SEPA is the single most important development in European payments in current times. It will have a major impact on the payment infrastructure and the banking industry. It will enable corporates to pursue very different cash management structures and benefit from lower banking fees. But, it is still not clear how it will all happen, when the existing systems will be phased out and exactly what it will mean for corporates. We invited these leading bankers to debate these issues and this is what they said:

Richard Parkinson (TT): Today we’re talking about the impact of SEPA (Single Euro Payments Area) on corporates and the first question is what are the big opportunities for corporates with the introduction of SEPA?

Brendan Reilly (Deutsche Bank): The hope is that there’s going to be a lot more standardisation. So the corporates who have activities in several countries will be able to take advantage of that standardisation and be able to use that single set of standards across those countries to gain much more reliable information flows. The SEPA credit transfer provides the guarantee that up to 140 characters of remittance information must flow end-to-end – corporates have never been certain of that before, but will be certain of that with the SEPA schemes. Similarly, they can rely on return codes and their standardisation, so they can review this and their back office processes in order to take advantage of those codes and the reliable flow of information. Those are just a couple of benefits.

Alan Koenigsberg (JPMorgan): I would first characterise the changes in Europe not unlike many of the changes around the rest of the world. It provides corporates with more ease of use and the possibility of straight through processing. I find today that, with many of our corporates, the client experience is challenged because they have to go through multiple experiences and separate clearing systems for urgent and non-urgent payments. SEPA provides, in the end game, a consolidation of those clearing systems so they can have reliable standards for the origination of payments. They can leverage, as applicable, their ERP (Enterprise Resource Planning) systems for the production of their standard file format in XML (Extensible Mark-up Language) and then, on the other side, be able to receive returns and to automate them fully end-to-end.

Frank Taal (ING): I would like to add to that – I think there is the opportunity to reduce the number of bank accounts. There is, of course, an organisational issue that companies have to keep in mind, namely what their administrative setup is. But basically, the opportunity to reduce the number of bank accounts will be there. This is beneficial to cash management, but of course, this is only the first step. In the longer run – and this is also the view of the European Commission – we can create a uniform platform upon which we can develop our new products and services. Products such as e-invoicing and e-payments, from where in the end, the real benefit should come. We’re at the starting point now of enabling more end-to-end European processes, enabling us to simplify cash management. The real benefit will come from new services based on the harmonised payment landscape we will then have in Europe.

Michael Turner (Fortis): Ultimately, SEPA will be domestic. For example in Belgium, they’re already saying that the ACH (Automated Clearing House) will disappear, so therefore SEPA will be domestic. We also need to look at the real benefit for corporates. It’s not just about bank account structure. It’s a good time for them to look at their working capital procedures and how it will effect their liquidity management and cash flow management. So corporates can use the opportunity of SEPA as a catalyst and they should start reviews with this in mind.

Koenigsberg (JPMorgan): There are two big obstacles still in the way that even the Payment Services Directive doesn’t fully acknowledge or cover. These are tax harmonisation issues and all those central bank reporting requirements. We don’t really have any firm commitments that it will change, so from a corporate’s perspective, one of the first questions they ask is:

“How can I begin to consolidate the number of accounts that I have throughout the Eurozone market, because that’s really where I’m going to reap benefits from a liquidity perspective first and foremost.”

Then secondly:

“How can I look at the consolidation of my collection business and that of course, is direct debits.”

Reilly (Deutsche Bank): It’s also worth adding that definitions are really important here. So you do have to be clear that SEPA actually only applies to the banks that have signed the adherence agreements, or indeed the banks that will sign.

Parkinson (TT): What are adherence agreements?

Reilly (Deutsche Bank): The adherence agreements are key, they are actually part of the scheme documentation – ie the credit transfer scheme documentation or the direct debit scheme documentation. It basically says that you, as a bank, agree to adhere to the rules of the scheme and only by agreeing to adhere to these rules do you become reachable through the scheme. For example, I can’t send a SEPA credit transfer to a bank that has not signed an adherence agreement.

Parkinson (TT): And do all the banks have to join?

Koenigsberg (JPMorgan): Well inevitably they’re going to have to join in order to participate. I think that part of this is a technicality. We talk about 28^th January 2008 like it is this magical date, when the world will change. However, nothing much will change on 28^th January. It’s a threshold date for the beginning of a consolidation.

