Cash & Liquidity Management

SEPA – open for business

Published: Sep 2008
SEPA – open for business Talking Treasury Forum group photo

Since the launch of SEPA in January, adoption has been slower than many had expected. But why is that? And will the SEPA Direct Debit be ready as planned in 2009? In this Talking Treasury Forum, our panel of industry experts examines the latest developments in the SEPA world and the obstacles hindering take-up. They also discuss the PSD and consider what it will mean for corporates – in the context of SEPA payments and beyond.


Portrait of Alan Koenigsberg, Core Cash Management Product Executive – Europe, Middle East and Africa, J.P. Morgan

Alan Koenigsberg

Core Cash Management Product Executive – Europe, Middle East and Africa
J.P. Morgan logo
Portrait of Simon Colboc, COO, Financial Supply Chain & Cash Management, Fortis

Simon Colboc

COO, Financial Supply Chain & Cash Management
Fortis logo
Portrait of Mark Hale, Director, PriceWaterhouseCoopers

Mark Hale

PwC logo
Portrait of Frank Taal, Global Head Product, Solution and Channel Management, ING

Frank Taal

Global Head Product, Solution and Channel Management
ING logo


Portrait of Richard Parkinson, Managing Director, Treasury Today

Richard Parkinson

Managing Director
Treasury Today logo

Richard Parkinson (TT): Where are we with SEPA right now?

Frank Taal (ING): Well, we’ve seen the start of the credit transfer at the end of January, but today the statistics show that less than 1% of the payment traffic is currently using the SEPA Credit Transfer, mainly as a result of the banks routing cross-border European payments to the SEPA Credit Transfer.

Alan Koenigsberg (J.P. Morgan): I agree it’s been a slow start for the larger corporations with more established payables processes. But interestingly, you take a smaller market like Luxembourg and you’ll see they’ve shifted the vast majority of their payments over in one fell swoop. It’s a modest but healthy start.

We’ve enjoyed over two years of dialogue with organisations of all sizes on the subject of SEPA, but just recently we’ve started seeing a number of US corporates begin to adopt SEPA on our web channels. Smaller corporates that didn’t have as much volume to risk are also beginning to shift. We’re talking to a number of airlines that do business in the region about shifting their payments to SEPA. But I do think the vast majority are still waiting. And they’re waiting for clarity around some of the burgeoning industry issues; issues like the impact of the Payment Services Directive, what the SEPA Direct Debit will really look like, and when businesses can expect it to be introduced. With this greater clarity, I expect that corporates will begin their payment process re-engineering activities. And I think for the most part, the public sector institutions will begin their re-engineering activities too, but maybe not until the latter part of 2009.

Simon Colboc (Fortis): I am with you there. We are seeing a little bit of movement in the public sector. The pension and European public sector seem to be the first users to at least make the right noises. I agree, it’s been a relatively slow start. We found ourselves in the position of being, I think, one of the biggest movers of SEPA volumes, because others have been even slower to take up. In part this is probably because we had already moved our payment systems into a shared service centre. We’re very happy to have done it, but it’s not something that the clients are jumping up and down about yet.

Mark Hale (PricewaterhouseCoopers): That’s not surprising if banks aren’t promoting it. The 2008 Banking Banana Skins survey shows that concerns about liquidity, credit, risk products and risk management are at the top of the CEO/CFO agenda; not SEPA. When it comes to what’s hot and what’s not, then payments simply isn’t up there. It’s only 27 out of 30 on the list. A crisis, a compulsion or a compelling business case would make SEPA more visible.

Koenigsberg (J.P. Morgan): If I may, may I be a little bit controversial? I think that to some degree, SEPA actually benefited from the market turbulence. While earlier this year, eyes were on liquidity and risk management, the banks actually had a little freedom to really bed in the functional side of SEPA. There has been the odd teething trouble. On the SEPA Credit Transfer side, we don’t have a full product yet. When we have additional payment flags that all come in at the beginning of next year, then we will have the vendor payments and the payroll components and all the pieces that will make up the whole credit transfer product. And, hopefully, the direct debit product will go in as smoothly as the payments have.

