From the May Special Report issue of Treasury & Risk magazine

Countdown to SEPA

Lagging SEPA implementation leaves companies at risk of payment disruptions.

As the February 2014 deadline for switching to the Single Euro Payments Area (SEPA) format approaches, there are growing doubts that companies will be ready in time, raising the prospect of a disruption in euro-denominated payments.

The European Community was the latest to chime in, warning in March that while most companies have done their planning for SEPA, many were looking at very late deadlines for making the changes required.

Lesley White, head of treasury products for Europe, the Middle East and Africa at Bank of America Merrill Lynch, recently participated in a roadshow across the United States where SEPA was among the topics discussed. “The key message was, if you don’t think about [SEPA] now, you’re not going to be able to make or receive payments,” she said. “You could see the light come on in people’s eyes.”

“As of February 2014, those local instruments that go through local clearing will be decommissioned,” White said. “As of February 2014, it will be the SEPA credit transfers and SEPA direct debits that the biller uses to collect from the payer, that they will need to use.”

In January, PwC issued a report suggesting that 55% of companies risk missing the February 2014 deadline. However, Peter Frank, a principal at PwC and leader of its Corporate Treasury Solutions practice, said the situation may not be as dire as it’s painted.

“To make a SEPA transfer, the payment file needs to be in a certain format, ISO 20022,” Frank said. Companies are working on the internal changes that would allow them to generate files in that format, but if they don’t complete the work by Feb. 1, “a lot of the banks are offering services to convert the files on their behalf,” he said. “You could send a non-compliant format to the bank and the bank will take that file and convert it,” he said.

While that allows companies to go on making payments, Frank said that having the bank convert payment files will mean higher transaction costs. And if large numbers of companies decide to rely on banks to convert payment files, the volume could overwhelm banks. “I think there’s an open question as to the banks’ capacity to do it, that is, their internal processing capacity,” Frank said.

White said BofA is well prepared, noting that the bank has “an end-to-end business plan around how we support our clients through SEPA migration,” a plan that takes “bottlenecks and resources challenges into account. I do think though that those that leave it to the last minute are absolutely risking not getting the right support,” she said.

PwC’s survey of 293 finance executives in December and January showed that 22% of companies had not yet planned their SEPA implementation. Even those who put together plans had holes in those plans: for example, fewer than 20% had included the company’s HR, legal and sales departments in their planning. And 44% of those with plans had deadlines that PwC describes as “uncomfortably close” to the February 2014 deadline.

BofA's White, pictured at left, said she sees different levels of preparedness among companies. “Some clients are more ready than others and that generally seems to depend on how they’re structured, the size of the teams they have outside of the U.S. to focus on this.” Staffing is another factor, White said, and noted that that involves not only the employees in a company’s treasury department, but also those in IT and operations.

The ECB report warned that companies whose SEPA implementations were scheduled to be completed late this year risked suffering a disruption, and urged companies to complete their implementations by the third quarter.

“The deadline isn’t really Feb. 1,” PwC’s Frank said. “The deadline is probably something well before that. You don’t want to send out your first payment file untested on Feb. 1 and hope it will go through.”

In addition to allowing time for the normal testing and glitches involved in implementing software changes, companies need to take into account internal constraints around year-end, Frank said. For example, he said, some IT departments won’t make changes to ERP systems in the last two weeks or month of the year for fear it would complicate closing the books at year-end.

Implementing SEPA direct debits is seen as a bigger challenge than the credit transfers. Such debits are typically used by businesses that deal with consumers, like utilities or insurers, and are paid by debiting customers’ accounts.

“The key thing on the direct debit side is that ownership and management of the mandate—the contract between the biller and payer, which was historically held and managed by the bank—will now be the responsibility of the corporate,” said BofA’s White. “It’s completely new ground for companies.”

PwC’s Frank said the process of going to all of a company’s customers and gathering new mandates could take some time. “Then you may need a technology solution to manage those mandates, depending on how many of them you have,” he said. “It’s possible companies could spend a year or more getting ready for this.” And he noted that unlike credit transfers, where companies could turn to their banks to convert files, “the bank can’t gather your mandates or process mandates for you.”

Frank suggests U.S.-based companies are behind their European counterparties when it comes to SEPA preparations. “For European companies, SEPA has been organized as a headquarters-led, priority initiative,” he said. “A lot of U.S. corporate treasuries have essentially delegated this, and they don’t have a lot of visibility into what’s going on and not going on.”

That may come back to haunt them if the company finds itself unable to make payments on Feb. 1 of next year, Frank said. “I don’t think a U.S. corporate treasurer can just say, ‘The European finance manager can take care of it.’ I think it’s the responsibility of the U.S. corporate treasurer to take active ownership, and that’s not going on.”

Read the May Special Report on Cash Management & Forecasting.

All Eyes on Cash
Cash Keeps Building at U.S. Companies
Accurate Forecasting: It's the Discipline that Matters
Effective Liquidity Management Drives Results

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