Don’t Lose Your Grip on SEPA
Announced on 9 January, the European Commission’s (EC) decision to allow an extra six-month extension for non-SEPA payments provided a grace period giving companies until 1 August 2014 to comply and was therefore welcome news to those businesses struggling to meet the original date on 1 February.
This grace period is still a proposal at this stage but will be approved by the European Parliament (EP) and Council in due course. This won’t happen until later this month when the parliament next meets but the approval is basically a formality.
The extra six months gives companies a little more time in which to process their legacy payments but this is their last chance. The EC has made clear that the transition period will not be further extended and 1 February remains firmly fixed as the formal deadline for SEPA compliance.
Businesses must continue as planned and maintain a relentless focus on moving to SEPA as soon as possible. This will help them keep control of the costs involved and ensure they can start making the most of SEPA’s immediate and long-term benefits.
Uneven Concession
It’s also important to act quickly because the grace period is likely to be different in some countries and companies might not have as long as they believe. In Belgium, for example, the authorities are proposing only a two month extension. Germany, on the other hand, is going to employ the full six months for everything except legacy business-to-business (B2B) direct debits, which will be discontinued on 1 February.
Companies that don’t migrate their legacy payments in time could find payments blocked because banks won’t be allowed to process them – leading to significant business disruption and cash flow challenges throughout the supply chain.
Some businesses, such as corporates with large numbers of direct debits, should use the additional time the EC has given them wisely. This means completing their technical migration to SEPA by 1 February and then moving their payment and collection flows across gradually, reducing the risks associated with a ‘big bang’ migration.
The good news is that migration volumes continue to grow. According to the latest figures from central banks, 74% of credit transfers in the eurozone were SEPA compliant by the end of December 2013 – up from 64% in November. The figure was 41% for direct debits – up from 26% the previous month.
This is a big move in the right direction but, with large volumes of legacy transactions still left to transfer, there remains much to do to reach the 100% target that legislators have set for all businesses operating within the EU.
However, it should be stressed that there are far more reasons to embrace SEPA than merely meeting deadlines and targets.
It creates a compelling business opportunity. Many companies have barely scratched the surface of what it can do for them and it should remain a live issue for treasurers long after 1 February.
First and foremost SEPA will harmonise payment solutions, helping companies reduce their payment transaction costs.
The opportunity it brings for standardisation across Europe means that treasurers can achieve a higher reconciliation rate for their receivables, collect payments quicker and improve their forecasting. It also creates a level playing field from a legal point of view and in terms of service levels.
Corporates are likely to reduce complexity by cutting the number of operational accounts they hold across different countries and the number of banks they work with. This will improve control, visibility and efficiency when managing their daily liquidity.
Over time, as companies become more efficient through SEPA, they could also enjoy the benefits of virtual account structures set up within a master account. Transactions can be posted to the relevant virtual account easily and associated with a particular activity or cost centre. This means improved reconciliation rates for accounts receivable (AR) and less need for a large number of real accounts.
Innovation Stimulus
SEPA also opens the floodgates to wider innovation. Its focus on ISO 20022 XML will allow companies to benefit from other initiatives based on that standard.
The electronic bank account management (eBAM) scheme is a good example. Businesses will find it straightforward to adopt once they are SEPA compliant and doing so will bring more transparency and control of their data and processes. They will be able to keep tabs on their data requests and handle many of their needs online.
Another XML-based initiative, Transaction Workflow Innovation Standards Team Bank Services Billing (TWIST BSB), will enable corporates to standardise billing statements across several banks, enabling them to compare prices and analyse data more effectively.
SEPA will also be the blueprint for other pan-European electronic commerce (e-commerce) programmes such as e-mandates and e-invoicing. It’s the foundation on which cross-border digital banking will be built. Although there are currently a number of country-wide e-commerce solutions, they have yet to be joined by one that is efficient and cost-effective running across Europe.
Innovation won’t necessarily come from the new initiatives themselves but from third party providers, who will create better approaches to cash management using the SEPA framework. It’s worth looking out for those providers.
Companies which adopted the SEPA credit transfer (SCT) early also soon discovered the extra benefits of simpler, same day, more standardised processes on payment systems centralised regionally.
ARs are usually processed domestically, more so than payments. so the introduction of SCT will make that much simpler. This provides a great opportunity for industries that collect payments locally through direct debits – such as telecommunications and utilities – to centralise and achieve new economies of scale.
Yet despite all these benefits, SEPA has proved difficult to get off the ground. There are a number of reasons why, not least of which is the technical complexities involved.
Many companies also chose to focus on other priorities, adopting a ‘wait and see’ approach. They were reluctant to invest in the technical infrastructure needed for migration and started preparing late, only then realising the complexity involved.
On top of this, full adoption by 1 February 2014 hit a stumbling block last year when some countries, including Spain and Italy, successfully applied for a two-year waiver from adopting the ISO 20022 XML standard.
This added another level of complexity. It means that, even when all relevant organisations are on the SEPA platform, there will still be differences in the standards used and more to be done to ensure consistency across Europe.
A truly level playing field won’t be achieved until the mandatory messaging format is introduced across the board from 2016, including for those countries that are EU members but are not part of the eurozone.
What matters now is that companies minimise any negative impacts and maximise the opportunities of SEPA. Treasurers need to focus on becoming SEPA-compliant as a matter of urgency.
Just as importantly, they need think about how they can leverage their work on SEPA to benefit their entire operations for years to come. The long-term winners will be those who can use SEPA to escape their dependency on in-country solutions and create a pan-European approach.