Cash & Liquidity Management

Single Euro Payment Area (SEPA) – the implications for corporates

Published: Sep 2006

Treasury Today hosted a roundtable of payment experts to talk about the Single Euro Payments Area (SEPA) and what it holds in store for coporates operating inside and outside the Eurozone. Will corporates move to SEPA systems for their domestic business or will they simply look at SEPA in 2008 as the products to be used for cross-border payments?


Portrait of Frank Taal

Frank Taal

Global Head of Product, Channel & Solution Management

Portrait of Philippe Lambrecht

Philippe Lambrecht

General Manager

Portrait of Maurice Cleaves

Maurice Cleaves


Portrait of Geoffroy de Schrevel

Geoffroy de Schrevel

Head, Payments Market

Portrait of Gianfranco Tabasso

Gianfranco Tabasso



Portrait of Richard Parkinson

Richard Parkinson

Managing Director

Richard Parkinson (TT): What do you think will be out there for corporate customers at the beginning of 2008?

Frank Taal (ING): There will definitely be something because everyone is working very hard to get new payment systems to the market. But, it will be immature because the banks have developed the existing systems and products over the past 30 or 40 years. The big banks will be ready but I am less certain about some of the smaller players. To change to a totally new system in one or two years is very ambitious.

There will be systems and there will be products but what the market take-up will be at that time is difficult to predict. There will be early adopters perhaps some governments and governmental bodies who will take the lead. I hope they will do, actually, because they should and gradually we will build and improve and enhance and try to get more customers and users on board. I think that will be the process.

Geoffroy de Schrevel (SWIFT): The first thing to say about 2008 is that there are going to be a large number of banks capable of issuing credit transfers and direct debits within the SEPA scheme. That is less than 65 weeks from now, so it is very short. The European Payment Council (EPC) has come up with the rulebooks and, although one might disagree about the extent and the beauty of these, and the completeness of those rulebooks, at least they are there. To put 70 banks around a table in Europe and get them to agree on something that will transform the industry and actually deliver product rulebooks is a major achievement.

One of the key challenges everyone has is how long the coexistence of the current systems of the legacy products and the new SEPA products will last because coexistence is going to be expensive for everybody. The shorter this transition period the better, but the number of legacy systems to be adapted at banks and market infrastructure, at corporates, at government, institutions etc, etc, is huge. I think that one of the biggest question marks is how long will this transition period last and how much is it going to cost the community at large?

Gianfranco Tabasso (EACT): I agree, and maybe I should say something from the corporate side. The basic question is will this be a big SEPA or a small SEPA? Will corporates move to SEPA systems for their domestic business or will they simply look at SEPA in 2008 as the products to be used for cross-border payments?

There are discussions going on between the EACT and the EPC about what can be added to the core schemes to make them more attractive but whenever we say we want something else the famous words ‘AOS’ – additional optional services – comes out. They say “oh don’t worry it will be there, the banks will be offering it.

From left to right: Gianfranco Tabasso and Geoffroy de Schrevel
From left to right: Gianfranco Tabasso and Geoffroy de Schrevel

It will not be in the basic scheme but banks would be offering it as AOS”. It used to be described as ‘value added services’ but for some reason it has been changed to ‘additional optional services’ so as to make it clear you have to pay for this option if you want it.

So this leads to another big question which is about pricing. Corporates will not expect to pay more for the same or similar services simply because we move from an old different or legacy standard to an XML system. They will expect to pay more if they get something more in terms of service, which potentially XML and the new network TCP-IP will give compared to the current situation, but maybe not immediately.

From left to right: Richard Parkinson and Philippe Lambrecht
From left to right: Richard Parkinson and Philippe Lambrecht

Philippe Lambrecht (KBC): We are likely see a slow adoption in 2008 because I think that the common belief now is that the SEPA products described in the rulebooks are more of the lowest common denominator than best of breed systems. For a lot of corporates, adopting SEPA instruments as they are now, and will be in 2008, would mean a step backwards for the quality of information that is provided.

Then you go to the big discussion, what are the additional optional services? Is that a competitive space or is that a co-operative space for the banks?

