The start of a new European payment regime, the Single Euro Payments Area, is just months away. Effective Feb. 1, 2014, SEPA will transform the way businesses make payments in 33 European countries. Yet many companies have yet to switch, raising the possibility of a traffic jam toward year-end as large numbers of corporates all try to migrate at once.
A PWC survey conducted this summer concluded that about a third of companies risk not making the deadline; as of June, about a quarter of the companies PWC surveyed hadn’t planned their SEPA implementation. European Central Bank data show that as of July, 50% of credit transfers were occurring in the SEPA format and just 4.8% of direct debits.
Those statistics, particularly the numbers on direct debits, seem alarmingly low, especially since there’s general agreement that European regulators are not going to postpone that Feb. 1 deadline to give companies more time.
“There’s an overall concern, absolutely, about companies’ ability to achieve compliance and about the banks’ being ready to support all of the compliance efforts, as well as all of the third parties involved,” said Eric Cohen, a principal in PWC’s corporate treasury solutions practice.
As the deadline gets closer, there are also concerns that if a large number of companies aren’t ready for SEPA, their inability to make payments could pose a problem for other companies.
“There are major risks in terms of liquidity which would have to be dealt with if Feb. 1 comes and there are hiccups in the system,” said Shahrokh Moinian, head of trade finance and cash management corporates Americas, Global Transaction Banking at Deutsche Bank.
While companies still have time to migrate to SEPA, “the window of opportunity is decreasing,” Moinian said. “The later corporates start preparing, the more external help and support is required, which means more budget is needed as well.”
Although much of Europe has had a common currency since 1999, until now each country had a separate payment system. Companies that did business in more than one country had to deal with different payment formats; they often maintained bank accounts in each country in which they did business as part of dealing with the different systems.
SEPA does away with the national payment systems and establishes two payment instruments, credit transfers and direct debits, and a single XML format, ISO 20022 Payment Initiation (PAIN) messages, for sending payments.
From a global company’s perspective, implementing SEPA means updating its systems to adopt the PAIN messages and switching from using national identification numbers for the banks and bank accounts of the companies it is paying to using International Bank Account Numbers (IBAN) and SWIFT’s Bank Identifier Codes (BIC).
Companies that use direct debits—often those that collect payments from consumers, such as utilities or telecom companies—face more complicated changes. Until now, a company’s bank usually maintained the agreements, or mandates, in which customers gave the company permission to debit their accounts. SEPA requires companies to take responsibility for those mandates.
Some European countries have been given waivers allowing them to maintain legacy payment systems involving smaller numbers of payments for another couple of years. But consultants and bankers say those exceptions just create confusion among companies.
For example, in Spain, certain types of direct debits have been given a waiver to operate until 2016, said Lesley White, head of treasury products for Europe, the Middle East and Africa at Bank of America Merrill Lynch. This means that companies operating in multiple countries are faced with moving some payments to SEPA while continuing with existing formats for payments in other countries, she said.
“This does not help in terms of driving efficiencies,” said White, pictured at left. “If there was a consistent approach across all countries, this would have made the task to migrate much easier.”
“Italy has a waiver to allow the customers to send data in the old legacy systems and then translate it into SEPA, whereas other countries such as Netherlands are forcing all of their customers in the new SEPA formats,” said Craig Ramsey, wholesale solutions leader at ACI Worldwide, which provides software and products related to payments. “If you’re a customer doing business in Italy and in the Netherlands, you’ve got one country telling you to do it one way and another country telling you to do it another way.”
The first issue companies face is coming up with the resources to implement SEPA. There’s general agreement that small and midsize companies are farther behind than large corporates, and Ramsey relates that to the issue of resources. Big corporates not only have more resources to begin with, but will realize more benefits from SEPA, which means the finance team can make a stronger business case for getting the resources to make the switch, he said. A small company that does business in just one country still has to bear the costs, but isn’t really going to realize any efficiencies from switching to SEPA, which makes it harder to put together the case for getting the resources, Ramsey said.
When it comes to implementing SEPA, the real challenge for corporates is direct debits, said Martin Runow, head of cash management corporates Americas, Global Transaction Banking, Deutsche Bank.
“The SEPA credit transfer is relatively similar to the older payment types, once you get your IBANs and BICs together and make some changes in your IT structure to hold your new format,” Runow said. That’s not the case for SEPA direct debits, where companies will have to make substantial changes to their existing processes. “Taking a telecommunications company as an example, if you collect your monthly payments in Germany via direct debit, the actual mandate, the language, is typically embedded in your mobile phone contract. They have to change all of their standard contracts and get the sales organization on board as they have to use the new forms,” he said, adding “The touch points within the organization are much wider, which makes it much more complicated.”
Payroll is a possible sticking point, said Anupam Sinha, head of corporate payments, Europe, Middle East and Africa, for Citi Treasury and Trade Solutions, who's pictured at right. “The last thing you would want to do is delay a paycheck,” he said.
Because payroll is usually the responsibility of local HR departments, not finance, some companies missed including payroll in the original scope of their SEPA project and now are struggling, Sinha said. “There’s also a general issue of preparedness among payroll vendors,” he said. “The payroll space is typically run by a number of vendors, rather than clients doing it themselves. There’s a general feeling that vendors are not really prepared.”
But Sinha cited collecting customers’ BIC and IBAN numbers as the No. 1 practical challenge, describing the process as “very time-consuming.” Companies are turning to conversion utilities to handle the task, he said.
