In order to realise the potential benefits of SEPA implementation banks and their corporate clients need to develop a coherent approach. So says Karoline von Richthofen, Head of Corporate High Value Payments, Cash Management, Deutsche Bank.
While many EU inhabitants have been using a single currency for several years, the European payments market is still heavily fragmented and retains strong national characteristics across the various countries of the eurozone. Differing legal frameworks, infrastructures and standards, as well as differing product offerings from banks, have hindered the development of a genuine European single market. The Single Euro Payments Area (SEPA) has been designed to remove local barriers to harmonisation and increase efficiencies by creating a uniform market for payments. And a competitive market with few restrictions will inevitably drive down transaction costs.
With the SEPA Credit Transfer (SCT) due to go live on 28 January 2008, financial institutions and corporates should by now be well prepared for its impact. Yet while many corporates have been taking effective action to ready themselves, there has been a tendency to concentrate on the immediate impact of changes in transaction protocol rather than considering the advantages that SEPA promises in the medium to long-term. To deal with this, Deutsche Bank has developed a strategy that allows clients to realise the immediate benefits of SEPA transition, while still focusing on the wider implications for best practice in treasury and cash management.
A virtuous circle?
For corporates, the implications of SEPA will go well beyond the required technical changes – such as the implementation of IBANs and BICs – that will have an impact from the outset. In terms of treasury best practice, SEPA should be viewed as an enabler of the next generation of cost savings and efficiencies. Indeed, the effects of SEPA could be likened to a ‘virtuous circle’: the opportunities for centralization that it presents will encourage process automation that will, in turn, open up further opportunities for centralisation.
The phasing out of the myriad payment instruments currently operating across Europe will give large corporates the opportunity to centralise certain treasury functions and reduce costs by eliminating processes that are currently duplicated across national subsidiaries. Standardisation and centralisation will allow bank accounts and banking relationships to be consolidated – reducing banking fees and easing working capital requirements. With processes centralised in one location, corporates will be able to enhance the use of IT systems to increase automation and drive further savings. Automating interfaces – both internally and with third parties – will open up further opportunities for centralising related processes.
Though the imminent arrival of the SCT is clearly the most pressing issue for banks and their corporate clients, it should not be forgotten that the SEPA Direct Debit (SDD) and the SEPA Cards Framework (SCF) are also on the horizon. The direct debit scheme in particular will create more possibilities for centralisation and standardisation that should yield benefits for corporates with pan-European operations – especially those in consumer facing industries such as general insurance or utilities.
The change at the heart of the SDD is that the new instrument will allow for collections across the SEPA area that use a ‘pull’ rather than a ‘push’ mechanism. This provides corporates with a genuinely pan-European collections process, enabling the creation of ‘collections factories’, and yielding further centralization and automation benefits. The SDD should also stimulate competition among European corporates by reducing the barriers to entry into new markets. Entering into a new domestic market within the SEPA area will no longer require a duplication of collection processes.
Deutsche Bank has approached SEPA by developing a coherent strategy early on. The bank’s analysis established several key implementation concerns with respect to SEPA, which became a four pillar approach for our clients.
First, the bank decided to treat all cross-border payments with SEPA criteria, regardless of amounts, in the same way and at the same price as legacy domestic mass payments. In this respect, the bank will be exceeding the requirements of the current EU Regulated Pricing model by some margin.
Second, we thought it important to enhance the global payment formats currently in use – i.e. Idoc, csv and EDIFACT. Our thinking here was to alleviate the need for corporates to immediately change their payment processes and infrastructure to accommodate the standard SEPA format, XML – with the aim of insulating clients from technical difficulties of their SEPA migration. We also decided to support the use of XML globally, not just in the SEPA area, so that clients will be better placed to realise the cost savings and associated benefits of standardisation.
Third, it was decided that any client account held at a branch within the eurozone or the UK will be able to process SEPA transactions. There will be no compulsion to open any new accounts at a central location to access and benefit from SEPA processing – again creating an easy and convenient migration.
Fourth, the bank has developed a number of other new product features aimed at mitigating the disruption caused by changes in transaction initiation and reconciliation processes. One example is the population of missing BICs derived from the IBAN provided in the payment order. A key aim here is to take into account clients’ individual migration challenges as well the pace of change within payments markets themselves.
This was one strategy out of many potential approaches to SEPA. However, we thought it important to develop and communicate a clear set of priorities and principles with relation to SEPA implementation. This provides transparency and incentives for corporate migration.
In addition to any declared strategy, the size and scope of a bank’s operations will also be vital. A truly global transaction bank will have the capability to invest in new technology to design value-added solutions to ease the transition. Larger organisations also have extensive branch networks across and beyond the SEPA area – allowing SSCs and payment/collection factories to adopt a global rather than a merely European perspective.
Corporates themselves should also be taking steps to ease the transition process. They should conduct analyses of the likely impact of SEPA on their accounts receivable/payable set up, as well as evaluate the potential rationalisation opportunities within these same processes. Likewise, the impact of SEPA should be included in liquidity strategy planning. Treasurers should be wary that it may impact on other impending projects that do not seem directly related. On a purely practical note, IBAN and BIC information should be collected from business partners, or corporates should consider using the account number exchange facilities that are offered by the banking industry.
However, despite the benefits that SEPA promises – and the steps that need to be taken to ensure that these are realised – corporates should also be aware of the limitations of the initiative. Currency issues and other local differences will impose restrictions on the scope of standardisation and centralisation programmes. Indeed, SEPA only covers euro transactions and the euro is only used by 15 of the 27 EU countries. And, for example, corporates operating in some southern European countries will find that the use of cheques and other non-SEPA instruments is still prevalent. Despite the consolidation effects of SEPA there will be a continued need for Global Transaction Banks offering local services in these markets.
Uncertainty regarding the timing of the SEPA roll out has also plagued the project. The launch of the SDD is largely dependent on the implementation of the Payment Services Directive in each of the participating countries, which comes after a delayed ratification by the European Parliament. Also, the phase out of legacy instruments is not currently subject to any legally binding timeline. Additionally, there are unresolved issues relating to central bank reporting requirements within individual countries.
However, none of these issues will derail the SEPA programme and a proactive approach from corporates to both the benefits and potential pitfalls is needed. And with respect to the European banking community, these institutions have a definite roll to play in helping clients address SEPA issues. Indeed, Deutsche Bank’s strategy is a clear one – to make the long-term opportunities of SEPA an immediate reality for corporates so they can benefit from lower transaction costs and the smoothest possible migration.
For more information on SEPA, please visit our website: www.db.com/gtb/sepa.