Ready or not, the Single Euro Payments Area is coming. And if you think there was a lack of specificity about Sarbanes-Oxley, wait until you deal with SEPA. "The politicians are running it," notes Cleveland-based treasury consultant Mark Webster. "There are lots of directives, but few specific regulations ready to go. The banks are behaving badly. The French are dragging their feet. The British banks have their own ideas. The goal is wonderful, but there will be chaos in the short run."
On the other hand, the possibilities for straight through processing (STP) and banking consolidation are immense. "SEPA is bringing an opportunity for all corporations to rationalize their account structure in Europe, abandon the existing model of keeping an account in every country, use local clearing systems and move to a truly harmonized pan-European payments infrastructure," explains Harold Young, head of payments in the global transaction banking–cash management unit of Deutsche Bank. "One set of accounts could service all their euro-denominated transaction needs."
Whether the SEPA glass looks half full or half empty, treasuries have a lot to swallow. Those who are prepared may see exciting benefits, but those unprepared will definitely feel pain, emphasizes G.M. Stetter, group senior vice president in the global treasury advisory unit of ABN Amro Bank. "Payment processing will change, and if you don't fall in line, you'll get failed payments, late payments and fines for payment repairs."
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There are, however, many large multinationals ready to take advantage of the new structure. For instance, Honeywell International Inc. is already counting the euros it will save from reduced fees on cross-border payments and more effective use of its shared service centers–although the company's treasury pros are quick to note that the total extent of savings is still unclear. "Overall, the impact will be positive," asserts Craig Mondschein, director of global banking and cash management at the $31.4 billion Morristown, N.J.-based technology and manufacturing company. "The settlement process will be unified and the time frame shortened across Europe. That means that cash will flow faster and funds will be available sooner."
Moreover, Mondschein adds, the A/R posting process should improve with the disappearance of fees banks charge payees, which makes the amount collected less than the amount billed and throws off matching engines, creating more exceptions to be reviewed manually. "We'll get better matching and a much more automated posting of accounts receivable," he predicts.
The same is true of Livonia, Mich.-based TRW Automotive Holdings Corp. "We're in a dozen countries in Europe, using over 40 disbursement accounts. We're expecting to whittle that down to five, based partly on SEPA efficiencies," says Guy Simons, assistant treasurer for the supplier of car components, which makes over half of its $13.1 billion in annual sales in Europe.
In anticipation of SEPA, TRW engaged in a global financial infrastructure project that includes a new SAP ERP system and harmonization of its vendor master file. SAP will work with TRW's netting vendor, Coprocess SA, to route payments through two global banks, no matter where in the world the payee may be. Simons explains that the new SAP system means that TRW will only have to make a small incremental investment to get the benefits of SEPA. "We're implementing our solution gradually, starting in Germany, and then rolling it out in stages," Simons explains.
His biggest concern about SEPA is central bank reporting, an issue that has yet to be addressed. But SEPA rules are expected to be strict and exacting to support STP for payments. That includes widespread use of IBANs and corporate bank account numbers. That's a culture change for U.S. treasurers used to keeping bank account numbers secret. IBANs in Europe are becoming very public numbers, printed on every invoice and bank statement, Stetter points out. That raises security concerns. You can put a debit block on accounts in Europe, Stetter says, but you can't use filters to allow some debits and not others.
The stringent standards go beyond having IBANs, Stetter continues. They include what will be a mandatory remittance data field–70 characters in structured fields, 70 in unstructured and all in the SEPA-required ISO 20022 XML format. Getting remittance information from a NACHA 820 format to an ISO 20022 format could be an issue that requires IT help for U.S.-based companies, he warns.
While SEPA standards technically apply only to payments that are both originated and received in EU countries, "we've seen examples where payments were rejected and charged a repair fee for not complying, whether or not both ends of the transaction were in Europe," Deutsche's Young points out.
If you haven't already, appoint a SEPA guru to be a liaison with the company's European and global banks, Stetter urges. Have that expert make sure IBANs appear on all invoices and see that they are collected from all European suppliers. The guru also needs to work closely with IT.
Honeywell took the first step years ago and made sure all payables had IBAN numbers attached, so funds could be directed to the right account and bank repair fees avoided, Mondschein explains. "We had to provide numbers to our customers and get them from our suppliers," he explains. Getting and providing IBANs is now almost 100% complete, he notes.
Because Honeywell started early, SEPA has "not had a large impact on our daily operations," Mondschein reports. "Going forward, we'll be talking about business strategy and how to get the most from centers of excellence and shared service centers, which may involve some reengineering."
He's more concerned about security when the direct debit becomes operative. "Direct debit is very nice on receivables, but scary on payables," Mondschein says. Think of a SEPA direct debit as being much like an ACH direct debit, he says. U.S. treasurers have generally viewed ACH debits as a security threat and put debit blocks in place to prevent withdrawals without the payer's explicit permission.
Some European banks permit debit blocks, Mondschein notes, but not all. "If you do nothing, your accounts are unblocked," he warns. "Taking advantage of SEPA is partly playing offense and partly playing defense."
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