Europe is one big step closer to payments integration with the announcement that the deadline for migration to the Single Euro Payments Area (SEPA) has been set for Feb. 1, 2014, a deadline ratified in February by the European Parliament. Aside from the headline 2014 date, existing niche schemes which represent less than 10% of credit transfer or direct debit payment volumes in a particular country have until 2016 to migrate to the SEPA credit transfer (SCT) and SEPA direct debit (SDD) schemes.
Reactions to the SEPA end-date have largely been positive. It is widely acknowledged that a deadline is essential if full migration to SEPA is ever to occur, given the pace of uptake so far. As of December, SCTs represented 23.7% of all credit transfers within the eurozone, while SDDs made up a mere 0.5% of all direct debits, according to data from the European Central Bank (ECB).
“The banking industry as well as corporates welcomed the SEPA end-date announcement because it delivered the direction and planning certainty for which market participants were long awaiting,” says Wolfgang Stockinger, head of payables and receivables for the Global Transaction Banking unit of Deutsche Bank.
Until now, many companies have been reluctant to migrate to SEPA. As recently as 2011, a survey by the ECB and European Community (EC) found 46% of respondents had done nothing to make the move, with 36% of those citing insufficient knowledge about SEPA as the main reason for inaction. Eighteen percent said their bank or payment provider hadn’t offered SEPA payment services, while 13% said they were waiting for the use of SEPA payment instruments to become mandatory.
Now that the end-date has been decided, time is running out for corporations to begin migrating to SEPA. With only two years to go before legacy systems are switched off, many will struggle to meet the deadline. Stockinger suggests that treasurers make the move sooner rather than later, warning that “there is expected to be great competition for SEPA talent project resources.”
Even for companies that are now preparing to embark on the migration to SEPA, completing the transition within two years may be something of a challenge.
“Many banks should be ready on time, but we are hearing from some corporates that, particularly for the SEPA direct debit, the relatively short migration period from now to February 2014 is going to be a real challenge,” says Tony Richter, head of strategic business development at HSBC. “The systems changes they have to make are significant, while the area of mandate management is going to be quite a big topic.”
While companies’ legacy direct debit agreements with banks can be used for SEPA, new direct debit customers will need agreements that specify SEPA, requiring companies to set up new processes to manage those. Where banks are concerned, another area of concern around SEPA direct debit is the abolition of multilateral interchange fees (MIF) by 2017 for domestic direct debits and by Nov. 1, 2012, for cross-border direct debits. This will be a significant change for banks in countries where MIFs are currently applied.
Other aspects of the migration may also prove challenging. For example, the SEPA regulation requires that corporates send bundled payment instruction files to their banks in SEPA ISO 20022 XML formats by 2016 at the latest.
“This could potentially be a bit of an issue. We may have a situation now where corporates are required to send XML-compliant files to the banks themselves, rather than the banks being able to support them with conversion solutions,” says Ruth Wandhöfer, head of regulatory and market strategy for Citi Global Transaction Services. “An XML project is quite a big exercise for a business, particularly if the company is large. We’ve already heard from a number of communities that businesses are unlikely to be ready in time.”
Wandhöfer says that in light of the requirement to move to ISO 20022 XML, multinational corporations should consider whether they can benefit from adopting XML on a global scale, rather than simply migrating to it in Europe. However, even for those with the budget to make such an investment, the move would still be a major undertaking.
“If a larger corporation decides to move to XML, it may decide to do so for all its transactions, not only SEPA,” says Wandhöfer. “This would clearly be a strategic project and it would hardly make sense to execute this based on changes happening in Europe alone. If they decide against such a global project, which may still be the case for many, they will be asking, ‘Why do we need to do this for Europe when it is in our view the banking sector’s responsibility to support us in SEPA?’”
A late addition to the SEPA story is the decision to abandon the requirement that the initiating customer provide the bank identifier code (BIC) of the beneficiary. The BIC is effectively a zip code identifying the branch of a bank to which a payment is to be paid. Currently, SEPA transactions require both the BIC and the international bank account number (IBAN). But starting on Feb. 1, 2014, customers will no longer need to supply BIC codes when making or receiving domestic payments (and from 2016 on for cross-border payments). This change is designed “to make migration as easy as possible for all users,” according to the EU’s Web site, and indeed critics of the lengthy “IBAN the terrible” may be relieved about this development. However, dispensing with the BIC has implications for banks when it comes to processing payments.
“It’s going to be up to the banks to make sure that if the customer just quotes the IBAN, payment will reach the beneficiary,” says HSBC’s Richter. “The banks have to create the BIC from the IBAN, which is not so straightforward in all communities. We are currently looking at the implications ourselves.”
Although in a number of countries it is possible to extrapolate the correct BIC from the IBAN, this is not always the case. In some markets, for example, it is possible for a bank account holder to retain the same IBAN when moving to a different bank, so the BIC element of the IBAN may reference Bank A, even though the IBAN has been transferred to Bank B. In such a scenario, it would be impossible to accurately determine from the IBAN alone where the payment is to be sent.
“One way of handling this at a domestic level, which some countries have already started to tackle, is to have a domestic IBAN/BIC database where banks or bank customers can obtain the corresponding BIC to an IBAN they have been given,” Wandhöfer says. “While that’s a positive thing on the domestic level, for cross-border payments the concept is much less straightforward. One option would be to set up a pan-European BIC/IBAN database, but every day, banks would need to feed in information. IBAN/BIC combinations change because banks can merge and customers can change banks, but also new IBANs are being created with new accounts being opened.
“Also, the question would arise as to who would administer this database,” she says. “Surely, it cannot be the banks themselves, not least given the associated risk and liability issues. Alternatively, every country could build a domestic database where every bank would need to plug into those 30 databases every day. This would be a major operational effort, also involving risk and liability concerns that may very well exceed the expected benefit of IBAN-only on the customer side, leading to increased transaction costs instead.”
In light of the general uncertainty about how this obstacle will be overcome, Wandhöfer advises corporates to continue collecting BICs. “Corporate customers have been looking for two data points ever since SEPA came along—it was always IBAN and BIC.
“For the past six or seven years we’ve been recommending that corporations collect IBAN and BIC and make sure that vendor data is in this format,” she adds. “We would suggest that corporations continue to focus on doing this in order to avoid the significant risk that without the BIC, some payments will not arrive.”
For an earlier look at SEPA, see Too Much Wiggle Room.