The prolonged process of implementing the Single Euro Payments Area (SEPA) ended this summer. Now that the standardization of euro-denominated electronic payments has occurred, companies that do business in multiple European countries have an opportunity to realize efficiencies in their cash management and payments operations.

Eurozone countries have shared a common currency since 1995, but prior to SEPA, each country still used different electronic payment formats. In the 28 European Union nations and six other European countries—Iceland, Liechtenstein, Monaco, Norway, San Marino, and Switzerland—SEPA replaced those local instruments with standard payments, SEPA Credit Transfers and SEPA Direct Debits, that are formatted in an XML standard, ISO 20022.

“There are now no more differences in executing payments in the different countries,” said Arn Knol, a senior consultant at Zanders. “You don’t have to do anything to your banking infrastructure, and you can reap the benefits.”

Those benefits could be substantial. A PwC study released in February estimated that SEPA will produce annual savings of $29.87 billion and result in the elimination of 9 million bank accounts in the European Union. The study saw most of those savings accruing to companies, to the tune of $21.9 billion annually, as payments standardization allows businesses to cut operating and processing costs. PwC also predicted that SEPA will result in $309 billion in liquidity being freed up as the result of more efficient clearing and enhanced cash pooling.

Companies are eager to realize efficiencies based on the work they did to comply with SEPA.

Martin Runow, Deutsche Bank“The vast majority of our corporate clients operating on a multinational basis have taken on ‘beyond SEPA’ projects,” said Martin Runow, head of Cash Management Corporates Americas, Global Transaction Banking, Deutsche Bank. “These corporates are actively looking into the opportunities of further streamlining their European treasury and payments setup to secure the intended efficiency gains in the SEPA zone.”

Anupam Sinha, head of corporate payments, Europe, Middle East and Africa, for Citi Treasury and Trade Solutions, said he is seeing many requests for proposals related to SEPA. “(A), they’re looking at restructuring their cash management,” Sinha said. “(B), they’re looking at rationalizing their bank relationships. And (C), coming from those two points, they’re also looking at account rationalization.”

Rob Allighan, SEPA product manager, Global Transaction Services, for Europe, the Middle East and Africa at Bank of America Merrill Lynch, said he now spends a lot of his time talking to clients about how they can take advantage of SEPA. But he cautioned that centralized payments may not be right for every business.

Companies should think about where they do business, whether they want to centralize, and “how much control local subsidiaries have in relation to a centralized treasury function,” Allighan said. “The aspiration to reduce the number of accounts to become more efficient should be a driving force for all entities.”


Cutting Back on Bank Accounts

It’s been common practice for companies to maintain multiple bank accounts in each European country they operate in, but SEPA promises to make that an outdated concept. “You’re now able to execute all your payments from a single euro account in the Eurozone,” Knol said.

Still, there remain some barriers to the vision of a single bank account for all of Europe.

At this point, efforts to pare the number of corporate bank accounts and rationalize companies’ banking structures have been impeded by legacy electronic payment methods, known as niche products, that are still operating in certain countries, Allighan said.

“It’s not until all those local nuances have been eliminated that a corporate will be able to move to a one-account structure,” he said. “That is the holy grail.”

Niche products must come into compliance with SEPA by February 2016.

Knol said that niche products are generally not too widely employed, so the chances of a company using them isn’t that significant. “It might be a barrier to full centralization,” he said. “On the other hand, going from 20% centralized to 95% centralized is already a huge step.

“And that additional 5% will sort itself out,” Knol added, pointing to the eventual phase-out of the niche products.

Another set of local variations, called “additional optional services,” provide extra functionality in certain countries and will be preserved under SEPA. These are payment features that local markets didn’t want to lose, such as a function in Finland that allows the transmission of more remittance information with a Credit Transfer.

But Sinha said the additional optional services “create country-specific flavors of SEPA Credit Transfers and SEPA Direct Debits.”

Anupam Sinha, CitiTo the extent that corporate clients want to continue to use those services, “they’ve not got a harmonized process,” said Sinha, pictured at right. “The best way out of this would be for the SEPA community to work toward making [the services] available across markets rather than being available in one or two markets.”