Colboc (Fortis): Absolutely agree with that. Why do daily banking when you can do juicy loans? Now that has turned around a little bit. It has got the attention of the sales force, and it has got the attention of the corporate clients as well, because they are no longer only focusing on getting that extra layer of leverage. They are having to think hard and smart about how you best change the structure to make best use of your working capital. So back on the earlier point, why is the thing relatively slow in picking up? It’s not going to have any impact on corporates as long as the ERP systems are not following. And that has been the weak link in the chain so far. You get to your client and say, “look, this is going to make it easier for you to reconcile.” They say,”to reconcile what? My ERP is not ready for it.”

Hale (PwC): I think that the ERP vendors might be further ahead than you think. When I was an ex-officio office holder of the European Payments Council, I discussed SEPA with many of the principal ERP vendors, all of whom were addressing the requirements of the new instruments and reviewing their development roadmaps accordingly. Certainly, if the MNCs and larger SMEs are going to migrate to SEPA, then it needs to ‘land’ in an ERP accounting environment.

However, because corporate IT development programmes also have lead times to change and ERP vendors are customer driven, I see the issue more on their demand side than their supply side. In my conversations with companies, there is a consistent complaint about poor communication from the banking industry and therefore their lack of demand for SEPA is unsurprising. Interestingly, when I test those claims, they tend to know and have seen more than they would initially claim. Something else is missing. SEPA must become less optional or more compelling if it is to better succeed.

Taal (ING): But that is changing rapidly. I will be speaking about SEPA tomorrow at a meeting organised by the larger Dutch employers together with the Central Bank and the other banks. There was a little bit of a wait and see attitude. Will it really happen? It has taken some time before people really understood that SEPA is here to stay. But have the ERP vendors already adapted their systems? No, they haven’t. When do they have to actually adapt them? They don’t know yet because they are waiting for specification of the SEPA Direct Debit, so it’s a little bit of a chicken and egg situation.

Koenigsberg (J.P. Morgan): I think these ERP vendors don’t develop until there are standards. You have a scheme like SEPA which is only about 30% rolled out. With the credit transfer, half the capabilities are really live, the other half will come live next year. We don’t have the collection component yet, so this is a natural evolution, it’s a ‘when not if’ conversation. That’s why the ERP vendors are reacting in this way, and that’s understandable. When we talk to corporates about it, they say, “OK, tell me if it does this, this and this?” Then we reply “Well, not yet.” So they then say “Fine, come back and tell me when it’s better, faster, cheaper.”

Colboc (Fortis): And in some cases, it is.

Parkinson (TT): So can we get into a little bit of detail on this? Let’s start with the credit transfer, which you say is not doing everything it should do?

Koenigsberg (J.P. Morgan): The bottom line is, you’ve got what they call a core basic transfer. So if you want to make a payment to a supplier or if you want to make a payroll payment, it’s simply not possible right now. You cannot yet make a payroll payment which carries the appropriate flags. As a result, that payment wouldn’t be prioritised in the way it would in any other ACH today.

Hale (PwC): The good news is that the next version of the SEPA Credit Transfer scheme addresses many of these issues and the purpose of the payment can be specifically added into the payment instruction. In my negotiations with the European Association of Corporate Treasurers, agreement was reached on a number of other important changes for the 2009 version too. As well as being able to identify the purpose of a payment, corporate identifiers will be able to be added as will beneficiary ‘reference party’ descriptions. These descriptions support complex group accounting structures, enable efficient cash management structures and allow innovative payment factories to be deployed for SEPA.

Gaining agreement to the first version of a SEPA scheme is always the hardest challenge because you are negotiating against many competing national legacy schemes. The second and subsequent versions are much easier, because then you are negotiating against the previous version. The debate about whether SEPA will happen is now over and since it has gone live, people are realising that there is no turning back. The advocates of the Single Market should be congratulated on the fact of the change, and shouldn’t get too disheartened about its initial pace.