Targeting the third quarter 2009 for the final adoption of the PSD (Payment Services Directive) throughout the market is aggressive. So you’ll likely have challenges in creating and managing a direct debit programme in early 2009 if you chose to do so. So you have to look at other markets around the world to see how they consolidated their businesses. It took the United States 30 years to get the ACH system that they have today – 30 years! The Australian market took over 20 years as well. For us to think that in just a couple of years’ time we’re going to have a fully operable, well governed, fully adopted programme is very optimistic. We have to be honest with corporates because what they’re reading in the newspapers – and even in the FT – sounds very optimistic. Not all banks may be lit up and on the network and on-line to be able to participate.

Turner (Fortis): I fully agree with that, I think there are also country differences. For instance, in Belgium, the banking community has decided to give up their clearing house and have a very quick conversion to SEPA. Their very aggressive migration plan ends in 2011, so in approximately three year’s, they want to have migrated from all the existing domestic solutions to SEPA products. So you can imagine that the impact of SEPA for, let’s say, international trading corporates – and also for the domestic corporates – is quite direct. So in the Belgium market, let’s say half of the market is expecting to start using SEPA products and to migrate to SEPA in the first two years. But if you ask the same question to a Dutch or perhaps French corporate, I think you would get a totally different picture.

Editor’s note: By moving the introduction date for SEPA Direct Debits, the original end date for introducing SEPA from 2010 also moves, but has not been confirmed yet.

Koenigsberg (JPMorgan): What’s interesting is that the Belgian market moves its current domestic programme to SEPA compliance and so corporates in that market will say that they will leverage SEPA products, but they may not be able to leverage them outside Belgium.

Parkinson (TT): So how will this work if my bank is a member of a Pan-European Automated Clearing House, but not all the other banks in Europe are members of it? Some may not have joined at all and some are going to be members of another PE-ACH (Pan-European Clearing House). How will payments get made?

Taal (ING): I can only speak for ING, but we have thought of this question because I fully agree that not all the banks will have signed the adherence agreements by the end of this year. We will have banks, perhaps hundreds and thousands of banks, small banks, who are formally not reachable according to the SEPA adherence agreements. This is something that you can’t explain to your customer. You can’t publish a table every day or every week in which you list all the banks which are reachable.

Parkinson (TT): So what happens if I tell you ‘pay this bank, this account number’ and the bank is not in a SEPA clearing system?

Taal (ING): What we will do is what we do now. We will route the payment instructions via other clearing mechanisms, correspondent banking arrangements, or our own network and process them on a ‘best effort’ basis. So that could mean that the majority of payment instructions are going exactly according to the SEPA rulebooks, but a number will be processed according to other rules. The ordering customer won’t have too much trouble with it because we won’t reject anyone, but we will re-route some payments and the beneficiary will not get a SEPA compliant payment order on his account.

Reilly (Deutsche Bank): Deutsche bank, a while back, took the step of sending a letter to CSM’s (Clearing Settlement Mechanisms) asking them to confirm that they would be able to send SEPA credit transfers (SCTs) to Deutsche Bank or any of its branches through the EBA’s (European Banking Association) STEP2 system which is a PE-ACH. So in other words, we have nominated the EBA as our PE-ACH SCT CSM! Or in plain English, essentially what we’re saying is we’re not going to join the local clearing schemes for the purposes of sending or receiving SEPA credit transfers on day one.

“The documentation and mandate is another major issue for the big corporates because this has to be changed.”

Koenigsberg (JPMorgan): Corporates ask us, ‘which clearing settlement mechanism is more effective on day one?’ and I’ve got to say the EBA, in many cases, may not be the most effective clearing settlement mechanism on day one and they may choose to carry on using legacy clearing and settlement mechanisms until such a time as we see the consolidation.

JPMorgan Chase has sent a very similar letter asking for all of our payments to be routed through EBA. We’ve made the decision that the EBA is our clearing house of choice because we believe that they have the furthest reach.

A bank may not be a direct member and the performance of that payment may not be as effective as the current legacy environment. Our corporates need to know that, because it’s being handled two or three times before it gets to the end financial institution and therefore it may take two or three days longer for the payment to clear. We need to develop, for example, more dynamic tables which are continually updated and look for low-cost routing or ‘best time’ routing.

