From the October 2014 Special Report issue of Treasury & Risk magazine

Beyond SEPA – The New Payment and Treasury Landscape

Jim Volkwein, Deutsche BankWith the August 1st migration end-date for the single euro payments area (SEPA) credit transfer and SEPA direct debit behind us, there are new opportunities ahead for corporates to improve their payments structure in Europe and at a global level. Companies can achieve the benefits that SEPA originally promised and more both within and beyond the Eurozone. This creates new opportunities for automation, standardization and centralization along with payments systems’ innovation for both corporates and banks.


Harmonization Benefits

The introduction of SEPA opened the door to new opportunities beyond the more immediate benefits of regional harmonization. As with any regulatory initiative, it can act as a launch pad for the planning, execution and realization of additional internal improvements; implementing changes effectively in order to enhance operational efficiency, bolster risk control and reveal financial benefits. Such an approach is all the more relevant to SEPA thanks to the payment scheme’s opportunity for significant rationalization and innovation. By embracing SEPA, corporates have the opportunity to convert what was initially a regulatory project into a strategic innovation.

Without a doubt, SEPA offers treasurers a major opportunity to examine their treasury and banking technology — including reviewing group-wide treasury and banking software — in order to consider upgrading systems and processes. In particular, treasurers can take the opportunity to analyze infrastructure processes applicable to banking and account relationships. Such an analysis can range from examining the number of banks in each SEPA country where the enterprise operates, and potentially concentrating cash flows through fewer accounts, to reducing corporate-to-bank tools, communication links and systems.


Operational Improvements

With the August 2014 deadline come and gone, the migration phase is finished for most corporates. With the single XML format, based on the global ISO20022 standard, there is enhanced visibility over data, offering opportunity for standardization, rationalization, automation and centralization. By requiring corporates to use an XML-based format, SEPA supports bank-agnostic features and seamless integration. The standardization of formats enables corporates to move from bank to bank more easily, reducing their dependency on any one provider. As communication becomes more standardized, corporates are able to use other considerations to distinguish between providers — such as service quality, value-added services, and pricing. In this regard, SEPA can be looked at as a step towards empowering the corporate treasurer.

Furthermore, global acceptance of the XML format means it can be extended to SEPA-like initiatives all over the world, using the technical infrastructure already in place. For instance, the format could be used for data flows — seamlessly integrating the foreign exchange element in cross-border transactions beyond SEPA’s borders. Such uses will not only provide corporates globally with greater portability, but will also enable harmonized and improved data, resulting in more transparency, operational efficiency, ease of compliance and risk control.


SEPA Solutions

With many treasurers assessing best practices, one way to move beyond SEPA is to examine emerging treasury tools, and access those that could be helpfully deployed within treasurers’ organizations. Some of the solutions being introduced include:

  • Payments on-behalf-of and collections on-behalf-of (POBO/COBO) structures,
  • Enhanced reconciliation programs for payments on-behalf/collections on-behalf,
  • Virtual account-based models, and
  • Financial supply chain management.

With SEPA’s rationalization and centralization benefits likely to further the development of in-house banks and shared service centers (SSCs) — structures that, in turn, support payment factories and virtual accounts are likely to increase in popularity. While POBO and to a lesser extent COBO are fairly established business practices, they have the potential to become much more effective liquidity management tools under SEPA.

One of the reasons such tools are emerging as increasingly practical and implementable options is that reference text through the deviating orderer field in SEPA’s ISO 20022 XML format can be passed through the clearing system without truncation. While formerly data could be cut or left out; making reconciliation difficult for POBO and COBO, and meaning SSCs’ transporting data on behalf of underlying subsidiaries lacked the information necessary for virtual accounts to operate properly.

However, under SEPA, corporates can be certain that data regarding the underlying counterparty — on behalf of whom payments are being made or received — is fully transferred without truncation; providing the transparency necessary for the deployment of more advanced treasury tools and techniques. For example, the ability to immediately identify a transaction’s underlying counterparty means intra-group reconciliation can be undertaken from a single physical bank account across a group of sub-accounts held as virtual accounts. This in turn enables corporates through an SSC to operate an in-house bank; passing internal entries between subsidiaries, and debiting and crediting accordingly. Under such a structure, the SSC would perform much of the work previously handled by the payment bank. Strategically, this is an important issue for treasury, with the corporate — in essence — moving into the banking space.

The rolling out of such tools is easier under SEPA, as the rationalization of accounts along with the reduction in technological interfaces to deal with simplifies the process.


A Global Impact

Ultimately, SEPA allows treasury to go deeper in terms of standardizing practice on a global basis, making it much more than a Europe-only initiative. Global and multi-national corporations with European operations need to understand the opportunities that SEPA brings not only to the European subsidiaries, but to the rest of the business.

By using SEPA formats and standards, rationalization and centralization opportunities can be used to reach new efficiencies. Furthermore, a standardized, global operating model can be used to generate strategic advantages in areas such as data transfer, working capital management, financial supply chain management and most importantly full automation of the end-to-end process. In addition, treasury teams can review their operating model to assess how risks are managed. By taking the SEPA mindset and applying it globally, corporates can expect to strengthen their financial supply chain while improving the receivables process.


Beyond Treasury

As well as going broader into treasury in terms of geographic spread, SEPA provides a catalyst for going deeper into the organization: reaching beyond the treasury function for greater engagement throughout the organization, in order to discuss key issues such as risk, financing, the working capital environment, and foreign exchange. This reach can even stretch outside the company in terms of the market. During the migration period, treasurers had the opportunity to work with divisions and units where the treasurer previously had little contact, and this shows the advantages that could be accrued across the organization. It may be possible to add value to the overall franchise by demonstrating to other parts of the business how new structures and payment methods could be implemented. These are concrete business opportunities — worth reviewing in some detail.

In fact, SEPA can be viewed as a means of opening doors; making it easier for smaller corporates to enter previously-untapped overseas and export markets, using instruments such as the direct debit scheme to facilitate collections. This is still in progress as the legal background in the form of the Payment Services Directive (PSD) will continue to change as the European Commission contemplates successor work through PSD2.


The Value of SEPA

SEPA allows corporates to re-engineer treasury and financial processes: centralizing, automating and improving operational and commercial tasks. This gives treasurers the potential to achieve year-on-year savings through operational improvements and efficiencies gained in areas such as finance, risk, technology and control. Whether treasury is a cost or profit center, SEPA provides multiple ways for improvement projects, and creates an opportunity to strengthen the treasury link throughout the wider corporate organization.

Despite market challenges — from broader regulatory change to ongoing risk concerns and market uncertainty — SEPA is a reason for optimism. By offering corporates — through their treasury departments — a way of optimizing treasury structures, bank accounts and bank relationships, SEPA helps to create and facilitate the flow of international trade providing tremendous value.

Furthermore, SEPA also underlines the important role of treasury as a value creator for the organization. Dealing effectively with SEPA involves more than ensuring successful compliance. The differentiator between good and excellent treasury over the coming years will be found in those who significantly move beyond SEPA; using the scheme as a springboard to far greater payments and treasury opportunities.


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