Koenigsberg (J.P. Morgan): And I think the faster we can roll out more capability, and the faster we can settle the direct debit differences and bring the collection part of the equation to market, the sooner we can set an end date. This should help build a much more competitive landscape for processing payments transparently throughout the market. I think that’s all corporates are asking for, to easily make payments in a fully domestic European environment.

Hale (PwC): The market needs that from an investment point of view. One of the cost pressures inherent in the overall roadmap is the co-existence of legacy systems and the new. The last thing that the market wants to do is to have to invest in both.

Colboc (Fortis): We have pretty much burnt our bridges in a way by setting up a new payments engine. We’ve moved our different domestic payments and the interfaces to payment systems onto the same platform instead of processing separate payments in each country. So the good thing is we have a platform that we can immediately extend to customers. When you talk to corporate clients, they’re probably not directly interested in SEPA or when you talk to them about SEPA, the first thing they say is, “Well, we don’t know what’s in it, we’re not informed.” And then you start scratching, they actually know about it, but they just don’t really see what it directly means for them. If you can say very simply, “Look, what are you interested in? Are you interested in setting up payment factory? Are you interested in setting up a collections factory? Are you interested in having end- to-end processes and is your reconciliation to the accounts payable, to accounts receivable, something like that?” That talks to corporate treasurers rather than SEPA in itself. Now, can you do that more effectively with SEPA? Would it be better with SEPA than it was before? I think the answer is yes. Is it already visible today? Only partly.

What will really make a difference is XML.

“We have pretty much burnt our bridges in a way by setting up a new payments engine.”

Koenigsberg (J.P. Morgan): The best thing that ever happened to XML was SEPA, and you are seeing many corporates that are beginning to take advantage of XML standards, but I think we’re still years away from XML being the corporate standard for processing payments. At present, corporates simply expect banks to route payments via the most expeditious route. We’ve built flexibility into our systems to perform this so-called ‘intelligent routing’, but corporates really don’t want to be involved in that part of the process.

Portrait of Frank Taal, Global Head Product, Solution and Channel Management, ING
Frank Taal, ING

Taal (ING): For large corporates with a centralised treasury, cash management banks have already created a kind of semi SEPA by using pooling structures and payment factories. So you’re really left to take it from where we can further enhance the structure by having fewer accounts or less complexity with all these various formats. It is more an enhancement on top of an already efficient structure in most cases, rather than a major step forward. But, for corporates with a decentralised treasury the situation is different.

Hale (PwC): That depends. SEPA is intended to change the status quo after all. As some banks use the opportunity to put new platforms in place, they should find it easier to offer services outside of their traditional geography within their new domestic marketplace, which is SEPA. The new legislation facilitates this, and it also motivates organisations to respond by creating a new regulatory category of Payment Institution. The new legislation makes it easier for Payment Institutions to enter the market and also to have access to the core infrastructures to give them reach. I believe that they will innovate more effectively than many existing players, and I therefore think that the customer is going to be a winner. Reach is going to be less of a differentiator than before.

Taal (ING): I think you’re right. We have done the same as Fortis did to create one group platform instead of changing all the domestic systems in the countries that we are in. We both have the big differences in prices between, let’s say, the southern countries and Belgium and The Netherlands where we are more or less for free. We see a potential opportunity in countries like Italy or Spain or France, also to some extent Germany as well.

Koenigsberg (J.P. Morgan): I agree, while SEPA in isolation may not be exciting the masses, it is transformational. That to me, from a banker’s perspective, is the exciting part about it.

Taal (ING): Absolutely.

“As some banks use the opportunity to put new platforms in place, they should find it easier to off er services outside of their traditional geography within their new domestic marketplace, which is SEPA.”

Portrait of Mark Hale, Director, PriceWaterhouseCoopers
Mark Hale, PwC

Hale (PwC): I think transformational is a good adjective, and I see three dimensions for the entrepreneur. One, it’s intended to change the rules of the market; the Single Market. Policy makers will continue to intervene to address indicators of market dysfunction, such as price variation between Member States. This makes them very concerned to drive up innovation and competition. That’s what gets them up in the morning.