Parkinson (TT): Will D+3 apply payments to banks that are SEPA compliant, but may be reachable through a different PEACH than your bank uses?

Koenigsberg (JPMorgan): This relies very much on the route the payment is taking. In some of the European countries we have already D+1 today; in some others the average processing time is D+3. If the first ACH in line receives that payment and then has to turn around and find the beneficiary bank through another ACH or send it to a legacy clearing system, this will then certainly add another day or two to the process. So it’s unlikely to be out of compliance for some of the payments from day one.

Parkinson (TT): What will happen to pricing?

Taal (ING): There are some countries – for example Italy, France and Spain – in which corporates pay much more for banking services than, for instance, in Belgium, the Netherlands or Finland. So I can imagine that in some countries you can expect quite a dramatic reduction of the fees at short notice. I don’t expect that to happen in the lowcost countries, because it’s virtually zero now and there’s not much to reduce. Large payment users could use a payment account, a special payment account for instance in Belgium or the Netherlands so that would, of course, create a price pressure in a country such as Spain or Italy. Actually, it is part of our strategy and the European Commission wants us to create a larger payment market in which there is more competition in the end.

Turner (Fortis): But at the same time, you’ve got the Payment Services Directive (PSD) which will reduce value dating. The PSD is determining the execution cycles – so ultimately there will be only a one-day float on the debit side. For example, in some countries at the moment, clients pay a fee on individual transactions, whereas in other countries the banks do not charge a fee, but rely on the value of the float. Once this float is removed, potentially there will be a lot of negotiation to be done with regard to pricing.

“Because its being handled two or three times before it gets to the end financial institution… it may take two or three days longer for the payment to clear.”

Koenigsberg (JPMorgan): On the electronic ACH side, there is value dating and it does exist predominately in Southern Europe and somebody is paying for the transactions and it’s typically the receiver. I think that there will be a shift in who’s paying for what and how the fees are assessed.

Parkinson (TT): What should corporates be aware of with regard to the PSD?

Karsten Wenk (Commerzbank): You have to keep in mind that the PSD is not only for SEPA products, it also concerns the existing products which are regulated by the PSD so that it will affect us first and foremost on existing work. Take authorised direct debit as another example in relation to PSD, where the period is harmonised on eight weeks.

Parkinson (TT): Is that the period during which the payment can be returned?

Wenk (Commerzbank): Yes, the new rules will be that it can be returned within eight weeks. Those utility companies or other corporates, which are not internationally operating companies, and which use European direct debit, will find that it also affects their existing direct debits, products and systems in their domestic locations as we use them today.

Taal (ING): In the Netherlands, the documentation and mandate is another major issue for the big corporates because this has to be changed. There is a lot to be done for the corporates before they can, on a legal basis, join the SEPA scheme. We are currently investigating how we can minimise the hassle for corporates.

Turner (Fortis): This is where we’re going to be helped by the corporates, because the Payments Services Directive didn’t effectively say, ‘your existing mandate for your local direct debit scheme will transport into the SEPA scheme’. There is a different country by country approach as to how to move the existing direct debit contracts to SEPA ones. However, there is an opportunity for countries to take account of this when they embed the PSD into their national legislation. So if corporates, along with others, were to say to their local government, ‘when you’re incorporating the PSD, could you also ensure you include the statement that existing mandates will apply a SEPA scheme’, then that would be exceptionally helpful.

Wenk (Commerzbank): We have had many discussions with corporates in Germany. This is the one reason why they are saying, ‘thank you very much, but it is too much of an effort to switch to the new scheme.’

Turner (Fortis): But if a German corporate is going to be able to take a direct debit from a company just south of Naples, rather than wait for a draft, that potentially could open up different opportunities. So moving away from the local direct debit to cross-border direct debit, are we going to see collection factories ultimately alongside payment factories? Of course, this initially will only be valid for a select group of multinationals, but it is conceivable that, in time, these services may be outsourced.

Wenk (Commerzbank): I think for the type of business corporates have, there is a need for close credit control on the payer and I believe that it will be local business. Although it will remain local business, I can imagine that in the same way in which you could create a payment factory, why could you not create a collection factory with multi-lingual expertise which collects debts for you all around Europe, or you do it on behalf of others?