The fact that you have standards that allow much more room to put commercial data is not going to help if every bank is doing it differently. There is not a single bank in the world that is covering all their customers payments end to end (from ordering party to beneficiary) and not all of the banks will be supporting all of the additional optional services that will be offered by some of the regional, global and smaller players.

The big issue is what will happen on the infrastructure side. Once we start embarking on necessitating additional optional services to make reconciliation possible, in replacement of data components in national systems that are well embedded, we will have made it less attractive for the corporate to switch to the new SEPA infrastructure. This will slow down the adoption by corporates of SEPA solutions.

Parkinson (TT): It doesn’t sound very attractive does it?

Taal (ING): To get this thing running we should focus on corporates and institutions who can benefit from a European SEPA solution. Companies selling cross-border today.

Maurice Cleaves (JPMorgan): The real interesting thing here is on the direct debit side, because if you look on the payments (credits) side, I just see the payments side a much simpler process to get to 2008 and much easier to get to the end point. But if today you want to make a direct debit to Germany from Belgium you have got all sorts of complexities of systems and interfaces. It’s not just the scheme, it is also legal and regulatory barriers so the hurdles we have to get across for 2008 are considerable. So a new solution to this would be good.

Lambrecht (KBC): There are still quite a number of hurdles in the direct debits solution that have to be addressed. When we talk to some big direct debit issuers in Belgium they are a bit uncomfortable with the fact that a move to the SEPA scheme, as defined, will mean a move from a very cheap, next-day value system with excellent reconciliation and only four days for complaints to a system where it is going to be more expensive and it will take longer to get the funds and you have up to six weeks to ask for your money back. Plus mandate handling which is another big issue.

Tabasso (EACT): Yes, I agree that the problem is the direct debit rulebook being so different to every other scheme and most national schemes offering better conditions and better terms. Will the large billers adopt it domestically? Or, as long as the national schemes are in place, will they stick to the domestic schemes until they see that the EPC scheme becomes more similar to what they are using today?

There is no room for discussion today. The rulebooks are frozen and I understand that if you want to get systems in place in 2008 you cannot keep changing the formats. But I think that work should go on continually so that a number of features which are not currently in the basic scheme will be adopted as standard and not as optional additional services.

SEPA really only covers the inter-bank space and the use of ISO 20022 standards are being recommended for the corporate payment initiation and the bank reporting. We have to see if the banks will follow this recommendation and change what they have. Today, every bank has its own payment standards and there are big differences from bank to bank, country to country. Let’s not forget that for reconciliation and improving our efficiency bank reporting is even more important than payment initiation.

We need the information to come to us in a certain way, in a unique and uniformed way from all the banks in order to do reconciliation. We should also agree that whatever is considered additional optional services should be standardized. We should design standards for the services which are considered optional so the optionality will be whether a bank does or does not do this service not how it does it. We don’t want to end up with 10, 20 or 100 different proprietary systems.

Lambrecht (KBC): The commonality of those additional optional services, or at least the basics that will allow reconciliation, have to be common to all banks.

Cleaves (JPMorgan): I think most of the additional optional services should be geared around what other things can be done outside of that particular payment, such as supply chain finance and additional reporting elements. Those kind of things which are really competitive. If you are not able to use the existing payment information to do that then you do need a standard but we all know how some standards are established and we all know how standards evolve. We are in danger of evolving these additional optional services either industry by industry or country by country so that we finish up with multitudes of these additional services.

The XML nature of the payment may assist in this in that the additional optional services can be serviced by a data dictionary type approach. So you could have multiple ways of embedding information within the payment message, which could be preserved as standards for a particular industry, a particular type of activity or a particular country because it is in the data dictionary. As long as you use XML it can be machine readable all the way through.

So we finish up in 2008 with just the basic and then the thrust of the additional optional services will come after that.

Parkinson (TT): Can we focus on direct debits, because what is going to be in place in 2008 is a scheme that is being described as based on the lowest common denominator with lots of features that are not going to be very attractive. So, if I am a corporate, I am just going to stay with what I have got now and not move my domestic business to a SEPA scheme.

Taal (ING): Although, in the beginning, the product might be perhaps in some areas not completely compatible to the current product, on the other hand there is an upside. There are markets in Europe where you don’t have a sophisticated system at all, where there is no direct debit introduced so far or only in a very immature stage. There will be countries or perhaps industries where SEPA is definitely new and also innovative compared to what they do today.

