On 14th February 2012, the European Parliament passed a new directive that would have profound implications for both the European retail payments landscape and the consumers and businesses who operate within it. The SEPA regulation required that all euro member states fully migrate to the new SEPA credit transfers (SCTs) and direct debits (SDDs) by 1st February 2014, with a further 2016 deadline set for the remaining non-euro member states. In January 2014, with migration across the Eurozone evidently not progressing, a ‘grace period’ ending at the beginning of August that year was afforded to banks and companies behind schedule.
Anyone who predicted that the SEPA issue would disappear from the corporate agenda with the passing of the end-date for euro-member states could not have been further from the mark. By the time the ‘grace period’ had ended in August 2014 corporates across the continent already had their eyes fixed on the next target: how to leverage the newly established pan-European payments area to their advantage.
One year on and many are still at it; building payments factories, rationalising bank relationships and even, in some cases, centralising receivables with on-behalf-of structures. Suddenly, those enormously expensive migration processes are beginning to look less like a waste of money and more like a change which could bring real, tangible benefits to corporates – and treasury departments especially.
The SEPA story does not end here then, that we can say with a large degree of certainty. In this Section, we will look at some of the aforementioned initiatives currently being pursued by corporates to get the most out of SEPA, before exploring how the SEPA initiative is itself developing with the migration of non-euro area countries, the phase-out of remaining niche payment products and, finally, the forthcoming SEPA for Cards framework.
Up until the conclusion of the migration period, corporates had mostly tended to view SEPA strictly as a compliance project. The number one priority was to ensure the terms of the SEPA regulation were met, allowing the business to continue to process transactions without disruption after the so called end-date of 1st February 2014. Those who have successfully migrated their systems can now begin shifting their focus away from pure compliance to those opportunities – overlooked in the rush to meet the deadline – that SEPA offers.
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. By far the biggest opportunity for companies with a pan-European footprint is to use SEPA to centralise payables and receivables. They can do this because, with the ability to make cross-border credit transfers and direct debits that SEPA confers, organisations can now become independent from in-country bank accounts for their payments processes. By shedding their framework of in-country euro accounts in favour of a payments/collections factory which can execute and process transactions on behalf of one or more subsidiaries, considerable efficiency gains can be realised.
“Now we’ve got over that compliance hurdle, clients are definitely asking more questions about how they can realise the benefits of SEPA. It’s becoming an increasingly consistent theme around RFPs. We are being asked more and more if clients can rationalise the number of bank accounts and providers.”
Alex Wong, Solutions Consultant, GTS EMEA,
Bank of America Merrill Lynch
For some, the ultimate goal is to reach a point where only one operational euro account is needed across the entire continent. However, due to the ongoing use of certain niche payment products, together with regulations concerning what instruments are used to make payments to government agencies (eg for tax purposes), this remains, for the time being at least, beyond the reach of all but a small handful of corporates.
Unsurprisingly, centralisation solutions have become quite a hot topic amongst the corporate community since the passing of the SEPA deadline. “Now we’ve got over that compliance hurdle, clients are definitely asking more questions about how they can realise the benefits of SEPA,” says Alex Wong, Solutions Consultant, GTS EMEA, Bank of America Merrill Lynch (BofA Merrill). “It’s becoming an increasingly consistent theme around RFPs. We are being asked more and more if clients can rationalise the number of bank accounts and providers.”
“Certainly one of the areas where we are having more conversations with clients is around the centralisation of receivables activity,” says Rob Allighan, Euro Payables & Receivables Product Director, EMEA at BofA Merrill. “Payments on behalf of (POBO) was something embedded and had been adopted in the run up to SEPA, but post-SEPA migration the number of conversations we are having with our clients around collections-on-behalf-of has increased significantly, and without a doubt, the SDD has been a catalyst for that. Clients now have the ability for collections to be undertaken on a consistent basis across the euro area rather than on a country by country basis.”
POBO and COBO
An alternative way to capture centralisation benefits is through deployment of payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) shared services as a result of SEPA feature functionality. In this model, which is generally regarded as the most efficient of global cash management structures, every transaction activity associated with either payments or collections, including corresponding bank accounts, is handled by a large single entity.