Koenigsberg (JPMorgan): This happens in other markets. You see Mastercard RPPS (Remote Payment and Presentment Service) in the United States is essentially that – a collection factory across 50 states.

Parkinson (TT): But the SEPA direct debit scheme as it stands now is not particularly attractive to the end user, is it?

Koenigsberg (JPMorgan): For a German or Dutch user no, because their direct debit programmes today are efficient. They are very easy to use and do lack bureaucracy.

Taal (ING): There’s the problem. I think you can have a group, a segment of companies who want to collect crossborder for which the SEPA direct debit could be a perfect instrument, but at the same time, you have the majority of the direct debits running in the domestic schemes. I think it will be very difficult to migrate the very efficient, German, Dutch or other efficient domestic schemes, to the new SEPA direct debit scheme. That will be extremely difficult. But in the longer term, it’s a no brainer, we will migrate, there is no alternative.

Parkinson (TT): You’re in danger of having to close down very efficient systems that the customer likes and pushing them on to a system that in some respects may be inferior then!

Koenigsberg (JPMorgan): The direct debit model will need to evolve to a point where that product has the feature and functionality and the value added services that make it attractive. So that consumers and corporates – as well as B2B (Business-to-Business) and C2B (Consumer-to-Business) – are willing to participate. Otherwise we’re going to have an infrastructure that will be underleveraged.

Reilly (Deutsche Bank): The EPC is already developing a separate scheme which would be voluntary as opposed to mandatory. It would apply to B2B transactions where you need a scheme that provides greater certainty and removes the possibility of a refund if a valid mandate is in place. It’s quite likely that it’s going to be introduced in parallel with the standard scheme.

What you don’t want is to have an emergence of local communities within SEPA schemes which make it very difficult for you to move from one local community to another because then we just get back to where we are today. Sometimes, when you talk to some of these CSM’s, they’re starting to mention having the flexibility to provide specific communities with special services and that might make life very difficult in terms of sending transactions from local community to another.

Koenigsberg (JPMorgan): If the five banks round this table get together and decide for every transaction destined for any one of us we want to have special rules and value added services as well as packaging and features and functionality to make us more competitive – and we don’t need to go through a clearing house because of the switch so we can save that expense – that’s fantastic. The bad idea is 20 clearing houses and many PE-ACHs all over the place, then we continue to modify rules and try and impose those rules outside their networks on banks that aren’t even members.

Wenk (Commerzbank): With SEPA, there is another difficulty with relation to e-invoicing because of the delay of the SEPA direct debit, which in turn, relates to the PSD. Given the lack of clarity about the detailed product features, because the discussions are still ongoing, you will see e-invoicing and electronic presentation of bills for payment coming through in a three to four years timeframe, which is, of course, a form of substitute for direct debits. This is, either way, one of the products the European Commission wants the banking industry and other share stakeholders to develop. If that is an attractive payment method on a European scale, it will also be a kind of competitor to the SEPA direct debit system which will take at least another one and a half to two years before it gets off the ground. Thus, there will be competing products, substitutes most likely, in a similar time framework as the direct debit and which will reach the markets by the end of perhaps 2010 or 2011.

Koenigsberg (JPMorgan): Why do we think that by doing all of this work around e-invoicing that the adoption will be any greater than it is today in each individual market, which of any markets, is not high at all?

Wenk (Commerzbank): No, but it’s not idle, it is starting off now.

Parkinson (TT): If I’m a corporate, what am I going to see as I go into next year? What should I be doing?

Taal (ING): Well, if you’re moving to a new ERP system or if you are dissatisfied with the clearing structure or if your organisation is changing, then I think you should have a close look at SEPA and see where you can benefit.

Turner (Fortis): I think the other thing corporates should be doing – and whether that’s now or in a few month’s time – is have a conversation with their bank or banks about a migration path. At some point, they are going to need to try and migrate their payments and direct debits. Which means looking at where the gaps are. So in summary, identify the total impact time involved and implement as appropriate.

Parkinson (TT): Am I’m going to have to migrate because I have to or because there’s a value in migrating?

