Is SEPA the answer to every treasurer’s prayers? In this Business Briefing we examine the range of tools available to help treasurers handle pan-European receivables, payables and liquidity management with maximum efficiency.

Treasury priorities in 2010

In a tough economic climate, treasurers will yet again have a number of core battles to fight this year. These will predominantly centre around controlling cash as they tackle receivables, payables and liquidity management. Corporates should therefore be looking to optimise efficiency and minimise cost by automating processes wherever possible. This is in itself another battle; particularly with technology spend being put on the back burner in many companies. Leveraging market opportunities will therefore be key to success in 2010, together with building an optimal treasury model across the fragmented European payments landscape.

Receivables management

The very nature of a company’s receivables brings complexity and fragmentation, as Andrew Ponsford, Executive Director, J.P. Morgan Treasury Services, explains, “Receivables are rarely centralised. This is because the corporate may have certain cash/coin and paper requirements in some countries, cheques may not be used in one country but are commonplace in another, and there are differences in electronic instruments and tax environments. There is a great deal of complexity here, but that also means a great deal of opportunity to achieve greater control, visibility and efficiency.”

Challenges

The major hurdles facing corporates today in terms of receivables management include:

• Visibility.

  No longer an administrative function but a strategic one, accounts receivable is seen as one of the cornerstones of good cash management. As such, companies are looking for better quality, more reliable data that is end-to-end. Now more than ever companies need to know who owes them money, how much, and when it will be paid. But how can this be achieved with minimal disruption to existing business processes and without significant expenditure?

• Forecasting.

  A knock-on effect of having sub-optimal visibility over receivables is difficulty in forecasting. This is one of the most important and yet most frustrating tasks for treasurers. Where is the cash coming from? When is it due to be paid? Where does it need to be next? What is my borrowing requirement? How much can I invest and when? Spreadsheets can no longer perform all of the necessary tasks and checks to ensure that forecasts are accurate.

• Non-standard transactions.

  In any business there will always be exceptions to the rule – and this is certainly true in receivables. Dealing with disputes and chasing up late payments is time consuming, particularly when different systems are used.

• Legacy instruments.

  Added to the challenge oh5f mastering exceptions is that of paper processing. Documents are easily mislaid or filed incorrectly. This results in greater inaccuracies and inefficiencies.

Solutions

The first step for companies looking to optimise their receivables management is to assess their current processes. This is where an outsider’s view can be particularly useful in identifying pain points. “At J.P. Morgan, our approach is to understand what the client’s existing infrastructure is, what their business priorities are, and to identify where efficiencies can be made,” says Ponsford.

One of the most important steps in optimising receivables management is adopting market initiatives, such as the SEPA Direct Debit, to help automate processes.

SEPA Direct Debit

The world’s first pan-regional, cross-border direct debit instrument, SEPA Direct Debit (SDD) is a simple and cost-efficient way to collect high volume payments across Europe. The SDD offers many benefits to corporates, including:

• Greater control over collections.

  Authorised SDD transactions carried out through the Business to Business (B2B) scheme are irrevocable. This provides full control over the collection of payments, giving increased visibility and oversight.

• Standardisation.

  Formats will be the same across all SEPA countries, meaning that return codes and return timeframes will also be standardised. This will lead to more efficient exception management together with a simpler technical infrastructure.

• Improved reconciliation.

  SEPA allows for guaranteed transmission of 140 characters of remittance data, where currently the character count ranges from 40 to 60 depending on the country. Reconciling invoices and payments received should therefore become simpler and more efficient. Electronic reconciliation should also become easier, mitigating the need for paper processing.

Ponsford adds, “Previously, SEPA had been seen as an instrument for corporations with operations in multiple European countries. The SDD however is also going to be extremely useful for the domestic market as well, especially for countries where direct debits aren’t currently used. As such, this really will be a much more cost-effective, efficient and agile mechanism for collecting receivables.” Eventually, domestic direct debit schemes are likely to disappear, so early adoption of the SDD will give an advantage.

Payables management

Payment services within the European Union are notoriously fragmented: individual countries have adopted their own standards, rules, practices and procedures for managing and processing payments. The growth in electronic payments has also led to an incalculable number of different payment systems being used. This has made cross-border payments time-consuming and costly. This is where the single market vision comes into its own. As key stakeholders in the SEPA initiative, banks should be actively encouraging their clients to pursue their SEPA plans and helping them to make the most of the opportunity it presents.

Building an optimal treasury structure

Operating a centralised treasury slitructure, using a payments factory for example, can help corporates to achieve the full benefits of SEPA. These benefits include: major cost reduction, improvement of internal controls, standardisation of best in class risk management processes and elimination of system redundancies. Other potential benefits include reduction in number of banking vendors and rationalisation of bank accounts. Although SEPA is a definite step in the right direction, significant challenges remain:

Challenges

• Multiple clearings and formats.

