirement is not as clear cut as it may first appear to treasurers.

At present, services that convert local country formats into XML files are available from banks or third-party vendors for companies without proprietary XML capabilities, but they are unlikely to be a sustainable long-term SEPA solution. Costs aside, there is no guarantee that the law will allow such services to continue beyond the end date. For this reason, Deutsche Bank recommends that all corporates strive to develop in-house XML capabilities. This is especially important when you consider that XML ISO 20022 messaging is also fast becoming the format of choice for non-SEPA transactions, offering efficiency benefits. Many companies will need some guidance in this respect as migration to the larger XML files can have considerable knock-on effects on business lines beyond treasury and on enterprise resource planning (ERP) systems. Seeking help without delay will ensure integration and easier compliance.

Multiple versions of XML, with slightly varying definitions, can cause problems. In order to be SEPA-compliant, banks require only a single channel through which to accept XML, despite the fact there are numerous domestic versions available. As many treasury professionals have commented to me, this XML variance seems contrary to SEPA’s pan-European payment harmonisation objectives and it is often deemed a major challenge.

One way in which the XML challenge is being overcome is through improved corporate-bank communication, with corporates increasingly leading the dialogue. Indeed, one treasury analyst told me of his company’s efforts to gather its major banking partners together in a workshop to reach a joint decision over which versions of XML to use. This is not the first case we have heard of (often larger) corporates being proactive in this way, and Deutsche Bank believes it is to be encouraged.

However, it must be acknowledged that there are compliance barriers beyond individual corporates’ control. The major concern is varying degrees of bank readiness for SEPA across markets, which comes partly as a result of local governments having yet to decide on the initiative’s full and final details. For 35% of Deutsche Bank’s ‘Eurofinance’ surveyed treasury professionals, Italy proved to be the most challenging market for SEPA compliance, followed by France (20%) and Spain (17%).

This presents corporates with an apparently impossible situation. If some countries are yet to finalise their individual policies with respect to SEPA, some companies understandably do not know what to do, but must be ready to do it long before the end of the year to achieve SEPA compliance.

Conclusion: Education, Clarity, and Direction

While the official deadline for migration to SEPA is 1 February 2014, year-end technology freezes mean that November of this year is effectively the ‘real’ cut-off point. This crucial point must never be forgotten by treasurers and should guide all their other SEPA considerations. With the right guidance and support, a November date is still achievable but it requires action now.

In order to support corporate treasurers, education, clarity and direction is needed, and Deutsche Bank is one among many seeking to provide it via whitepapers, workshops and individual corporate advice. The bank’s ‘Practical Guide to SEPA Migration’, for example, offers advice on how corporates can benefit from third-party assistance, and what treasurers need to look for in a provider. The creation of a dedicated online SEPA site at the bank, acting as a hub for knowledge-sharing and compliance expertise, should also help treasurers achieve compliance and gain process efficiency benefits at the same time.

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