From left to right: Maurice Cleaves and Frank Taal
From left to right: Maurice Cleaves and Frank Taal

de Schrevel (SWIFT): We should avoid falling into the trap of thinking everything is perfect in Europe right now. There are a number of countries where corporates are pretty happy with the direct debit schemes, but in other countries the banks are starting to say this direct debit scheme is not what we want for the future.

The simple fact that the new SEPA products will be based on open global XML standards is going to give the corporate a tremendous improvement in bargaining power with respect to their banks. They will be much more capable of bargaining with their banks on a number of services. I think that is provided by SEPA.

In terms of standards. On 12th July ISO published the ISO global standards for direct debit and credit transfer in the bank to bank and the corporate to bank space. Standards for reporting and cash management will follow later in the year. The Implementation Guideline is also available. So it is there and it is very important that we keep telling the market it is there. Corporates need to know that, software providers need to know that, banks need to know that. We all need to be a bit better at communicating and get ready for testing.

Lambrecht (KBC): I tend to disagree. But I agree with your first point. For some countries there will be huge benefits from switching to SEPA. For others there may be no benefit. But, definitely XML is the future. How long is it going to take before it is going to be adopted in all the systems in the banks? I think we’re talking about a very long period of time.

I sometimes get a bit of the feeling that XML is being hyped like EDIFACT which was going to allow everything and then never got adopted.

Indeed, you can start programming based on the rulebooks but, again, based on the rulebooks as they are now; hence not based on the edition that will be dealing with the bank to corporate space and that is unlikely to cover everything that is required. If I talk to a corporate they are asking me: “What will happen with my structured message as I have it now in Belgium, in the Netherlands; what is going to happen with my Tag86 that I have at this point in time in Germany?” These things are so embedded in their ERP systems that the clear benefit for a corporate to switch and to get away from that to a pan-European standard will have to be proven. They will not just do it because we are creating a new standard. It is our responsibility as an industry to make sure that this happens. But I think in 2008 there is going to be slow adoption.

Tabasso (EACT): XML by itself will not sell SEPA. If it comes with a service, with a product – a banking product – which is better than the current ones then, yes, it will be adopted. But this doesn’t seem to the case right now and certainly not in 2008.

There is another problem. Not only the issue of mandates for direct debits and so on but, at the same time, we have to use IBAN and BIC. A major worry of corporates using b2c direct debits is not so much the return rate as the technical rejects due to having the right IBAN. I hope we will eventually not have to specify the BIC. I hope the banks will find a solution to translate the IBAN into a BIC. They are the only ones who can do it. So I don’t think we will put both the IBAN and the BIC but just the IBAN. But to get the right IBAN for all our clients from the banks is going to be quite a job.

Parkinson (TT): So there is going to be slow adoption but, if I understand it correctly, the Commission wants the existing systems to be disbanded by 2010?

Lambrecht (KBC): Nobody in the industry believes that. Even the commission doesn’t believe that is feasible. Initially they said existing national systems should be discontinued by the end of 2010. Now they are saying by the end of 2010 there should be critical mass on the pan-European systems that will allow disbanding of the national systems. I think the banking community has been very straightforward, from the start, that total disbanding by 2010 is not realistic.

Parkinson (TT): But if I’m a major utility using a domestic direct debit system to collect my bills and I’ve got to start getting IBANS from all my customers before moving to a new SEPA system – am I going to do it? It is hard to see how the new systems will ever get critical mass?

Cleaves (JPMorgan): There has to be some benefit for the upheaval that corporates will have to go through to make the change and I think the danger is having this interim step of multiple systems interlinking before we get to the ultimate – sometime after 2010. The first phase is making sure that the BICs and IBANs are always there and available.

The second upheaval is just the pain of trying to make some systems interoperable across Europe, because that will be the element where those transactions are passed but then the next phase of that will be to disband some of those systems. So, for the direct debit piece anyway, we’re probably in danger of having two major steps until we get to the ultimate.

Parkinson (TT): And so, just so I understand this from a corporate point of view, as of the beginning of 2008 there will be some systems that can handle pan-European cross-border direct debits. I will have the ability to reach anyone, anywhere?

