From the April 2011 issue of Treasury & Risk magazine

Too Much Wiggle Room?

If there has been one defining reaction to the Single Euro Payments Area (SEPA), it's been "ho hum." SEPA aims to eliminate differences between national payment systems in Europe, thus cutting the cost of cross-border payments. Its adoption finally looms larger on the horizon after the European Commission proposed long-awaited deadlines in December for switching to SEPA credit transfers and direct debits. But it's still difficult to find corporate treasurers who are excited about the change.

They will have time to mull it over. The expectation is that once the regulation passes, which is likely to happen by the end of this year, it will require all credit transfers to occur using SEPA by the end of 2012, and direct debits by the end of 2013. But that's if the regulation is passed by all the countries in the European Union in a timely manner.

"Confidence in the draft at this point in time is relatively low," says Andreas Unterste, director of financial operations, compliance and technology at Dow Chemical in Michigan. "To some extent, it's a bit of a wait-and-see attitude. It's too early to get excited."

Stakeholders say that much still has to be debated and accomplished before SEPA becomes truly useful across Europe as a replacement for existing payment instruments, which have been working just fine for corporates and banks for years. SEPA covers the 27 eurozone countries as well as Iceland, Liechtenstein, Monaco, Norway and Switzerland.

The first issue regarding the draft regulation, according to Ruth Wandh?fer, head of regulatory and market strategy for Europe, the Middle East and Africa at Citi Global Transaction Services, is when existing instruments will be phased out. The current draft is not clear on that point, Wandh?fer says, and "this is what is needed to ensure corporates will be able to realize the full benefits on offer."

Another issue relates to the technical requirements for SEPA payments, bank executives say. As the proposal stands, companies must take on the burden of converting their batch payment authorization files for direct debits to an international standard, the ISO 20022 XML SEPA standard. This is a change from the current way of doing things, where banks handle any necessary conversion for corporate customers.

Banks are firmly against any change to that custom. And corporates may feel that it's an unreasonable burden to have to use the ISO standards when initiating files of payment instructions, Wandh?fer suggests. "This would be a significant additional cost burden, and anyway is unnecessary as corporates are able to take advantage of the benefits SEPA will bring without needing to invest in these standards," she says.

Anthony Richter, head of business development for payments and cash management in Europe at HSBC, agrees. "I can see what they're trying to do, they're trying to make things standardized across the entire region, and it's very good to try and make everything the same," he says. "But to my mind, especially for the smaller companies, this will be an additional cost to them to migrate."

Richter says there's also the issue of sticking with paper-based payment mandates for direct debits, which he calls "cumbersome."

"Our customers, ideally, would be looking to dematerialize the whole process," Richter says.

Olivier Bornecque, chairman of the French Association of Corporate Treasurers and head of SEPA implementation at his own company, Aviva Investors, says there's too much uncertainty in the regulations, especially about how direct debits will be implemented in each country.

"The EC proposal is not a very good one on that point," Bornecque says. "There's too much room for interpretation." He hopes the final regulation will be more clearly worded so that for direct debit payments, "everyone will do it exactly the same way, with no possible change."

At Dow Chemical, Unterste says SEPA's credit transfer provisions offer little value to big companies, which have long had systems in place in Europe to transform cross-border payments into local ones by having local subsidiaries make the payments. Moreover, companies will still need local bank accounts for some domestic payments, which limits the amount of account consolidation that companies can achieve, he says.

Unterste says SEPA's value for big companies comes in the area of direct debit, where there are far greater variations from country to country in Europe. But he's disappointed the direct debit part of the proposal mandates core payment compliance only for retail and not for business-to-business payments.

"If the SEPA direct debit business-to-business scheme were widely available, I could use it across Europe today," Unterste says. "I'd do it tomorrow, and nobody needs to give me an end date. Nobody would need to push me off the cliff, I'd be jumping off the cliff with a big smile. Except I can't, so I'm going to stand there and wait."