Two, it’s about innovating new sources of value for the customer. The commodity element of the payments is something of a margin race to zero, which means that a few Payment Service Providers will thrive on scale, whereas the others will have to move up the value chain. This is where it’s going to get really interesting for individuals, companies and banks alike. New services such as mobile account and payment management for all, electronic invoice presentment and payment for companies, or electronic bill presentment and payment for retail customers, are the things that are going to become increasingly important.

Three, it’s about understanding that payments is a vital part of a wider transaction banking business and leveraging that opportunity within the organisation. The credit crunch and associated liquidity issues are driving investors and analysts toward businesses with more stability, easier to manage risks and closer to the real economy. It is also putting a premium on the value of those businesses where they are separately identifiable. If you pull those three things together, there is a real moment of opportunity for a courageous and visionary leader.

Taal (ING): The change will be incremental. On this, I think we all agree. My concern is that it will be too incremental. What I mean to say is that if everybody is waiting, everybody will keep waiting.

Parkinson (TT): That’s where the majority of the corporates are right now.

Taal (ING): I’m concerned that if there is no real volume in the system and there is no real usage that, in the end, the development will not happen. So I think we should work on improving, enriching and enhancing the payments and the services surrounding it. It doesn’t take away the need to find launching customers which can now benefit from SEPA. SEPA is a politically driven ambition.

I think the government and the semi-government organisations should now stand up and really start implementing because they make 30% of the payments volume in Europe. It would be a shame if they wouldn’t start, let’s say, before the end of the year, at least a number of them.

Colboc (Fortis): There’s something I keep hearing from our clients in the pension funds, for instance. They are among the biggest issuers of payments and they have pensioners that have retired on the Costa Del Sol or in the south of France and you need to send them the payment. Part of the reason they are holding fire at the moment is they are waiting to see what’s going to hit them with the PSD, which will have as much of an impact on them as SEPA.

Portrait of Alan Koenigsberg, Core Cash Management Product Executive – Europe, Middle East and Africa, J.P. Morgan
Alan Koenigsberg, J.P. Morgan

Koenigsberg (J.P. Morgan): I think that if we’re all representing the best interests of our customers, we would implement Payment Services Directive on schedule and consolidate the systems in Europe, pure and simple. I talk to corporates all the time, not only here in the region but those doing business all over the world and their question to me constantly is, “What’s taking so long?”

Which brings me to the Payment Services Directive and how SEPA will be legally institutionalised by the PSD implementation, and for good reason too. It’s the PSD that will bring the required level of transparency and dependability, and also the terms around handling of that payment by the banks. This all has to happen in order for there to be a fully transparent market.

“I’m concerned that if there is no real volume in the system and there is no real usage that, in the end, the development will not happen.”

Colboc (Fortis): It doesn’t make sense at the end of the day to talk about an integrated European market if you don’t have an integrated European payment system. Without SEPA or something equivalent, the Treaty of Rome is a bit of a charade. I think we were absolutely right to launch that initiative at SEPA. That has prompted the legislator to elaborate the PSD which has taken on a life of its own.

Hale (PwC): Absolutely, but the changes do strike at the heart of core accounting systems. Many accounting systems have a premise of a single bank account number and with the existence of two (BBAN v IBAN), we go into a different set of risks.

Koenigsberg (J.P. Morgan): We spent months with our customers discussing IBAN and BBAN. The first piece of feedback they provided us with was, “I can’t manage multiple account number formats in my ERP or my traditional accounts payable system, no way.” So how is that going to work? And so now we’re making headway into the BBAN to IBAN conversion issue, and we’re helping customers manage that critical task.

Taal (ING): You said the customers have difficulties in working with systems next to each other. We have one customer who is a very large customer in direct debits, that issues several million direct debits per month. This customer has run through a very extensive SEPA programme. They have decided to go for a big bang approach.

They have said, we are not willing to have the various payment types in the various forms next to each other because it’s too complicated for us. We know that we will suffer some pain in the first two or three months, but we feel that it is a better approach to do it in one shot rather than do it in a kind of step by step approach. And we also have some customers who have started IT projects because they don’t run a supplier-built ERP system, but they have home-built systems.