Taal (ING): I don’t know whether you will have 100% reachability to every bank at that time.

Parkinson (TT): But that’s what the Commission is asking for?

From left to right: Frank Taal and Gianfranco Tabasso
From left to right: Frank Taal and Gianfranco Tabasso

Taal (ING): Yes – even though most banks will be ready it remains to be seen if every bank will be reachable, since there is so much work to be done.

Lambrecht (KBC): If you look at the large banks in most of the countries in Europe they will be there. I think there is no doubt about it. If you talk about savings banks, or if you talk about some niche banks in some countries, they may not be there but their customers may not be overly concerned by the fact that they are not there. They may not even notice it. Most of the banks that corporates are dealing with will be there in January 2008, without a doubt.

Parkinson (TT): So, where does that leave Mr. Corporate as he looks at all this? He knows that the new clearing mechanisms are coming down the road in 2008 but the exact shape of them is not certain. Which banks will belong to which system is not certain. And, he is finding it difficult seeing the big gains that will encourage him to be thinking, I’ve got to be there, I’ve got to move all my payments onto these new SEPA systems.

Lambrecht (KBC): I think basically the corporate is going to look at: “What is my investment cycle? Do I need to change my systems now? If I don’t have to invest now, maybe I’ll just keep on doing what I have been doing if it is working fine. If I am dissatisfied with some pieces, I will look at it. Can I change it? And if I change it, do I have to do it through a SEPA-compliant instrument, because it is adding value or do I do something else?”

“If I want to start up a shared service centre that I haven’t got yet, what is the benefit of adopting SEPA’s schemes as compared to having connectivity with 25 different national standards?” This is the type of thinking that you will see.

For the corporates, I think it is essential to know what is happening in the payments industry and to try and understand what the ultimate objectives are. But, first and foremost, to try to define what is in there for me now?

Cleaves (JPMorgan): The other thing that the corporate should be well aware of, because banks should have told them, is that you’ve got to get your databases up-to-date with the BIC and IBAN. And, of course, as Gianfranco already said, only 2-3% of corporate payments are cross-border.

So, what is the advice to a corporate who once in a blue moon makes a cross-border payment, where none of the national clearing systems are going to a system of using BIC and IBAN? Is he going to go out to all his counterparts and say can you make sure I’ve got your BIC and IBAN information? Or is he just going to carry on doing what he does today?

I think the ‘carry on doing what you do today’ is a little bit dangerous. Because as the national schemes migrate across, the unknown is how quickly will they migrate just to a single system or to a separate system which is all SEPA-compliant and therefore BIC and IBAN standard? So the first thing they must do, is to make that decision to go to BIC and IBAN standard and then start collecting BIC and IBAN numbers and start using them in their regular activity.

I think the other area corporates should get involved in is being involved in the standards setting and in the dialog as what are the services that they really require because the messages that come back from the corporate community are different and they are also fragmented.

Parkinson (TT): What about cards? We have talked a lot about direct debits but we have not thought much about cards. Obviously for some corporates that’s quite a big issue and it is also seen as the payment method that will replace cash over time.

de Schrevel (SWIFT): In the past, if you had a card carrying a certain brand the transaction had to be processed by the dedicated specific network. A cross-border transaction, for instance, a cross-border MasterCard transaction always had to go through the MasterCard network, authorisation, and inter-bank clearing. This cannot be the case anymore. So what we are going to see is that I can send that transaction to any network, they will be ready to process it. And so you really have flexibility in that sense of looking at the network or the process that can give you the best choice.

Parkinson (TT): So I would split my transactions out and send via any network I choose direct to Visa or MasterCard and cut out the ‘merchant acquiring service’ or whatever you call the service, the intermediatory service that I used to use?

de Schrevel (SWIFT): That is a possibility. The processing for MasterCard and Visa is really coming into the competitive space. They can now compete with any local processor owned by their own members.

Taal (ING): There will be a tendency that domestic systems, currently in the various markets, will be replaced by two/three major global brands. This is also a concern of the European Commission. But I’m afraid that the United States will end up ruling Europe if we can’t get this to work. Looking at some of the comments of the bankers giving a report on the EPC’s work, they felt it was impossible to build a European scheme. The United States might therefore end up ruling Europe if we can’t get this to work.