Turner (Fortis): Well first and foremost, there may well be a value in corporates migrating – particularly on the direct debit side, where we are talking about the potential of setting up collection factories and achieving economies of scale. But secondly, as some institutions do migrate – and especially when we can get the public institutions to migrate as well – volume will move away from the local infrastructure. So sooner or later, you will be encouraged to move whether it’s because the services are better or due to the fact it’s going to be cheaper (as the banks will have a fixed amount of volume from the new infrastructure).

Parkinson (TT): But this is a bit like fixing a problem that I don’t have!

“There’s discussion about the potential demise of cash pools, but unfortunately the legal, fiscal, insolvency, and regulatory requirements have not changed.”

Turner (Fortis): I am not implying the multinationals are ‘broke’, but they still have to check they are not. They need to make sure they can actually benefit from SEPA. So if it’s taking them eight days to get cash and it can be three, they need to check and analyse what value this can bring.

However, I think it depends on whether you are multinational in the true sense of the word or multi-local (for example, somebody that’s got lots of subsidiaries around Euroland). Too many UK corporates borrow sterling when they’ve got Euro assets not working for them. In Continental Europe, this doesn’t happen so much because they’ve got one currency and they realise that they can do something with it.

It’s up to the banks to try and provide as much information as possible to the clients, and provide them with some sort of working outline that they can work to – and if they’re struggling, they can come back to us and talk again. One size doesn’t fit all. There’s discussion about the potential demise of cash pools, but unfortunately the legal, fiscal, insolvency, and regulatory requirements have not changed. I think now we need to support the corporates in the process, given that we’re starting to understand where we, the banks, are going in the process.

Parkinson (TT): So what can I do from day one?

Koenigsberg (JPMorgan): Okay, so let’s get very basic. On the 28^th of January, corporates and financial institutions will be able to take advantage of the new SEPA credit transfer product across the Eurozone market. SEPA credit transfer will provide a standard file format, rule book and a more flexible XML standard. End-to-end usage of XML will be gradual. The conversion of MT and proprietary formatted files to XML for clients will be in place until complete adherence and adoption takes place. Value added services such as low-cost routing to legacy versus SEPA ACH’s will also be attractive as changes occur in the market.

Turner (Fortis): I think in the long-term, SEPA is about the SMEs (Small Medium Enterprises). For example, those businesses who are currently only transacting domestically and who all of a sudden find there is demand from companies in the next country. They will want to start making and receiving payments cross-border. In today’s world, SMEs may find it difficult to get the complex service that some large banks offer. However, in tomorrow’s world, it’s exactly the same payment. In other words, the only payment type will be an SCT (SEPA credit transfer). So SMEs will have to make no changes whatsoever to their system. I think this is what it’s all about fundamentally. It is about creating a landscape that isn’t any different for the consumer, the SME or the corporate.

Parkinson (TT): I can see all that, but what I’m also hearing is multiple systems still in existence, which means you have a much higher cost base as an industry, whilst you have to charge less because you’ve got a political directive to do that. That will be fundamentally unhealthy and will give the industry a problem.

Wenk (Commerzbank): I believe that in the long run, in every banking community, you will see that at one stage or another, the vast majority of the payments will have been migrated. Recently, it has been said that it will take three to five years to complete the migration period. Of course, there will be pressure to get the last users off the old systems, as well as off the old products in most of the countries. Belgium again is very ambitious in that they have already set the end date of 2011. This has just moved somewhat, but there will be discussions as to what the realistic termination date is likely to be for all countries concerned.

Parkinson (TT): If we’re not going to have completion by 2010, what’s the EU going to say?

Wenk (Commerzbank): Civil servants appreciate the fact that you have to migrate within a firm timeframe and it should not take too long because it would otherwise create additional complexity as well as additional costs for all parties concerned. I do not believe that there will be many corporates which will switch immediately from the existing product range they use in the various markets for their various subsidiaries to SEPA. They will require a certain period of time, or it will be on the basis of country by country or subsidiary by subsidiary. It is unlikely that all products or payments will be switched over in one big bang to the new SEPA products. But to add to that, if SEPA does not make sufficient progress, the European Commission will no doubt issue new regulations to ensure a timely completion.

