The impact of SEPA on corporate treasurers - Brendan Reilly, JPMorgan

There have been many conferences, articles and presentations on SEPA over the last couple of years, but to an extent many of these have been theoretical or at high level. As the start of SEPA grows ever nearer, what are the practical implications and what will we really see?

As part of the European Payment Council’s (EPC) roadmap towards achieving SEPA, the SEPA Credit Transfer Scheme (the scheme) will be created to address basic credit transfers. The scheme is expected to replace Credeuro and the ICP. Treasurers should be aware of its intention to be unlimited in value, beneficiaries receiving funds in full with delivery of remittance data all the way through. With full reach across SEPA this will be a powerful instrument, however, full reach is not likely to exist from 01/01/2008. A treasurer will almost certainly wish to avoid requesting a SEPA Credit Transfer only to have it rejected because the beneficiary bank is not a member of the Scheme. Therefore, it will be important to select a bank that has the capability to ensure that the payment is still made to the beneficiary bank, albeit not through the Scheme. JPMorgan Chase (JPMC) will have that capability.

A treasurer should also select a bank that will have a receiver capability for the scheme. In due course the treasurer will be able to gain a definitive response on this capability by either asking if a bank has signed the EPC’s Adherence Agreement or, if the European Central Bank (ECB) decides to release a definition of SEPA compliance, by asking if the bank
is SEPA compliant. Any ECB definition of SEPA compliance should include the requirements to be able to receive payments made through the scheme and allow SEPA Direct Debits to be originated over accounts held at that bank. A treasurer will ultimately want to receive non-urgent payments through the scheme since it can then be assured that:

• The payment will be effected within a defined timeframe.
• No charges will be deducted and the payment will be received in full.
• Up to 140 characters worth of text will be reliably reported and will
  not have been truncated or altered at any point.

The latter point is key to enabling a stronger move towards auto-reconciliation. Similarly, if making payments through the scheme, providing one bank with an institution that will supply the information in an appropriate manner (and JPMC is one that will), the treasurer will have the opportunity to start automatically processing return codes.

There has been much talk about market infrastructure and the cost to banks of migrating to SEPA, but how will this impact a corporate? It should be irrelevant as the underlying payment infrastructure is a concern for the member banks only. However, it could become an issue if payment infrastructures do not consolidate rapidly enough to enable banks to cut their costs. The power of competitive pressure among banks will almost certainly force a separation between the influences that cost has on price. One would think that this would be driving member banks to force consolidation of the payment infrastructures, however, with the exception of Equens this has not happened to a large extent yet. There are four possibilities as a result of the increased pricing pressure:

• The pace of consolidation of market infrastructure will rapidly
  increase.
• Banks will outsource their payment processing.
• The pace of bank mergers will increase to produce entities that have
  much higher payment volumes who can achieve economies of scale.
• Banks will lose money.

In reality a combination of the above is likely to occur. The only real impact is likely to be that some banks will ultimately decide to part or fully exit the payments business so it is important that a treasurer selects a bank that is committed to providing market leading SEPA solutions. What are the key action points as SEPA approaches? In the near term a treasurer should ensure that:

• BIC and IBAN details are clearly placed on invoices.
• Obtain IBAN and BIC details for all counterparts, not just for
  cross-border.
• Ensure banks are capable of formatting payments to comply with the scheme and are able to provide services to facilitate the conversion of IBANs to domestic account numbers.
• Review banks’ preparations. For example, some banks have committed
  to take part in testing through SWIFT across the Eurozone from Q3 2007.
• If urgent payments are of importance, establish how banks are
  addressing TARGET2 and whether they are able to offer access to the EBA’s Priority Payments Scheme (which will offer a guaranteed timeframe of no more than four hours for funds to move from the remitter to being credited to the beneficiary), for which JPMC is a pilot bank.

In the medium term, consider the following:

• How to better utilise reliable remittance information. The review
  should apply to both accounts payable and receivable processes.
• Handling of reject code information. One feature of the Scheme is
  defined rejection codes. Depending on volumes, consideration should be given to the handling of these error codes in an automated manner to improve efficiency in data management.
• There will come a point when the national schemes close. Therefore, a
  gap analysis will be necessary to establish differences between the SEPA schemes and the national scheme.
• Review the use of XML and the provision of banks solutions that
  facilitate communication between the bank.

In addition to all of the above, review locations and entities to see whether further efficiencies can be achieved by taking advantage of SEPA. However, for the time being the reality is that other issues such as central bank reporting and taxation differences will mean that decisions around changing locations will continue to be complex.