With less than six months to go before the migration deadline for the Single Euro Payments Area (SEPA), Guy Pantall, Head of Product, Cash Management and Payments, Lloyds Bank Commercial Banking, outlines the immediate impact of 1st February 2014 and how Lloyds Bank is helping its corporate clients find the opportunities presented by SEPA to create a more efficient treasury.
Guy Pantall
Head of Product, Cash Management and Payments, Transaction Banking
Guy Pantall is Head of Product for Cash Management and Payments at Lloyds. He recently joined the group from J.P. Morgan (JPM), where he had worked in a variety of international cash management roles. Previously, Pantall held positions at Barclays and Citi, and has spent the majority of his career in the treasury management discipline.
With 1st February 2014 quickly approaching, some national bodies and banks are concerned that markets may not be ready in time for the Single Euro Payments Area (SEPA) migration deadline. Fuelling market uncertainty, rumours persist that some countries will not be able to convert all their legacy payment instruments by the February end-date, which will likely cause disruption to transaction processing.
But, in reality, the deadline is much closer than many people realise, according to Guy Pantall, Head of Product, Cash Management and Payments, Lloyds Bank Commercial Banking. The focus should be on November this year as the more accurate deadline, due to the year-end change freeze that occurs in most organisations. “Most corporates and banks will not implement IT or process changes over year-end – which is from the middle of November to the middle of January – because they are primarily focused on closing the books and can’t afford any disruption during the process.
“Therefore, given that the Eurozone migration date is 1st February, it will not be possible to accommodate a major implementation between mid-January and the end date because there is not enough time to perform the necessary testing. So unless these changes are implemented by November, then it is unlikely that an organisation will be ready on time.”
But have most corporates even started mapping out their SEPA plans? The trade press is awash with surveys and reports that paint a negative picture in terms of corporate awareness and adoption of SEPA. For example, in a PwC report released last month, one company in three remains at risk of not being ready. Some corporates who haven’t yet begun their SEPA journey are still struggling with the fundamental question of why the euro payments infrastructure has to change.
Similarly, the European Central Bank (ECB) migration numbers are indicative of the low level of adoption. On the slightly more positive side, the ECB indices show that just under half (46.95%) of credit transfers made in the SEPA zone are currently compliant, as of June 2013. However, conversion to SEPA Direct Debits (SDDs) is still at a remarkably low level – only 3.73% of euro direct debits are processed as SDDs.
Chart 1: Migration of credit transfers
Source: European Central Bank
What is even more worrying is the lack of preparedness of the small and medium-sized enterprise (SME) sector. The ECB ‘traffic light’ indicators show that in the two largest Eurozone economies, France and Germany, this segment is reporting ‘red’ for credit transfer and direct debits, which means that SME preparations have not yet commenced and/or are not expected to be ready in time.
All of this adds up to the fact that the payments industry as a whole needs to be prepared for less than 100% take-up of SEPA by the end-date.
Chart 2: Migration of direct debits
Source: European Central Bank
Conversion solutions
Due to the tight time constraints, many corporates are turning to third-party conversion services without directly integrating SEPA standards into their back office. “Corporates looked at their IT and business priorities and thought that by outsourcing they could check SEPA off their to-do list. Rather than creating changes in their own systems, corporates have turned to third parties to provide an intermediate step between what they have now and where they want to be,” explains Pantall. “But this goes against the spirit of SEPA, which is aimed at getting everyone to use the same ubiquitous standard.”
Chart 3: SME readiness
Source: European Central Bank
The original concept was for corporates to directly embed standard formats into their processes, not drive harmonisation through greater intermediation. It appears that this development was not anticipated when SEPA was first being mapped out, so there is no clear rule governing third parties and it remains to be seen whether future regulation will focus on these arrangements.
It’s also unclear what the impact of not being ready will be – there is no ‘Plan B’ if organisations don’t adhere to the end-date. “No one knows what will happen – again it wasn’t envisaged that organisations wouldn’t be ready,” says Pantall. It is quite possible that a country and its banking participants could continue to operate a legacy scheme as a sub-SEPA solution, such as the SEDA additional optional service (SEPA compliant Database Alignment) in Italy, and be willing for a time to accept the ramifications – and perhaps fines – from the EU or national bodies.