Parkinson (TT): What are the learning points here for a corporate? You have been saying the Payment Services Directive is the cornerstone of SEPA but does it matter to the corporate?

“Once we determine how our infrastructure must adapt to those laws, then it will be time to engage the corporate community about how that impacts them.”

Koenigsberg (J.P. Morgan): The Payment Services Directive provides a legal framework for SEPA but has a much further reaching impact than just SEPA. It impacts all payment service provision across the EU, impacting non-euro services too.

Parkinson (TT): And what should the corporate be worried about?

Koenigsberg (J.P. Morgan): The Payment Services Directive is going to impact banks significantly. But also, corporates should be seeking advice from their banks and their treasury consultants to figure out exactly what the impacts are. If they’re in the consumer to business collections market, they may want to evaluate whether or not they’re deemed to be a payments institution. I think that they need to consult with their bankers and they need to have those conversations pretty quickly, because banks have already evaluated all of the articles in the Directive.

Portrait of Simon Colboc, COO, Financial Supply Chain & Cash Management, Fortis
Simon Colboc, Fortis

Colboc (Fortis): I don’t think we’re saying all companies should move in this direction, or all companies should move in that direction, but I think what I’m hearing from both of you is that companies have to seize the moment, to grab the opportunity to re-think their financial supply chain. It will certainly have different impacts in different businesses.

If I’m in the B2C space, say I’m a utility, I’m now supposed to be able to sell electricity cross-border. Now, can I do that easily without a SEPA Direct Debit? No, because I have to set up all those direct debits. I need to rethink my commercial strategy. Do I embark on European growth in a different way because it certainly makes it easier for me to do that? Then you start thinking, OK, how does that impact my financial supply chain? Does it change the way I buy or does it change the way I sell, and then, only then, how do I change my treasury system? Sometimes you have people who have thousands of employees dealing with reconciliation. These people are going to be impacted by a change in financial supply chain event. Ask yourself the question at board level, is it something that’s going to change our strategic business model or not?

Koenigsberg (J.P. Morgan): I completely agree with everything you’re saying. I think the question is, “When?” If we think, as bankers, that corporates now in this financial environment, are going to actually wake up, turn around and be all singing and dancing ready for the Payments Services Directive and SEPA by November 2009, we’ve all been in banking way too long! So, it’s not realistic and that’s why I say, “When?” The time is now for us to be educating corporates.

Parkinson (TT): Why is the Payment Services Directive so important to a corporate?

Koenigsberg (J.P. Morgan): I think this is a banking activity right now until we bed down the law. Once we determine how our infrastructure must adapt to those laws, then it will be time to engage the corporate community about how that impacts them. I think that large corporates should be asking questions now and getting to grips with the impacts. They should be asking how the current text that’s been released across the EU impacts them. Broker dealers are asking questions, fund managers too, saying “Am I a payments institution?” There are channels that have been opened up to answer these questions, by the EC, in the UK by the FSA, by Treasury, etc.

Taal (ING): To give you an example, I think, especially for the customers using direct debits, PSD can have a major impact. The ability to return a direct debit for up to eight weeks, that is a big difference in most countries.

“I think direct debits are going to launch in 2010, not 2009, to get away from the change freeze over the Christmas period.”

Colboc (Fortis): It’s also not related only to euro payments, it is for all 27 countries and it relates to all the currencies, so it’s the sterling, the Swedish krona, the Nordic kroner.

Taal (ING): Based on the PSD there are also changes with respect to value dating and processing time lines.

Colboc (Fortis): And the direct debit mandates.

Taal (ING): And the mandates. Now let’s say, there is a lead time of perhaps at least a year if you want to change your systems, because these are huge systems, you’d better start now in combination with your bank or your consultant, looking at what’s going to change.

Parkinson (TT): Because, in 18 months’ time, the system is going to change?

Koenigsberg (J.P. Morgan): We think. Except for direct debits.

Taal (ING): No, also for the existing direct debits,

Hale (PwC): There’s one of the PSD and approach factors in action!