A POBO operation places supplier liability on the local entity’s balance sheet but that liability is made out of centrally-owned liquidity on its behalf. POBO may be delivered by the nomination of a single entity in each operating country which will be used to execute domestic liabilities incurred by domestic entities. Alternatively, a single legal entity may be nominated to execute all liabilities to domestic sources, even from outside the jurisdiction. As a relatively immature treasury concept, COBO and collections factories could be used to centralise receivables reconciliation and credit management and perhaps reduce the number of bank accounts required. If some degree of standardisation is able to take effect, invoice numbering will need harmonisation and so the technical connectivity required in a global operation may (perhaps through a single ERP) negate the benefits. But while payables transformation is considered to be relatively straightforward, 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.
“We are now seeing live examples from larger companies who are really observing the richness of this reporting, and the reason codes and what you can learn from this. Their transaction rejection rate went down.”
Francis Deroeck, Head of SEPA Offering, BNP Paribas and Chair of the European Payment Council’s Standards and Support Group
However as a result of SEPA, COBO solutions are now looking much more feasible than they were just a few years ago. “The clearing mechanism and the formats that SEPA uses provide a lot of opportunity to pass on the unique data and identifiers such as the Ultimate Debtor information that the beneficiary or the collector needs to be able to reconcile across a number of business units or entities,” says BofA Merrill’s Wong. “There may be some additional capabilities provided by banks such as virtual account management. That is again a different layer of data and information. But actually, there is a lot within the SDD scheme and the format itself that lends towards POBO and ROBO.”
When SEPA instruments were first introduced back in 2008 and 2009, the European Commission (EC) decided to bring in a uniform payments messaging format to be used across all the SEPA zone markets.
It was deemed important by the Commission that data formats used for SEPA were more than a mere European standard. On that basis, the EC decided that the SCT and SDD) schemes use a subset of the ISO 20022 messages. ISO 20022 alongside the XML-based messaging format in the two SEPA schemes meant that, for the first time in payment processing history, the entire end-to-end transaction flow could be executed using the same standard for payment initiation, clearing and reporting.
Perhaps the biggest advantage of ISO 20022 for corporates relates to the changes it has brought in the area of reporting. In the pre-SEPA/ISO 20022 world, when a corporate collected direct debits the treasurer would, in most cases, remain ignorant of the reasons as to why certain transactions had been rejected. Now treasurers have information that they can learn from and, if it the transaction was rejected because of an incorrect BIC or IBAN, they can adjust things accordingly.
“We are now seeing live examples from larger companies who are really observing the richness of this reporting, and the reason codes and what you can learn from this. Their transaction rejection rate went down,” says Francis Deroeck, Head of SEPA Offering, BNP Paribas and Chair of the European Payment Council’s Standards and Support Group. “They now have a better rejection rate than they have before, because they learn much more. Before a direct debit was rejected it was simply vetoed – but now you can see why. This is important because there has been talk that with SEPA it will go the other way – but that is only true if you just collect without looking at the reason a transaction was rejected.”
Additional optional services (AOS)
In the SEPA Credit Transfer (SCT) Rulebook, the European Payments Council (EPC) defines AOS as “complementary services based on the Scheme [SEPA] so as to meet further specific customer expectations,” provided by individual participants and communities of participants.
The EPC goes on to identify two types of AOS. The first are those services provided by banks to their customers as value-added services based on core payment schemes.
The second type of AOS are those provided by voluntary groups of banks; these communities can be local, national or pan-European. The EPC cites the use of additional data elements in the ISO 20022 XML standards as an example of this kind of AOS. The Council adds that any community usage rules for the use of the SEPA core mandatory subset of the ISO 20022 XML standards should be mentioned in the context of this type of service, even though “they are not per se AOS.” It also says other AOS, such as community-provided delivery channels for customers, may be defined.
In order to fully understand AOS, it helps to know a little of their backstory. “It’s been a very challenging task over the last ten years for all of us, not just as banks but as a community, to agree on a common set of standards for SCTs and SDDs,” says Anupam Sinha, EMEA Head of Corporate Payments at Citi, and one of the two representatives of the UK banking community in the Euro Banking Association’s (EBA) discussion on the build-up to SDDs.
“Everybody wanted to have the features specific to their own country included as a part of SDD and SCT, because they were used to it and it was embedded in their country’s payment infrastructure. The challenge was to create the most efficient scheme possible to be run across the community of countries that would be a part of SEPA,” explains Sinha. “As a group of individual communities with the EPC and the EBA, we decided to look at the common services being offered to our customers as the lowest common denominator to achieve a basis for the core SCT and SDD schemes. It was recognised, however, that individual markets were also used to certain local operating flavours which were highly embedded in both the banking infrastructure and the corporate and consumer processes in those markets.”