Runow said that while all of Deutsche Bank’s corporate clients are now SEPA-compliant, polls conducted during the first half of this year “suggested that corporates still deal with operational inefficiencies in their reconciliation processes and the handling of R-transactions.” R-transactions include returns, rejects, and refunds.

“Corporates will need to assess the end-to-end efficiency of their SEPA processes so that they reach—or surpass—the high levels of efficiency they benefited from in legacy processes,” he said.

Runow said he expects “it will take a few more months before corporates attain the same efficiency levels in their end-to-end processing,” but he added that the issues related to R-transactions have been “rapidly taken up by the European Payments Council as well as the Euro Banking Association, and we expect improvements in this regard.”

Knol noted that companies still have to contend with differences between banks. “The idea is that all the banks will support the same file formats,” he said. “But each bank still has their own unique requirements, even though that’s getting less and less the case.”

Knol noted that it’s now “cheaper and quicker” to make or receive electronic payments in Europe. The advent of SEPA speeded up payment processing, he said, eliminating float. And the advent of a single European clearing system means banks no longer charge higher prices for payments in certain countries. “Banks generally do not discriminate between a domestic SEPA and a cross-border payment,” he said.

As a practical matter, shifting all of a company’s payments to a single account is easy, Knol said, but consolidating receivables into a single account is another matter.

“When you have accounts and customers are paying into those, if you want to change those accounts, you actually have to change the behavior of your customers,” he said. “It’s not something you can change overnight—it might take six months before you have convinced all your customers to do so. That’s something to consider.”

And while B2B companies might go down to a single account for receivables, Knol predicted, companies that do business with consumers will still maintain accounts for their receivables in every country in which they operate.



One of the approaches that treasuries use to centralize payables and receivables is likely to get a boost from SEPA: Pay-on-behalf-of (POBO) and receive-on-behalf-of structures. In a POBO structure, one unit of the company, such as the treasury function, makes payments for other business units; with ROBO, one unit receives all payments and then transfers funds to the appropriate business units.

The “lack of standardization” that existed before SEPA limited the usefulness of POBO and ROBO structures, Deutsche Bank’s Runow said, since companies that used them “had to maintain a multitude of different local bank accounts to handle local payments and/or collections on behalf of their subsidiaries.”

In addition, Runow said, “payments and collections in different countries required the use of varying electronic formats, some of which could not indicate which entity within a group was making the payment.

“With SEPA, groups are able to rationalize their bank accounts and potentially operate with just one account for the entire Eurozone—thereby creating greater visibility over cash and liquidity,” he said.

Companies have been considering POBO structures for the last six or seven years, Citi’s Sinha said, but SEPA makes them easier to use because the XML standard provides POBO fields that contain information to help the company identify which customer is paying for what, expediting reconciliation.

But companies need to check first that they are able to use POBO, because in some countries, local tax regulations or commercial laws may not allow it, Sinha said.


Virtual Accounts

Ad van der Poel, Bank of America Merrill LynchWhile companies have been working to increase the efficiencies of their payment processes for years, “we now see a move to the centralization of receivables because of SEPA direct debit,” said Ad van der Poel, head of Product Management, Corporates, Global Transaction Services for Europe, the Middle East and Africa at Bank of America Merrill Lynch, who’s pictured at left.

“SEPA Direct Debit is the first cross-border direct debit scheme,” said Bank of America Merrill Lynch’s Allighan. Previously, companies collecting from customers in different countries had to have a local account in each country. SEPA Direct Debit “gives you the opportunity to do this on a cross-border basis in exactly the same format with exactly the same information,” he said. “So whereas a client maybe had three or four different processes to collect from a customer, with SEPA they can do exactly the same thing to effect collections from three, four, however many countries in which they collect.”

One bank offering that could support receivables centralization is virtual accounts, which allow a company with a single bank account to use multiple account numbers for that one account.