Koenigsberg (JPMorgan): We have to almost get beyond SEPA and I’m sort of getting weary of SEPA in a way. This is domestic European collections and there has to be continuous progress. We’re becoming domestic, the euro in terms of country coverage, will grow year over year, and these products must be competitive or they won’t survive. Legislation’s not going to fix that. I think the European Commission will take a look and say ‘what’s lagging?’ ‘Are countries lagging?’ ‘Are there clearing systems that are lagging, is there demand that’s lagging?’ And then, perhaps, surgically address it.

Parkinson (TT): There seems to be a general agreement around the table that the SEPA products are going to be improved over the course of the next few years and you’re hoping that that will encourage a transition. Now what about transitioning for a corporate, how are you going to offer to help me transition to these new instruments?

Reilly (Deutsche Bank): Most banks will say that they will offer to help. You’d be crazy not to, but what the corporates really need to do is test their banks’ knowledge and readiness and dig into the detail. Can the bank help you to do a gap analysis over what instruments you can use today versus what can you use in SEPA? If you send an IDOC file, can the bank convert it to XML for you, or what about if you send it as a CSV file? The ability of the bank to provide specific answers and demonstrate readiness is key.

The IBAN and BIC (Bank Identifier Code) question is a lot trickier because you can go one way, but not the other. So you can take an IBAN and you can work out what a local account number is, but it’s very dangerous to do it the other way. That will work for some countries, but not for others. So then you may be into acceptable business risk with your customer, but I wouldn’t recommend a creation of an IBAN from other details because you can not reliably get to an IBAN in all instances and establish the right routing. So again it’s really about digging into the detail, going along to your bank and saying ‘Well what are you going to do to help me to migrate, what are the services that you offer?’

Koenigsberg (JPMorgan): We launched value added services this year that basically took IBANs and re-routed them back to BBANs. There are still many of the legacy ACH’s in the Euro zone that don’t take IBAN.

Parkinson (TT): And there is no fix for creating IBANs from BBANs – domestic account numbers?

Reilly (Deutsche Bank): SWIFT were talking about creating a database which would specify all the exceptions, because if you know the exceptions and you know what the rule is, you’re okay.

Corporates really need to… test their banks’ knowledge and readiness and dig into the detail.

Koenigsberg (JPMorgan): Well, this directory under development will still be limited to confirm valid IBANs and their corresponding BICs. The EPC is already aware of issues caused by inappropriate derived IBANs and I think their approach is really right to support straight through processing needs: A fully automated process to request and store IBAN from the account holding bank rather than calculating them.

Wenk (Commerzbank): And the other thing apart from IBAN and BBANs that we haven’t discussed of course is that you will have to adapt your systems for better reconciliation because the information provided by the banks, especially for the customers using file transfer in which they have a full STP. The process of reconciling the account data and the transaction data into their systems will change as well.

Parkinson (TT): Please can we turn to cards? What is the message to the corporate in this area?

Wenk (Commerzbank): The users of pan-European domestic debit products will be able to use their payment cards anywhere, in any shop, and in any restaurant, and every outlet you can think of across Europe. I think that this is the real benefit for a lot of corporates. Firstly, they can standardise the products from a retail perspective. Secondly, it is a way to eliminate the use of cash in various countries, especially since it is still the major cost factor in the payments industry in all the countries involved: the heavy users of cash.

“The users of pan-European domestic debit products will be able to use their payment cards anywhere, in any shop.”

Wenk (Commerzbank): One thing that I would like to say, having discussed a lot of uncertainties and difficulties, is that despite the growing pains there are a significant number of customers who will really benefit from day one of using SEPA. I have met with customers who are waiting to kick off with the system because they have numerous bank accounts and numerous formats and who are convinced that they can benefit greatly from this standardisation. In spite of the many difficulties, we will need to improve the products and processes so as to make them acceptable to the vast majority of users. It needs to be stressed that SEPA will benefit numerous corporates, and I believe that we need to get this message across.

Koenigsberg (JPMorgan): From an intraregional trade perspective, these standards will create a new level of efficiency. SEPA removes country based barriers to create a more seamless experience to enhance trade and convenience. The changes also create a global effect reaching beyond the eurozone, inviting more business to be based in a efficient environment.

Parkinson (TT): Thank you everyone.

Despite the growing pains… a significant number of customers will really benefit from day one of using SEPA.

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