Making It to the Finish Line
With the clock ticking, bankers and consultants say companies need to focus on doing whatever it takes to be able to make payments in SEPA formats by Feb. 1.
Banks and service providers are offering to convert payment files into SEPA format, but that’s not a total fix; companies have to have IBAN and BIC numbers in the files they send to banks for conversion. Nor is having banks convert payment files a permanent solution; banks are only allowed to provide such services until 2016.
Jonathan Williams, director of payments strategy at Experian, said many companies were looking at SEPA as part of bigger projects, such as treasury centralization.
At this point, “businesses don’t have the luxury of time to restructure their treasury systems,” said Williams, pictured at left. “They need to focus on three things: making sure their software is compliant with SEPA, making sure their processes and procedures are compliant with the SEPA scheme, and making sure their data is ready.”
“The Plan B on the corporate side is either outsourcing some of the IT work to a variety of the service providers that are out there, or simplifying some of the transition requirements or the activities that are required for the transition,” added Deutsche Bank’s Moinian.
For example, a company that has five or six banks in Europe and lacks the time to make the changes and do the testing necessary with all the banks may focus on preparing for SEPA with one or two of its banks, then make all its payments from those banks come February, Moinian said.
In the past, corporate clients might have wanted to own their payment process and been reluctant to outsource, said Dub Newman, head of North American transaction services at Bank of America Merrill Lynch. “But in the last several years as they’ve tightened up expenses in their technology and operating areas, very large clients have become open to looking to their banks to handle a large number of things they previously would have done themselves,” Newman said, citing mandate management as an example.
Citi’s Sinha said companies should make sure they’ve provided their banking information to their customers. “So from a receivables standpoint, there shouldn’t be a situation where their customers aren’t able to pay them and they’ve got a working capital situation as well,” he said.
Companies operating in Europe should also consider the possibility that some customers won’t be able to process payments because they haven’t implemented SEPA, said PWC’s Cohen. “It could potentially result in a delay in getting paid,” he said. “Companies need to think about the liquidity component of not being able to receive timely payments.”
Experian’s Williams warns that out-of-date data in companies’ systems about their customers’ banks and bank branches may lead to errors.
“The data conversions we’ve done suggests around one in eight account numbers is incorrect in some way—the branch number, bank number or account number,” Williams said. “For businesses who have migrated, and we’ve only migrated half of the credit transfers so far, they have seen a significant increase in the number of [payment] rejections they’ve gotten.
“Under SEPA, there’s much less ability for payment systems to tolerate errors,” Williams added. Europe’s national payment systems were able to catch and fix some data problems, keeping transactions from failing, he said. “Once you move to pan-European clearing, we lose that local knowledge, that ability to route those payment transactions to a different destination,” Williams said. “There’s a danger we’ll see a large number of payment failures once companies have migrated to SEPA.”
Lesley White of BofA Merrill cited the risk that initially the rates of returns and rejects on direct debits will rise.
Adhering to a single standard for payments throughout Europe involves considerable effort and expense for companies. But it’s also been touted as an effort that will deliver considerable benefits to corporates down the line as the single market for euro payments paves the way for efficiencies and cost savings.
Until now companies may have had a local bank or banks in each European country in which they operate, said Citi’s Sinha. “Now they don’t need that. They can have one single interface and make payments across all the countries.”
“The other benefit is account rationalization,” Sinha said. “Today if they’ve got a business unit in Germany and a business unit in France and a business unit in Spain, they may need local accounts in each of the country. Going forward, they don’t need to do that. They can have an operating account, say in London, and make payments across those countries.”
Deutsche Bank’s Runow said the harmonization of payments that will result from SEPA should slightly lower payment prices for corporates and let them have the ability to streamline the number of bank accounts they need and possibly the number of bank relationships as well. Implementing SEPA also provides efficiencies resulting from the use of just one language, XML, throughout their systems.
Runow also emphasized that SEPA’s end-to-end information flow will provide a benefit that is not yet properly appreciated. Currently, national payment systems in Europe differ, and a cross-border payment that starts out carrying certain information may arrive at its destination minus some of that information.
“With SEPA, it is the rule: information flows end to end, no truncation,” Runow said. “Whatever you put into your payment structure will be shown on the account statement of the beneficiary.”
“The huge benefits that SEPA brings can sometimes be forgotten,” Runow added. “We are breaking down the borders, everything that hinders easy, fast, cheap payment flow in Europe. For a client who does business in several European countries, it is fantastic news, despite the work that has to be done.”
Deutsche Bank’s Moinian said SEPA plays into the trends in cash management over the last couple of decades: centralization, automation and standardization. “If you look at SEPA, it is a facilitator of all these efficiencies,” said Moinian, pictured at left.
“For a variety of corporates that have not had the chance to centralize and automate and standardize in the past through other means, SEPA is really an accelerator of these trends,” he said. “Hopefully after Feb. 1, 2014, we start a new chapter in the added layer of efficiency brought about by SEPA.”
To read about treasury departments’ SEPA implementations, see Corporate Perspective on SEPA.
Read the October Special Report on SEPA.
Corporate Perspective on SEPA
Rupee’s Slide Ruffles Outsourcing Customers
China Makes Life Easier for Treasuries
To Boldly Go
Standardize, Re-engineer, Rationalize
SEPA: The Gateway to New Value-Added Services