Tabasso (EACT): What about the telecom’s companies? Could they enter into this arena in the retail end of the payment market unless legislation forbids them from doing this? The new legislation seems to allow new players to come in.

Lambrecht (KBC): Legislation will not forbid them to do so. Legislation is only going to tell them that, as a payments service operator, they’ll have to comply with all the regulatory and legislation bits and pieces that banks have to comply with. I think that most of them at the moment realise what is the cost of doing that. It’s so prohibitive that they don’t want to be actively involved in the payments business.

Cleaves (JPMorgan): The other thing is the high cost of fixed infrastructure that you’d have to put together to be able really to operate those telephone schemes as a payment infrastructure versus the size of the transaction that’s going to go through and how much fee you could charge. You’d have to get it to SMS type proportions to make it valuable.

Taal (ING): There is also the same problem as with the debits cards, the marketing costs to convince the broad audience that it is reliable, that it is user friendly. It is not only the actual systems hardware and software costs but especially the branding and everything that goes into making it a generally accepted system.

Parkinson (TT): How will everything we have been talking about impact the structure of the industry. I’m hearing about the need for investment and the Commission is insisting on domestic level pricing for cross-border payments. This must have an impact on who survives? Could you share your views as to the shape of the banking industry going forward?

Tabasso (EACT): Fewer banks.

From left to right: Frank Taal and Philippe Lambrecht
From left to right: Frank Taal and Philippe Lambrecht

Taal (ING): I think we will see a huge consolidation. Of course over the past couple of decades if you look to the Dutch market there have been lots of mergers. Let’s say 90% of the market share is with three banks. You will see the same cross-border.

Lambrecht (KBC): I think we will see the emergence of a number of large payments processors in Europe, that is one of the major changes that I see in the industry, not necessarily a large reduction in the number of commercial banks.

Tabasso (EACT): Well, the name of the game is specialisation. You have to concentrate by specialty and one wonders how far along the road of outsourcing a bank can go. At the end they only retain their name and their sales people. Everything else has been outsourced!

de Schrevel (SWIFT): Processing payments will be transformed. One can hardly see how SEPA will deliver its ambitious benefits in terms of cost reduction and higher efficiency if payments are being transported and processed tomorrow in essentially the same way as yesterday.

Parkinson (TT): What are your closing recommendations to somebody who has been reading this?

Lambrecht (KBC): I’d want my customers to have a very watchful eye about what is happening in the market and try to see where the value is for them in the changes that we are facing. I believe that increasingly the quality of the services is going to be the major key buying factor for a corporate deciding what bank they go to because the competition will be a lot more open. The decision will be less dependent on the size of the bank and where the branch is located as we gradually move to a more pan-European landscape.

Cleaves (JPMorgan): I would say that there may be some scepticism as to whether SEPA will actually deliver any benefit. I think SEPA is an evolution not a revolution. What we have currently got as what might be called SEPA practices is only the first stage to what turns out to be the future. The banking industry has got a lot of work to do and there is a lot of money to be spent but hopefully a single euro payments area will be of major benefit to corporates in the long-term. It has started, it is moving. Whether it is moving fast enough is open to debate but it is moving and the benefits will come.

Taal (ING): I would like to add to that that I think it takes two to tango. We will see the first products coming, entering the markets in 2008 but to make them, to finalise them, we need a very good co-operation with the corporates. If we are to really make it fly. There will be ‘quick’ wins. There will be early adopters. There will be situations in 2008 in which you have real benefit in switching to SEPA products but, making it a real transition that it is beneficial to all parties involved will imply that banks and corporates cooperate to make that happen.

Tabasso (EACT): I couldn’t have said it better myself. I think that we have to give corporates the impression that SEPA is not just a one step adventure. It will be going on after 2008 and after 2010. Maybe taking a bit longer than originally planned in the original EPC plan but the direction is that we are moving on and co-operation is the name of the game so we don’t waste time, money and investments. We must keep an eye and try to define what should be within the standards and what should be left to non standard open competition.

Parkinson (TT): Thank you.

Thanks again to our participants

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