Will the Single euro Payments Area (SEPA) be genuinely useful to corporates? Naveed Sultan, Managing Director, Cash Management Head, Europe, Middle East and Africa (EMEA) at Citi, explains the potential benefits, such as the simplification of bank account structures across the Eurozone.

Naveed Sultan is the Cash Management and Treasury Services Head for Citi’s global transaction services for Europe Middle East & Africa (EMEA). He is responsible for the provision of cash management and treasury solutions to a broad range of customers including multinational corporations, top local companies, public sector and financial institutions. He also serves as an executive director on the board of Citibank, Europe plc.

Naveed has diverse and extensive experience encompassing relationship management, corporate banking, product management, operations and technology. From a geographic standpoint, he has served in a number of countries around the world.

Naveed holds a Master of Science in Management from M.I.T Sloan School of Management, U.S.A., as well as a Master of Business Administration from Pakistan.

What is Citi’s global transaction services cash management strategy in EMEA?

The overarching goal is what we call our ‘client first’ initiative, which is really to put client needs at the centre of the plate. Our success will be driven by the extent to which we embed ‘client first’ in our day-to-day activities. In terms of the business strategy, we think about developing our business around client needs in five ways. These are:

• Managing our existing business.

  We have a strong fact based management discipline to make sure we operate efficiently as a business and maximise the value delivered to our clients. In Europe, Citi is enhancing its domestic capabilities to support domestic flows. This will complement our strong position in the cross-border flows and further address the needs of our customers both domestically and globally.

• Product expansion.

  Determining what kinds of new products and services clients are asking for and developing solutions to meet their needs. We have a strong track record in developing new innovations and business models, eg mobile payments through Vodafone and TreasuryVision, an information delivery solution.

• Target market expansion.

  In many countries where we’ve previously only looked at the top tier clients, we have recently focused on broadening our reach to other customer segments, eg small and medium businesses.

• Alliances and Partnerships.

  This is a critical component of our strategy as it enables us to be more responsive to the market place by delivering comprehensive solutions while allowing us to tap into new distribution, product, processing opportunities.

• Investment in Technology.

  Citi has invested significantly to ensure that our cash management operating model, infrastructure and platforms are consistent domestically, regionally and globally to provide a seamless and efficient experience for our clients.

What sort of an impact is SEPA likely to have on this strategy?

We see the development of a Single Euro Payment Area as a fundamental market change. SEPA has the potential to transform the way in which all the players do business. The biggest thing that we see happening is a reduction in the friction that currently exists when businesses and people are trying to make cross-border payments within the Eurozone. The existing directives have gone some way towards reducing the friction, but the emergence of SEPA is likely to get us much closer to something resembling a domestic market for payments. It changes the landscape for each of our client segments in slightly different ways:

• For governments, we see it as very important they embrace SEPA in their own payments operations, because their participation can help the adoption of these types of schemes. In doing so, they will also gain greater efficiency in payments and related processes.
• For corporates, SEPA allows for a varied degree of centralisation, depending on their business strategy and evolution of the treasury and commercial model.
• For financial institutions, we see SEPA as being both a challenge and an opportunity. The significant and constant investment needed to build and maintain a payments infrastructure means that the arrival of SEPA represents an opportunity for banks to re-evaluate their business models and decide whether future investment in payment products and systems is necessary and sustainable. We see SEPA heralding a wave of outsourcing of transaction processing to a few key players.

Will SEPA be genuinely useful to corporates?

We believe so. At the moment, if someone wants to do business throughout the Eurozone there’s still the need to have domestic bank accounts in each country. SEPA isn’t going to completely eliminate the need for domestic bank accounts; however, we do think that over time the introduction of SEPA will enable companies to simplify their account structures. They’re obviously going to benefit from the economics of making SEPA payments compared to the existing ways of making payments within the Eurozone.

Having said that, there are some other things that have to fall into place. Other types of harmonisation are taking place in areas such as central bank reporting and tax environments, and these things together with SEPA will help corporates operate more efficiently within Europe. SEPA is not the whole story, but it is part of a general trend towards harmonisation that will enable corporates to act more as if the Eurozone is a single country.

What is Citi doing in the financial supply chain area?

In the corporate space, treasurers are becoming much more interested in what they can do to influence the financial supply chain, because there’s a great deal of value locked up in supply chains that can potentially be unlocked with relatively minor modifications. Most people are still sending and receiving purchase orders and invoices in paper and processing them manually. In these days of globalisation, where companies’ operations and suppliers are scattered around the world, it is possible to cut down a lot of the inefficiencies in the supply chain by making the connectivity between the parties in the chain electronic.

This is something that we are trying to help out with in a couple of different ways. One example is in the supplier financing area, which has been around for a while but which is getting more focus now. Corporates can basically use their credit rating to help out their suppliers. The vendor receives payment sooner but the buyer still pays at the same time that they had agreed within their commercial terms. Another example is in terms of providing electronic banking services that interact with our customers’ ERP and TMS systems, to give them visibility of what’s happening. The centralisation of treasury activities has made it easier to see where the efficiencies and inefficiencies are in the financial supply chain, so you’re able to get much greater visibility over where you can introduce an automated solution rather than a paper based solution to speed up the process.