  While domestic clearing schemes have historically ensured a high degree of efficiency and security within each country, on a cross-border level, the interoperability of domestic schemes is a real hurdle. With no end-date agreed for legacy clearings, which system should be used until SEPA migration has been completed? What if the account is not reachable by SEPA? Working across different countries and systems also requires the preparation of payments in different local formats. This increases the manual work flow and presents interoperability issues.

• BIC and IBAN requirements.

  Unlike domestic credit transfers which use BBANs, using the SEPA credit transfer requires BIC and IBAN codes. What is the best way to go about making sure these are correct and complete? Should the company store both formats?

• Central bank reporting.

  There is a lack of consistency in central bank reporting requirements across the EU, with some countries exempt. How can this be managed efficiently, particularly if bank accounts are centralised?

Solutions

• Multi-channel, multi-format offering.

  While SEPA can be beneficial to all companies, it is also a large undertaking. Therefore it is important to give corporates the choice of having domestic clearing systems as well as providing access to the SEPA compliant PE-ACHs. This is particularly true for smaller corporates and those operating in non-euro countries. Offering format conversion services – eg mapping EDI and ERP formats to XML – is also optimal to help corporates to recognise the benefits of SEPA, rather than viewing it as an added cost and administrative burden in the short-term.

• Intelligent routing.

  In instances where an account may not be reachable by SEPA, the next best alternative clearing channel should be automatically sought by the bank. This minimises delays and costs.

• IBAN derivation services.

  Some banks, such as J.P. Morgan, are offering value added services whereby they will derive the IBAN from the existing BBAN to ensure that a SEPA payment can be made. These conversion services, including IBAN back to BBAN, mean reduced administration for the corporate and increased certainty of payment transmission.

• Online, real-time reporting.

  Web-based reporting tools are becoming increasingly popular as companies move towards automated and paperless solutions. Central bank reporting (CBR) can be carried out and monitored online on a country-by-country basis. SEPA will also assist in this regard as it aims to abolish the administrative burden of CBR by 2012.

“Our job is to take the pain away from the clients and to ensure that we offer solutions that support every client’s needs. Really, it’s about having multiple channels available and converting that into a single channel in-house, putting the complexity on the bank’s side rather than the corporate’s,” says Ponsford. “At J.P. Morgan we are there to support the different types of business that our clients carry out with a number of solutions to simplify client operations through this time of change.”

Case study

Sony Pictures Entertainment

Sandra Ruckdaschel

Director of Treasury

Andrew Ponsford

Executive Director

Sony Pictures Entertainment is part of Tokyo-based Sony Corporation and is involved in film and television production and distribution. The company reported sales figures of JPY 717.5 billion ($7.2 billion equivalent) for the year ending 31^st March, 2009.

With operations in many different territories, achieving centralisation is a key objective for the treasury department at Sony Pictures. Sandra Ruckdaschel, Director of Treasury for Sony Pictures explains: “We want to streamline our cash operations worldwide in order to achieve centralisation. At the moment we use a zero-balance cross-border sweep within the Eurozone to centralise all our net credit balances and allow us to invest the surplus with Sony Global Treasury Services – the in-house bank. Other priorities for us include optimising the value of balances across the company, improving collections and payables efficiency, reducing costs and standardising payment processes across Europe.”

Working towards this aim, the company decided to pioneer a SEPA solution for its third-party vendors across Europe. “We started out using a more expensive wire transfer method, but over time, we switched to domestic ACH solutions in various countries. Now we are trying to streamline processes further by using cost-efficient solutions such as SEPA. We implemented a J.P. Morgan host-to-host File Management Services (FMS) solution approximately five years ago, which gave us a single submission channel with multiple country coverage. Now it’s simply a case of changing our payment methodology to use IBAN and changing the configurations in our systems. We are currently rolling this out across Western Europe,” says Sandra.

The solution has streamlined the company’s payment processes and reduced the costs involved in paying third-party vendors. “SEPA is definitely going to have a big role in our company. We may also find the SEPA Direct Debit of use in the future for business-to-business collections, and we intend to explore this further in 2010.”

“Relationship was key to implementing this solution”, remarks Sandra. “If J.P. Morgan has the capability, or even has the willingness to work with us to create that capability, we will always be open to partnering with them.” An added benefit of working with J.P. Morgan has been the file conversion service offered by the bank across the different countries in which Sony Pictures operates. “It helped us minimise man hours in IT and SAP support by standardising payment instruction formats, because there is one solution and not a multi-bank solution.”

In addition to SEPA, Sony Pictures is looking at using SWIFT SCORE in the future. “We see a definite trend here. We’ve contacted our peers that are using SWIFT and they say that it is beneficial. We would like to be able to get our banking information from all over the world in one consistent format, to help with positioning, forecasting and accounting entries.” Sandra sees technology as being critical to treasury operations going forward, particularly as many companies are reducing headcount.

Liquidity management

Optimising liquidity should always be a core discipline within treasury strategy. But at times when access to credit is severely reduced and borrowing costs are far greater than those corporates have become accustomed to, companies are looking to their internal cash reserves to ensure that these are being used as efficiently as possible. This can be a difficult task:

Challenges

• Managing multiple accounts.

