Additional Optional Services (AOS) could help drive SEPA efficiency for corporates, and a host of additional services are being developed. But what exactly are AOS? And how are they likely to evolve in the coming years following the SEPA migration deadline?

As the end of the grace period for the migration to SEPA looms, corporates that missed the February deadline are likely to be hard at work to ensure they are compliant come August. But even those for whom migration is now no longer a major concern may be asking themselves some questions: how can we derive greater value from the way we process payments in the SEPA environment? And what can our bank do to help us with this?

One potential answer is through Additional Optional Services (AOS). But what exactly are AOS and how are they implemented?

Definitions

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 (the International Organisation for Standardisation’s standards for financial services messaging) 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.”

Despite the innovative and value-adding services already being developed, there is significant scope for further AOS to help corporates in different areas of their payments processing.

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.

AOS innovations

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

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

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.

CAI

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.

SEDA

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

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.

“We believe that SEPAmail, as a community-shared AOS, is a good answer to the market needs. It allows banks to deliver different services through a unique portal. It simplifies connection for their customers while offering them a simple management of day-to-day administrative tasks,” says Jean-Pic Berry, CEO at STET.

AOS rules

There are certain restrictions on the provision of AOS.

The EPC sets out three principles on the offering of services in the SCT Rulebook:

• All AOS must not compromise interoperability of the Scheme nor create barriers to competition.

  The EPC says any complaints regarding this will be handled by the SEPA Management Committee.

• AOS are part of the market space and should be established and evolve based on market needs.

  The EPC has the right to incorporate commonly used AOS features into SEPA based on these market needs.

• There should be transparency in relation to community AOS.

  The EPC states that details of AOS relating to the use of data elements present in the ISO 20022 XML payment standards should be published on the internet in the local language and in English.

However, beyond these principles, there are no further mentions of AOS in the EPC’s rulebook. The Council says this is because the services are generally considered competitive offerings and are therefore outside its scope.

More options

Despite the innovative and value-adding services already being developed, there is significant scope for further AOS to help corporates in different areas of their payments processing.

“We are going to see a slew of new services,” says STET’s Jean-Pic Berry. “We need to change the way the banking leg of payments is done, and this has been delayed more than necessary. The way we pay for services over the net needs to be overhauled. And there’s a dire need both in terms of invoicing, particularly the reconciliation between invoicing and payments – here there is a need for basic services that are not provided today. Then there are services related to mobile phones – why can’t these be used for payments more generally?”

He adds that an AOS that provides a consolidated view of banking operations over time could also deliver significant value to some corporates.

Most of the largest banks support a number of AOS. Indeed, it seems it would be unwise to neglect the corporate interest in the area. “If you don’t offer these services, there is a significant risk of losing business,” says Citi’s Sinha.

STET’s Berry believes the question is not which banks will offer services, but will they offer them in a coherent way? “There is a trend towards monopoly in banking, and therefore a need for common answers. There is a natural tendency to have solutions which are easy to transfer from one bank to another,” he comments. This, he believes, will be the key factor in the development of the bank provision of AOS in the near future.

Along with the expanded payment possibilities of SEPA, and the associated AOS, financial risks are also growing very rapidly. A cloud on the SEPA horizon is that it is potentially opening up a new threat that never really existed before.

“There used to be a time when only cards had any significant risk of fraud, when fraud on CTs or DDs was virtually unheard of. Now you’re going to see a much wider area of fraud, which is one of the consequences, unforeseen or at least unwanted, of SEPA. Frauds on SDDs will probably rise significantly, given that you can now order a payment from anywhere in Europe,” says STET’s Berry. But he believes the growing cloud of fraud could have a silver lining, in that a whole range of new services could be developed to address this burgeoning risk.

AOS into the mainstream

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.