Sinha says market participants wanted to keep these ‘local flavours’, and this is where the concept of AOS came into being. Each country’s community had to determine whether the core SCT and SDD schemes met the needs of their market participants or if an AOS should be developed. Once implemented, the services would then be offered as a closed user group to all the participants who wanted to be part of that particular service.
Going forward, Citi’s Sinha would like to see the AOS, which have a common applicability, achieve a more centralised role within SEPA, so their benefits can be felt more widely. “For many MNCs, the biggest attraction of SEPA was that they would move to a very harmonised and standardised infrastructure, processes and set of rules. For example, if you’ve got a particular way of handling mandates in Italy, or a particular cycle time in Germany, or a particular way of passing information in Finland, then country-specific AOS are not really providing you with a harmonised process across all the countries,” he says.
“As the adoption of AOS increases, we, as the banking community, along with the regulators, should look at how we can make at least the key AOS, which are adding a lot of value, something that is more a core part of the SEPA service, rather than just being left as an AOS, in a particular community. Over the next two to five years, as the market evolves and we embed SEPA into our processes, we’d like to see these AOS become more mainstream.”
If some of these services do indeed evolve from peripheral, complementary products and gain wider usage among the corporate community, many more companies could then benefit from the innovative solutions now being developed.
While there is a wide range of AOS available (and the list is growing all the time), the selection below gives some idea of how they can help corporates derive greater value from operating in the SEPA environment.
COR1 is an AOS offered by a number of banks for corporates operating in Austria, Germany and Spain. It was created as a response to calls from some corporates that had previously used legacy direct debit processes with a D+1 clearing cycle time. When these companies transitioned to the standard SDD Core process (which has a longer clearing cycle), they faced disruption to their business. With COR1, these companies now have the previous benefits of the shorter DD submission deadline, while still being within the SEPA framework.
This AOS is particularly beneficial to corporates who operate on a cash on collection-type model, enabling them to clear up their credit line faster and better manage their working capital.
AOS2 is an AOS launched in Finland (one of the first countries to migrate to SCTs) related to payment remittance information. It allows corporates making SCTs to provide additional and more structured remittance information as part of the payment which then flows through the banking and payment network to the beneficiary.
This service helps corporates to further automate their reconciliation process, and has helped deal with the issue of missing or unstructured payment remittance information, which was an issue for the Finnish community before this SEPA AOS was developed.
Change Account Information (CAI) is an AOS offered in France through which ordering parties of SCTs and SDDs are notified of any changes to the counterparty’s account information. France’s legacy clearing infrastructure provided a reasonably efficient way of informing users when counterparties had, for example, moved to another bank; under SEPA this method was no longer possible.
Subscribers to the CAI AOS who order payments to obsolete accounts receive a CAI file with both the original account information as well as the new account details in both the BIC and IBAN format. The service can help drive efficiencies in a corporate’s AP/AR process, by reducing the time spent chasing changed account information.
SEPA Electronic Data Alignment (SEDA) is an AOS offered to corporates operating in Italy, whereby corporates can electronically collect mandates from customers, often through a web portal. Electronic mandates were the norm under Italy’s legacy system, and this service allows Italian companies to continue this, rather than having to revert to paper mandates under SEPA, which could cause delays to payments in the country.
This service is especially beneficial to corporates operating in Italy with millions of customers who make regular payments – such as a utility.
SEPAmail is a multi-faceted project developed by a community of French banks, which allows banking-related information (such as invoices, money orders, and notifications) to be formatted and sent using a secure protocol. Interbank payment service platform STET was asked by SepaMail to be a technical contributor to the project.
The AOS is a means of exchanging information, such as from customer to bank and from bank to bank. This messaging channel facilitates a number of services, such as high-speed account number checking; and giving corporates the ability to send an invoice held in a virtual safe along with payment information within a single formatted message.
For all the talk there has been of ‘SEPA 2.0’ of late the truth is that the pan-European payment market is still yet to fully materialise, at least in the way that the European authorities originally conceived it. As Jonathan Williams, Director of Strategic Development at Experian explains: “The challenge we have got is that we are not quite at SEPA 1.0 everywhere, yet. There are still a number of ‘niche products’ that we are relying on.”