We do see a growing revival of interest in e-invoicing solutions. While e-invoicing is not part of the core SEPA agenda it’s something that the regulators in the Eurozone are very keen to see take off. It’s an ideal that’s been around for a while, and during the dotcom years many a player burned their fingers in trying to launch e-invoicing solutions a little ahead of their time. But now we see a revival in interest in e-invoicing solutions, and that’s something that we are looking at very closely. Standards have still got a way to go before these solutions become widely adopted, but we see that as part of the trend towards harmonisation and standardisation of which SEPA is also a part.

What trends are happening in your clients’ markets?

Let me start with the public sector market. What we see amongst the governments is a desire to learn from corporate best practice. We’ve been able to make a pretty interesting parallel here between a multinational company and a government. A multinational corporate has got a head office and sometimes hundreds of subsidiaries in different countries. Structurally, a government tends to have a number of central departments and then hundreds of agencies which are satellites of those central departments.

We’ve been looking at what’s been happening in the corporate market over the past 20 years and what governments can learn from that. For example, corporates have been centralising their treasuries, ie taking the treasury function out of the local subsidiaries and organising it centrally. That’s also something that we see has merit in the government market. Corporates have also been implementing TMSs and ERP systems to get centralised control over the full span of their activity. The same types of systems have applicability in government. The third thing, and perhaps most important, is the establishment of shared services centres which provide services to the whole organisation. We see a big trend in government towards the creation of shared service centres. We’ve been trying to encourage much more dialogue between the best practice practitioners in the corporate market with the people in governments who are trying to move in this direction, and I think it’s going to be a very fruitful approach.

The trends in the corporate market are also very interesting. Treasury centralisation is one background trend, and that’s pretty well understood by most of the people in the market. The trend behind this is really globalisation. Globalisation means that you can deconstruct an organisation and put the pieces in the most appropriate location, irrespective of geography. We’ve seen the emergence of China as the factory of the world, India as the IT centre of the world. This trend hasn’t run its course yet.

There’s a possibility that treasury centralisation might go in another direction. You might actually start to see the decentralisation of some functions, because of the greater interest in the supply chain. If you want to maximise the supply chain it can be very useful to have the local knowledge, with people on the ground in certain places. What enables this to happen is technology.

What we are seeing with financial institutions is a slight change in mindset. Financial institutions are very self reliant, but over the past couple of years they’ve also been looking at what they do themselves and what they outsource. Financial institutions are increasingly looking at core functions, for example payments processing, in the context of SEPA and the costs of keeping up with the regulations, and are beginning to ask themselves whether or not they really should have the infrastructure for processing payments. Every financial institution needs to offer payment services and transaction processing services to their clients, but that doesn’t mean that they have to run everything by themselves. A number of banks are starting to look at the outsourcing of the technology involved in transaction banking.

What developments are taking place in terms of market infrastructures?

There are some interesting developments around the world. Historically countries had high value clearing systems and low value clearing systems. One of the clear trends is the consolidation of these. In the UK, for example, we have the low value BACS system and the high value CHAPS system, but we’re now developing something called Faster Payments, which is a payment mechanism which will get payments to the beneficiary within 15 seconds. In the fullness of time we anticipate migration from the BACS and CHAPS systems towards the Faster Payments system. And that same trend is happening around the world.

The other trend in the SEPA area is the consolidation of national ACHs, because ultimately within the Eurozone we’re only going to have a very small number of clearing systems. There’s currently a lot of redundancy in the number of clearing systems that we have within the Eurozone and in order to make Europe a more efficient place to do business that needs to change.

What impact is the economic climate having on your clients?

The financial markets are very buoyant at the moment. All of the major economies around the world are doing well, and there’s an enormous amount of liquidity in the system. When things are going well in this way, the competitive pressure is to go for growth. Efficiency is the goal in tight markets where everyone is going after the same pie, but in today’s economy you have massive middle classes emerging which means a lot more consumers. The nature of competition is to capture that growth.

We think this has an implication in terms of what treasurers focus their time on. What role can the treasurer play in helping companies take advantage of the opportunities around the world? We think that the treasury function is part of the engine room of the company, and the way in which that is set up can either be an enabler of growth or a constraining factor. So we are starting to talk to treasurers about what they’re doing to support their companies in their growth plans in addition to continue to look for efficiencies.

What developments are happening in the area of mobile payments?

We have a vision that mobile payments will become ubiquitous in a relatively short space of time – maybe in three to five years. If you look around the world, there are scores of initiatives going on in this space. In South Africa you have a bank called Wizzit, fully based on mobile telephones, which is becoming very successful. Then in Kenya, you have the Vodafone scheme called M-PESA, which was launched a couple of months ago. The takeup of mobile telephones in emerging markets is enormous, partly because the fixed line infrastructure isn’t there and partly because of the convenience and cheapness of putting in place the mobile infrastructure. So it’s been natural in those countries to develop banking solutions and payment solutions based upon the mobile telephone.

Citi is very engaged in the mobile payments space. We’ve created the world’s first mobile based remittance platform in conjunction with Vodafone, which is going live at the end of this month between the UK and Kenya. In the US we have also launched Citi Mobile, which is an electronic banking platform on the mobile telephone.

When you think about a treasurer and the kind of technology that a treasurer interacts with – TMSs, electronic banking systems, ERP systems – all of these systems are very deskbound. But the treasurer has to be out and engaged in the business. So we also see a latent need to enable treasurers to do their jobs on the go. So far we haven’t seen the development of mobile solutions in this area, but it’s something that we’re very interested in – what kind of tools could we put in place to enable treasury staff to do their job on the go? I think this could be an interesting area of innovation for the future.