So far, he says, Dow Chemical has taken no steps to convert its existing robust payments infrastructure across Europe, which involves an intracompany plan to transfer funds to subsidiaries when necessary and use their existing banking relationships to make payments, so that each payment occurs domestically, and at the cost of a domestic payment.

"We're not changing anything until we see real dates," Unterste says.

Of course, some companies are already taking advantage of some of the benefits that SEPA offers, in being able to use fewer banks, potentially, and save on transaction costs.
For example, as detailed in the November issue of Treasury & Risk, Google is saving money by using SEPA credit transfers.

The road to get all of Europe using the same payment instruments, and not just the euro, has been a long one.

For years, European bureaucrats have touted SEPA's benefits for companies, such as faster settlement, simplified processing and reduced costs. But adoption so far has occurred at a glacial pace. It's estimated that just north of 10% of credit transfers and about 1% of debits in Europe use SEPA's technology.

"It's been a relatively disappointing take up," says HSBC's Richter, although he adds that that's understandable given the timing of the financial crisis.

"You could say it wasn't No. 1 on the corporate treasurer's agenda," he says. "There are some definite benefits there, but on the basis that we already have a pretty-well performing system, for the corporates, it was a case of 'OK, I know it's there, but there's no requirement for me to change over as yet, so I'm going to see how things evolve in the market.'"

Adoption has also been slow because cross-border payments represent such a small percentage of overall volume, points out Bornecque. Since both companies and banks have to keep supporting both means of payments, the legacy systems and the SEPA-compliant ones, it's a cost, not a boon.

"SEPA is not something attractive from a short-term point of view," Bornecque says. "It's not attractive for banks, it's not attractive for companies."

Dow's Unterste says the numbers illustrate the problems the best. If only 10% or 13% of credit transfer payments, which have been available for longer than direct debit, are processed using SEPA, he says, "that means that the new thing they built is actually not that much better than the old. If B is only marginally better than A, then why bother? It wasn't good enough so that people would jump on it. You now have to push them over the cliff in order to get them there."

To a great extent, the confusion and reluctance surrounding SEPA is based on its shifting legal foundation, the Payment Services Directive.

This body of law has been tweaked from country to country, just as the Uniform Commercial Code has in the United States, says Nancy Atkinson, senior analyst at Aite Group. And in Europe, where individual countries still have a great deal of power, those changes hold sway, complicating the possibility of agreement on a pan-European SEPA plan.

"When you're dealing with the European Community, and its multiple languages, cultures, and even different holidays, it makes it tougher to come to a common agreement," Atkinson says. Though stakeholders want to realize the economic benefits of a single European union, "it's very difficult to separate economic ramifications from political and cultural ones," she adds.

Still, even though getting the SEPA regulation enacted by European countries may prove challenging, the European Union itself is committed, and many key stakeholders are also urging compliance sooner rather than later, seeing it as for the good of Europe, and in the long run for their own companies.

Aviva's Bornecque, for example, acts as a bit of an evangelist for SEPA among his treasury colleagues, encouraging them to get ahead of the curve and make the changes necessary for SEPA compliance now.

"You just explain to them that in the long term, it is a good thing," he says. "It is a very bad thing for everyone to have French means of payment on the one hand and the SEPA means of payment on the other hand. We will never know whether we want to use one or the other.

"We strongly believe that one solution that would be exactly the same in all countries in Europe will be a good thing," Bornecque adds. "Everyone will appreciate having the same way to pay in France as a cross-border payment. It will be a good thing for the global economy and for competition."

And he notes that Europe has been in this position before. "We were saying exactly the same thing 15 years ago about the euro," Bornecque says. "And now everyone is happy with the euro."

Though the use of SEPA will doubtless grow as the kinks get worked out, Bornecque has a long row to hoe.


To read about Google's Alexander Hamilton Award-winning project involving SEPA, see Saving with SEPA Credit Transfers.

For a Q&A on SEPA with RBS executive Anne Boden, see Why SEPA Matters.

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