Parkinson (TT): In other words, it’s impacting the domestic system, because it’s changing the law. But the problem is we’re aiming at doing something in November 2009 but we’re not sure exactly what shape it’s going to take.

Koenigsberg (J.P. Morgan): We’re not even settled down on the direct debit programme yet. And we’re not settled down on how much it’s going to cost and whether there is going to be an interchange fee. Are banks going to accept it? If there is an interchange fee, large markets like Germany and the UK may just take issue with that, and large corporates will as well. There are still a lot of rocks in the road that we’ll need to clear and I think that when we talk to corporates we must make sure they’re not unnecessarily burning a lot of calories on delivering to time lines that may yet change.

Hale (PwC): I’d agree with that. I think direct debits are going to launch in 2010, not 2009, to get away from the change freeze over the Christmas period.

Koenigsberg (J.P. Morgan): We care for what happens to our customers and we all want this to be resolved in an efficient way. But I think what we’re finding is that there’s a lot of developments that are being front-loaded here. But if I don’t receive final PSD law by the end of first quarter ‘09, then it’s going to be very difficult to have something properly ready for market by November.

Colboc (Fortis): We are already seeing the risk materialising that the SEPA formats don’t quite seem to translate properly in every European language.

Hale (PwC): It’s a tough problem. On the PSD side, of course, the intention was harmonised, consistent legislation and what you’ve now got is a number of derogations in each Member State. It’s highly likely you’re going to have some inefficiencies and inconsistencies as a result.

I’ve had the benefit of spending a lot of time in Brussels working ‘at the European level’, and therefore have a good understanding of the ‘Brussels way’. Getting it 100% right or ensuring operational consistency is not their first consideration. Getting it consensually moving in broadly the right direction is. When we implemented the euro the mandate was much clearer, the commitment was more evident and the collaboration between the key stakeholders was more effective. The change and risk is harder with SEPA and yet this time we have much more uncertainty, not least no clear end date to mitigate co-existence risks!

Koenigsberg (J.P. Morgan): My customers are worried about dates, they’re worried about things happening when we say they’re going to happen, so I think we’re all careful to say ‘around Q4 2009’. The other thing is that I’m not sure if a corporate necessarily needs to worry right now about the arbitrage issues between implementation of countries, ie one country implementing PSD before another. We, the banks, need to worry about that in protecting our customers.

The other is the arbitrage between the actual implementation – the derogations. You could in the future see a payment institution start up and then, naturally, want to go to where the laws are most flexible.

Hale (PwC): Banks should now look at the market differently and how to service their customers differently. This is important because customer expectations are changing as is their voice. And I do see a few banks and a number of new entrants really responding to their call. It is not only SEPA that is disrupting the market though; it is also things like technology. If you go right back to why we’re here, the politics of it, it’s about destabilising the market to bring about a number of changes that can’t actually be architected. Let new actors come in and, notwithstanding market safety etc, see what happens. Today’s leading names in the market are in many cases not the same as existed 10 years ago.

Koenigsberg (J.P. Morgan): I think everything that you mentioned benefits the customer; the expansion of information reporting, the introduction of mobile devices and additional optional services. I come back to a very simple event providing a standard collection service electronically across the Eurozone. And banks are still debating the finer points of that. If we can’t get beyond these false debates then we’re not going to be able to purvey complex, pan-European technologies that actually create a single market. And I think that’s the big concern, right? We see that all of these complex disruptive projects going on are demonstrating the lack of leadership in the payments business and I think probably, over time, corporates can see that pretty clearly.

But this lack of leadership is perhaps understandable when you consider that communities from the finance industry, regulators, the European Commission and consumer groups have all had a hand in shaping the position we find ourselves in today. What’s important right now is that the banks strive to complete the payments value proposition, then complete the picture with a compelling collection instrument for Europe’s businesses to use.

Once these propositions are in place and functioning as they should, the path to legacy system closure will be a much easier one to navigate.

Parkinson (TT): Thank you everyone.

Thanks again to our participants

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