From the October Special Report issue of Treasury & Risk magazine

Standardize, Re-engineer, Rationalize

At the heart of SEPA is the removal of barriers and requirements that previously restricted how euro payments and collections, and hence liquidity management, were conducted across the region. With harmonized legislation and payment schemes, SEPA now provides organizations with the flexibility to operate their cash management activities irrespective of the location of their counterparts, standardize their processes and rationalize activities. While some barriers still remain to complete portability of account location, SEPA can facilitate streamlined cash management and more efficient processes.

Karin Flinspach, Citi Treasury and Trade SolutionsPrior to SEPA, domestic payments and collections necessitated accounts to be held within the country of payment while payments were executed in accordance with national rules, standards and time frames. For organizations receiving and initiating payments, these requirements lead to local bank accounts, duplicate processes, varying technical configurations, general inefficiency and cost. SEPA enables clients to hold an account in any SEPA country from which payments can be made to and collections received from the 32 SEPA countries. As a result, clients will in the future hold fewer euro accounts within the SEPA region. To achieve this, organizations will need to assess their existing account profiles and consider a number of implications, including reconciliation and control, central bank reporting, and possible legal and tax implications. This reduction in accounts will in turn help support liquidity optimization, improve working capital and aid centralisation efforts.

On the payments side, SEPA is enabling the standardization of payables set-up and processing. National ACH payments are being replaced by SEPA Credit Transfers, thus creating for organizations a single payment mechanism across 32 countries for euro payments, eliminating many local country rules, enabling a single payment type to be used and facilitating the remittance of additional payment information. Those using credit transfers today are benefiting from very high rates of STP as the schemes have been designed on this basis. The main organizational payment flows—vendor, payroll and tax—are each migrating at their own pace to SEPA. By February 2014, all these flows will be processed via SEPA and clients will be able to benefit from consistency in processing across their organizational flows through either credit transfers or direct debit payments.

SEPA presents an even greater opportunity for organizations to reconfigure their collections activities across the region. Historically, to facilitate incoming payments from customers, collections accounts have been predominately held in-country. National direct debit schemes have significant variances in rules and refund rights, mandate processes and value dates. As a result, accounts receivable processes are less often centralized into shared service centers and less standardized than accounts payable activities. The SEPA Direct Debit schemes offer an opportunity to standardize all euro direct debit activity replacing the multiple standards and rules with a consistent approach that enables euro collections across the 32 SEPA countries. The possibility of collecting into one single account has been facilitated by SEPA. However, again, some challenges to this remain before this will be a common practice.

With two SEPA Direct Debit schemes, organizations can choose between a Core scheme (mandatory for banks to offer, and providing debtors with refund rights up to eight weeks) and a B2B scheme (optional for banks, and debtors to waive their refund rights). While adoption of the SEPA Direct Debit schemes has been low to date, recent legislation ensuring the validity of existing mandates for migration to the SEPA Core scheme alongside the 2014 migration end date has brought increased focus to this area. It is important to be aware that migration to the SEPA Direct Debit schemes requires more than just BIC and IBAN collection. Ensuring each mandate is assigned a unique mandate reference number and changes to payments systems to facilitate new collection cycles are also required. Furthermore, under SEPA, creditors have the full responsibility for maintaining direct debit mandates. Therefore, depending on the volumes involved and the complexity of existing setups, some clients may consider outsourcing the migration of direct debits and/or ongoing migration management.

Liquidity Optimization

Anupam Sinha, Citi Treasury and Trade SolutionsFor organizations that operate decentralized payments and collections structures, SEPA inherently offers a greater opportunity to rationalize, standardize and centralize. However, centralised organizations can also gain process efficiency benefits and seek further optimization through account rationalization and the use of the new data fields contained in SEPA messages. SEPA messages contain new fields that help facilitate POBO/ROBO activities and the transfer of additional information to beneficiaries. Organizations should assess, for payments and collections, how they can utilize these new fields to increase reconciliation and support in-house bank activities.

With these opportunities in mind, organizations also need to be aware of the current state of country market readiness. While February 2014 is the set end date for all countries to migrate to SEPA standards, certain national bodies, such as in the Netherlands, are requiring sections of their communities to migrate in advance of the legislative end date. Alongside this, the national market readiness to process all types of payments, certain local legislation and the use of local payment instruments, such as checks and cash, may place some restrictions on the level of account rationalization. However, these challenges should lessen over time.

SEPA is bringing significant change and will have an impact on the payments and collections activities of organizations in both the short and the medium term. Rather than having a tactical view of the SEPA deadline, corporates can view this requirement as an opportunity to further rationalize their cash management and banking infrastructure. Understanding the SEPA schemes and the opportunities that are available for your organization is key to determining how to approach SEPA.

SEPA supports several corporate objectives.

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