Many companies have trouble identifying a certain portion of the payments they receive, van der Poel said. “That detail doesn’t always come across through clearing, or a client sometimes doesn’t fill in all the necessary details,” he said. “A virtual account helps companies understand who pays them and for what.” That information can significantly boost the portion of their payments on which companies achieve straight-through reconciliation, he added.

Sinha cited the example of a company that receives payments from 100 different clients and has trouble telling which client each payment is coming from. “We will provide individual clients with a unique account number,” he said. “With that system set up, it’s easy to identify which client is making each payment.”

Bank of America Merrill Lynch is currently piloting virtual accounts with two clients in Europe and plans to soon roll out the option more widely. Deutsche Bank already offers virtual accounts.

“On incoming payments (collections), customers use the ‘virtual account’ number or IBAN that can then be used as a reconciliation field, enhancing automatic reconciliation rates and accelerating account posting,” said Runow. “For outgoing payments, the IBAN is used to indicate to suppliers the entity on whose behalf payment is being made in a standardized way. This significantly reduces supplier queries on funds that they have received and supports their own reconciliation efforts.”

“Virtual accounts are a way of helping our corporate clients segregate the information that’s coming in,” van der Poel said. “They have the flexibility to open them themselves and issue them to their clients. There is no need for bank intervention.”

The cost depends on how customers use the virtual accounts, he added. “For the treasurer who wants to use a virtual account per entity, versus an actual physical account per entity, it will be a lot cheaper,” van der Poel said. “For example, if you’re a utility company and you want to issue virtual accounts to each of your consumers, that comes at a cost, but we’re not talking about a very high one.”

Sinha noted that SEPA is also influencing the way companies organize their payroll operations. Corporate clients tend to do payroll locally, in each country, but they are considering centralizing that as well. “Clients are now looking to rationalize their payroll process, whether they bring it in-house and get the shared service center to do that, or get a vendor—a vendor that’s probably operating in multiple countries—to do that for them,” he said.


Implications for Supply Chains

Van der Poel sees SEPA’s XML standard for payments paving the way for further standardization in companies’ supply chains.

“When we are asked questions about what’s next with SEPA, that is always one of the things we call out,” he said. The supply chain stretches all the way from purchase orders and production to invoicing and payment. At this point, SEPA’s XML standard covers just one of those steps, but van der Poel noted the availability of electronic invoices based on that same XML standard.

“If corporates start to use that, they can integrate the invoice step with the payment,” he said. “They can integrate it much more than today and automate it.

“We foresee that that integration will continue over the course of the next 10 to 15 years,” van der Poel said. “We’ll slowly see those steps integrated through the use of XML.”

SEPA will also ease the way for future payment products, he added. “Previously when someone did an innovation in the space of mobile payments and did it in Germany, for example, if they wanted to roll it out to other countries, they would have to redesign the foundation to work with payment instruments in other countries,” he said. “Now, with SEPA, when you do an innovation, it’s much easier to roll it out in other countries, and you have a bigger market to make your innovation work. So your chances of being successful are higher.”

Zanders’ Knol pointed out that POBO and ROBO structures and virtual accounts all predate SEPA and can be implemented in other parts of the world besides Europe. While those options aren’t necessarily tied to SEPA, he credited SEPA with giving companies a push to make improvements.

“The one thing that SEPA has done: It created a lot of awareness of the payment process,” Knol said. “Companies actually had to analyze their payment infrastructure and make sure it was supporting SEPA. It may also have opened the eyes of some treasuries, [who are] saying, ‘There’s a lot to be gained here.’ And once you have momentum, you may as well hold on to that momentum and take the next step, which may be things like POBO and virtual accounts.”

The implications don’t stop with companies’ bank accounts and A/P and A/R processes, Knol said. Instead, payments standardization is part of a broader trend of centralizing companies’ business processes.

“What you see is companies consolidating their back-office activities, including treasury back-office activities, into shared service centers,” he said. “Whereas in the past maybe they had separate back offices in each country executing payments, now because of the file format, it’s much easier to consolidate that into one single back office.”