The result of late convergence, in conjunction with ad hoc decisions to facilitate local compliance by February 2014, risks moving the market infrastructure further away from SEPA’s standardisation and harmonisation objectives. In turn, the standards that are achieved in SEPA instruments are likely to be at a diminished feature-functionality level – the lowest common denominator – which could prove unattractive for corporates in the future.
The devil is in the detail
Adding to market confusion, many banks continue to present different interpretations of the regulation. For example, some banks insist ISO 20022 XML is mandatory for corporates, while others are keen to discuss conversion services. But for those corporates relying on banks or third-party providers for conversion services, such solutions cannot be implemented ‘overnight’ and mapping services are still dependent on the corporate’s access to core data.
The ‘devil’ is in the detail, and it is only when corporates examine the change effects can they fully grasp their implications, extending beyond simple IT adjustments. For example, the SDD Core scheme changes pre-notification routines, and provides for stronger consumer protection; and whilst the SDD Business-to-Business (B2B) scheme enables faster execution and limited payment revocability, it also introduces additional creditor mandate responsibilities. Banks also need to address clients with smaller scale cross-border trading relationships, or less sophisticated back office capability able to capture SEPA changes.
Today corporates are waking up to the fact that ‘the SEPA effect’ does not stop at an organisation’s boundaries, but touches all their counterparties – payments are fundamentally a network business. A corporate’s cash flow could be susceptible to counterparties’ delayed SEPA readiness – old-versions or in-house enterprise resource planning (ERP) systems may be incapable of accommodating SEPA data. Some corporates could be forced into unwanted or untimely system upgrades, or they could simply be on the debtor side of a SEPA direct debit collection and unaware of scheme change implications.
It is crucial that corporates talk to their relationship banks in order to understand how SEPA will impact their business. Although other banks will provide some perspective, only a client’s own bank is suitably informed to provide guidance and support that takes into account the client’s working capital requirements, its treasury complexity, transaction scale and volume, and risk appetite to determine optimum approach to SEPA. “And If your bank isn’t talking to you, you need to consider reaching out to a bank ready to address clients’ needs and provide its expertise such as Lloyds Bank,” says Pantall.
Opportunities in the making
Corporates need to build a clear picture of their euro transactions, understand which need to migrate to SEPA compliance and determine the business value of SEPA to identify opportunities to transform their euro cash management function. “The best opportunities of SEPA are being overlooked in the need to ensure compliance,” according to Pantall.
SEPA’s aim is to create a level playing field in the euro payments market, enabling faster, cheaper and safer payments processing with cross-border transactions aligning to domestic payments. ‘Free choice of EU location of an account with Europe-wide reach’ is a hugely significant aspect of the regulation. It will allow businesses to locate financial activities in their financial centre of choice and to rationalise bank providers and account structures.
Clients can capture centralisation benefits through deployment of payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) shared services as a result of SEPA feature functionality. Although payables transformation is considered to be relatively straightforward, meeting SEPA compliance in receivables given many small cross-border issues and transitioning to centralised COBO processing is much more challenging – none more so in business models where the offer to the consumer is directly linked to bill payment via direct debit.
“SEPA offers an opportunity to our clients to re-evaluate cash management across Europe as the traditional need to rely on local banks and local accounts is reduced,” says Pantall. How quickly corporates can take full advantage of SEPA, and how much value can be derived, is conditioned by the significance of non-SEPA money transmission in their ledgers, agility of ERP systems and treasury management systems (TMS), and the risk/reward profile of centralisation opportunities, including its corporate structure and culture.
It could take time for less sophisticated corporates that have achieved ‘late’ compliance to stabilise back office processes and leverage cash management and payments transformation opportunities, particularly those that have implemented alternative, local scheme solutions demanding continued access to Eurozone country accounts.
Corporates aiming to seize the opportunities created by SEPA must equally be aware of the implications on internal change capacity impacting systems, costs, resources and buyer/seller relationships, which require careful planning and controlled implementation methodology.
“‘Phase 1’ of SEPA implementation should be execution focused, with no or minimal disruption to business continuity, whereas ‘Phase 2’ could be considered a next step to pursue post-compliance benefits,” says Pantall.