Although SEPA now accounts for approximately 95% of transactions across the Eurozone, the lesser-used instruments – like ‘Télérèglement’ in France and ‘Recibos’ in Spain – still in existence, have proved problematic. The differences that manifest between countries because of these niche products has hampered corporates in their quest to centralise and get the most out of SEPA. This issue should diminish somewhat in the coming year though. That is because when the European Parliament imposed the original 1st February deadline for the Eurozone to become SDD and SCT compliant, they also introduced a host of separate deadlines covering the compliance of niche products.
What then do the deadlines cover? Firstly, all niche products, which are defined by the EPC as in country payment instruments that have a cumulative market share of less than 10%, must be converted to SEPA from 1st February 2016. There are also a number of other requirements becoming mandatory on the same date that corporates will need to be cognisant of:
Corporates must indicate the IBAN.
During the original SEPA migration phase for the Eurozone, it became apparent that some corporates simply did not have enough time to convert all of their Basic Bank Account Numbers (BBAN) to IBAN and, consequently, corporates were permitted to request their payment service providers (PSPs) to convert legacy account numbers to IBAN. This will no longer be permitted following the deadline and corporates will be required to indicate the IBAN on all SCTs and SDDs.
Payment card direct debits are no longer permitted.
The use of a payment card to initiate a one off direct debit will no longer be permitted as of 1st February 2016.
SEPA ISO 20022 XML format must be used by corporates.
Unable to become fully SEPA compliant themselves ahead of the original Eurozone SEPA deadline, a significant number of corporates took the simpler option of converting their legacy in-country payment format into SEPA compliant XML formats. Following the next set of deadlines, these companies will by required to send only XML SCT and SDD files to their banking partners.
Noting the chaos that ensued last time around when corporates let the original SEPA migration deadline creep up on them, the experts say that it is crucial they begin thinking about what these forthcoming changes to SEPA might mean for them. There may well be no impact on the business, but making an impact assessment is of vital importance. “It’s quite an important set of deadlines,” says Experian’s Williams. “When I was discussing these at a conference earlier this year it became apparent that a lot of corporates I was speaking to were not aware of these dates or that there was something they needed to be thinking about doing. Now is certainly the time to wake up and really plan for those deadlines.”
There is one final SEPA deadline approaching in the year ahead which is of particular importance for businesses operating in countries outside of the Eurozone. The deadline for non-euro countries to comply with the terms of the SEPA regulation will be 31st October 2016. Corporates affected by this deadline, in the UK or Denmark for example, should already be, by the time of writing, well on their way to becoming compliant. If the migration experiences of those companies who struggled to become compliant in time are anything to go by, those companies who have not given themselves at least a year to organise and execute their migration are going to have a very tough time indeed.
SEPA for Cards framework
After the EU finally completes migration to SCT and SDD there will be but one further pillar of the new pan-European payments landscape to establish. SEPA for Cards enables consumers to more conveniently use their cards for purchases anywhere in Europe. For retailers, accepting cards will become easier and more attractive.
According to a recent statement from the EPC: “The Single Euro Payments Area (SEPA) for Cards sets the conditions to offer European cardholders general purpose cards to make euro payments and withdraw euro cash throughout SEPA, with the same ease and convenience as in their home country. It also enables European merchants to choose which SEPA compliant card acceptance brand and product they wish to accept and with which acquirer(s) they wish to contract, without this choice being artificially constrained by legal, technical, or procedural issues.”
The challenge for SEPA for Cards has not been a lack of common inter-bank schemes which could be used for both cross-border and domestic payments, as was the case with credit transfers and direct debits. Rather it was on the need to agree a common security standard for all general purpose cards in Europe and, secondly, to establish sufficient interoperability so that different types of cards would have much greater acceptance across the EU. The second challenge is perhaps the most significant as it requires the development of SEPA-wide applicable standards for both cards and terminals in order for the SEPA for Cards framework to become a reality.
An initial SEPA for Cards framework was developed in 2008 but following the announcement of the SEPA regulation, attention turned to the two instruments SCT and SDD for which compliance was mandated. But following the completion of migration to those first two payment instruments, Europe is now beginning to look again at the SEPA for Cards framework. In 2015, the EPC together with the Card Stakeholders Group (CSG) – a body set up in 2009 to develop and maintain the SEPA for Cards Standardisation Volume – concluded a three-month public consultation. Based on the feedback received during the 2015 consultation new elements will be incorporated into the next version of the document which will be subject to a three-year implementation timeline.