  Running an organisational structure across different countries with varying legal and tax regimes usually means a large number of bank accounts and therefore banking systems. This in turn makes consolidating account balances tricky, leading to impaired visibility at a regional and global level, particularly for companies operating on a decentralised basis.

• Maximising yield.

  With interest rates at record low levels, finding the right liquidity management tool is crucial. Corporates want security – with minimal counterparty risk – but they also need yield. How can this be achieved efficiently?

• Administration.

  Manual processes surrounding account opening and closing as well as security measures, such as signatory updates, are extremely time consuming. There is also significant margin for human error here. What is the role of banks in helping their clients to reduce account administration?

• Visibility.

  Using multi-bank reporting to give visibility of cash no matter which currency, bank or location.

Solutions

• Cross-border cash concentration.

  Although concentrating cash in one place may not provide the yield benefits of yesteryear, it can provide optimal use of liquidity by reducing the need for bank funding as inter-company loans are leveraged. Moreover, online portals can provide real-time updates for corporates, not only on specific transactions but also on the status of their overall liquidity structures. This means improved visibility, which can in turn lead to more efficient investment of surplus cash.

• Pan-European notional pooling.

  The local cash balances of each subsidiary – concentrated by relationship banks in country – can be centralised automatically using an overlay structure run by the pooling bank. Notional pooling reduces the interest paid on debit balances and increases the interest received on credit balances, thereby optimising yield. Notional pooling also allows for local control of cash, which helps to overcome the tax and legal obstacles involved in pan-regional cash management.

• Revisiting the basics.

  “On a day-to-day level, the majority of administration issues arise from simple tasks such as security entitlements. It’s important not to get distracted by the seemingly more important things and to make sure reporting is accurate and systems are operating at optimal levels, with the highest degree of automation. Banks need to help their clients to gain control over the fundamentals and to access as near to real-time data as possible,” says Ponsford.

Innovation

Aside from providing these core solutions, banks are the key innovators in this space. J.P. Morgan for example recently developed a rules-based investment programme called Cash Trade Execution (CTE) with another client Google Inc. Through the solution, Google transfers excess operating cash into a J.P. Morgan investment account, which is swept into time deposits with a broad range of pre-screened bank counterparties. CTE also tracks the counterparty exposures and ensures these stay within pre-agreed limits, thus enabling adherence with risk policies and diversification in investment, whilst freeing up treasury staff.

Looking forward

J.P. Morgan’s CTE solution also demonstrates a new mode of thinking among banks – that is the collaborative effort. Banks are increasingly recognising the need to provide a service to their customers; not everything revolves around price anymore. “On the back of this, we have also seen increased openness of the banks towards bank agnostic channels. I believe it’s a natural evolution of the industry,” remarks Ponsford. SWIFT is one of the major players in the bank agnostic space. SCORE (Standardised Corporate Environment) for example allows corporates to exchange files with any registered bank through a single SWIFT interface. This essentially means independence from bank proprietary connections and greater straight through processing. Moreover, SWIFT has developed messages in line with the XML standards which also underpin SEPA. The solution supports centralisation initiatives, creating greater efficiency, visibility and control over cash flow: the ultimate goal.

Electronic bank account management (eBAM) is another initiative launched by SWIFT that is designed to standardise and streamline the account opening, closing and maintenance procedures between corporates and banks. This initiative again highlights the themes of increased customer focus, compatibility and collaboration. “From our perspective, we think it’s an absolute step forward,” concludes Ponsford. “Since it helps our clients spend more time and resource on the real business of treasury, it is something that we are actively encouraging.” The task that remains for the corporate is to choose a banking partner that can service their needs with appropriate solutions, whilst evolving with their company and the industry.

Glossary

SDD Core

SEPA Direct Debit Core

SDD B2B

SEPA Direct Debit Business to Business

IBAN

International Bank Account Number

BBAN

Basic Bank Account Number

ERP

Enterprise Resource Planning

EDI

Electronic Data Interchange

PE-ACH

Pan-European Automated Clearing House

CBR

Central Bank Reporting

SCORE

Standardised Corporate Environment

CTE

Cash Trade Execution

FMS

File Management Services

J.P. Morgan

J.P. Morgan has a unique status in treasury and cash management. We are a full service provider offering traditional transactional capabilities, liquidity and investment management, and global trade services across the entire financial and physical supply chain.

We understand you select a banking partner based on a variety of individual requirements, our continuing investment in quality treasury and supply chain solutions demonstrates our determination to help you succeed. Operating within a diverse financial infrastructure requires practical answers on a global scale, but delivered with local expertise.

Industry regulation, the economic climate and evolving technology present the treasurer with opportunities – and challenges. We understand how to help you take advantage of both.

This is our business.

Contact details:

treasury.services@jpmorgan.com

www.jpmorgan/ts