Impact on UK companies
The effects of SEPA exceed the Eurozone – 51% of UK trade overseas is with Europe. By embracing SEPA, UK businesses will benefit from the standardisation across Europe.
Chart 4: Balance of trade
Source: Regional trade statistics, HMRC
However, with most of the SEPA messaging coming from European banks focused on the 2014 deadline, many corporates will not have had a conversation about the latter deadline of 31st October 2016, for those holding accounts outside the Eurozone. This is one reason why SEPA is not high on the corporate agenda in the UK.
The UK market view risks “polarisation” between the 2014 and 2016 end dates, according to Pantall. “Effectively, the UK is already participant in a SEPA continuum, with sterling-base corporates at varying stages of SEPA readiness. Those corporates with a high focus on euro working capital, higher time and interest commitment with dedicated resources allocated to SEPA transformation, and higher competitive leverage with their banks are likely to render the 2014 end date as a demand-led date for SEPA convergence,” he explains.
Hence, Pantall advises clients of non-Eurozone banks to focus on the immediate impacts of February 2014, whereas he sees the 2016 deadline as a lesser event with fewer legacy issues to resolve. However, insight from some of Lloyds Bank’s larger corporate clients highlights that there is still much confusion in the market about what the impacts and opportunities are, as they are being presented in different ways by the various banks. The key consideration for UK businesses is where their bank accounts are domiciled. It is the location of these accounts – and not the company location – that determines the relevant deadline.
“UK corporates may not be aware of the impacts and opportunities of SEPA, mainly because they have more pressing things to worry about,” says Pantall. “However, if a corporate holds accounts both in and out of the Eurozone, will it make the change for just some of its accounts? Very unlikely. Corporates should look to convert everything at once.”
Across the board, technical compliance must be achieved by October 2016 and few commentators would bet against a low state of readiness in jurisdictions outside the Eurozone as that date approaches. Clearly, much depends on multiple and diverse economic conditions in the interim, although the Eurozone provides a strong frame of reference for banks outside it to drive a more seamless changeover and de-risk SEPA compliance.
Back to basics
SEPA will happen, and in time corporates will see an end to SEPA-themed events and material. The real story behind the initiative is about making the euro work for business and consumers. The UK trade with Europe is vast and Lloyds Bank is committed to supporting its clients operating in euro.
“Our aim is to set out the facts around SEPA and be clear about what the opportunities are for our clients, what our SEPA products are, the options clients have to locate financial activities in their financial centre of choice, rationalise bank providers and account structures, and create efficiencies more closely aligned to their treasury organisation and working capital structures,” says Pantall.
The bank has positioned itself to address the needs of clients of all sizes, including the middle market segment, which has been overlooked by most banks to date. “A lot of the SEPA conversations have been dominated by the big guys, but we are looking forward to having more engagement with our mid-cap customers to give them the support they need.”
Lloyds Bank is a natural banking partner in Europe – located in a non-euro country, euro is its second currency and the bank can offer centralised liquidity management using SEPA as “the reach” for transaction management across the region. “In terms of a consolidated one-stop shop, we fit very well. Conditions around bank accounts and liquidity structures are very favourable in the UK, and Lloyds Bank has ubiquitous reach for processing,” explains Pantall. “In order to appeal to our clients, we have joined up our SEPA offerings with Trade and Card to present broader capabilities in the form of solutions, which address the needs defined by our clients.” The bank has partner bank arrangements on the ground in Europe for clients who want to extend beyond the classic centralised payables and receivables model for services delivered locally.
And most importantly, Lloyds Bank puts its client at the centre of the product management discipline. “We are cognisant that clients do not buy products; they need solutions across all their transaction banking and commercial banking needs,” Pantall concludes.
Lloyds Bank
Lloyds Bank Commercial Banking provides comprehensive expert financial services to businesses of all sizes, from start ups, through to small businesses, mid-sized businesses and multinational corporations. These corporate clients range from privately-owned firms to FTSE 100 PLCs, multinational corporations and financial institutions.
Maintaining a network of relationship teams across the UK, as well as internationally, Lloyds Bank Commercial Banking delivers the mix of local understanding and global expertise necessary to provide long-term support and advice to its clients.
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