Bank Interview: Tony Richter, HSBC Group

Published: Nov 2010

Regarded by EU policymakers as a further step along the path to full monetary union, SEPA, or the Single Euro Payments Area, has yet to capture the imagination of most corporates. With the European Commission expected to announce an end-date for full migration in the near future, we speak to Tony Richter, Head of Strategic Business Development at HSBC, about the obstacles and opportunities the scheme presents for corporate clients.

Tony Richter

Head of Strategic Business Development

Tony Richter joined the HSBC Group in 1979, after graduating as a Bachelor of Arts in German and Economics in England. More than 15 years of his career have been spent outside the UK in Asia and Continental Europe.

Following various management positions in both Corporate and Correspondent Banking, Credit and International Planning, Tony moved into Global Payments and Cash Management, Europe in 1998. His positions have included roles in project, product and sales management.

Current responsibilities are for strategic business development across the European Region, including the Single Euro Payments Area (SEPA) and Payment Services Directive (PSD) Programme.

How has the market responded to SEPA so far?

The first thing to note – and here we’re talking about SEPA Credit Transfers – is that the 8.8% or so take-up in the market as a whole is largely due to fact that corporates and businesses are taking advantage of the cross-border play on prices. This is absolutely understandable and I guess that would be mainly around cross-border supplier payments being switched from previous ways of making those payments to the SEPA Credit Transfer.

The other thing that we are seeing – which is more on a domestic front, in terms of volume – is the big news around the French public sector, which is moving quite rapidly to SEPA Credit Transfer. We know that their target is to have 80% completed by the end of 2010 or the beginning of 2011. Certainly, we can verify that in terms of the through-put that we are seeing from our customers in France.

Are there others following the French government’s lead?

We are a large institution in France and not so large in some of the other countries. Looking at some specific countries, though, we are seeing that our customers in Belgium in particular are migrating to SEPA. This is in tandem with the national plan to have the credit transfers migrated by the end of this year. Spain and Malta are also actively migrating. Certainly, looking at our customer base, we are holding their hands through this migration and that is now well advanced.

Obviously the UK is a very large market for us. We have been surprised – right from when the SEPA Credit Transfer first launched – by bigger than expected demand among our retail customers there. They are taking advantage of SEPA in order to make payments relating to their European properties and other European responsibilities.

Finally, we are now receiving substantial numbers of RFPs across the board, largely from multinationals. These are not just European multinationals, incidentally; we are getting RFPs from US and Asian multinationals, too. These multinationals are drilling down and asking, “What is it you can do for us?” Their RFPs are covering both SEPA Credit Transfers and, where relevant, Direct Debits, too. So we are seeing a lot more activity on that front and there are some interesting insights coming from them on what corporates are looking for.

You mentioned SEPA Direct Debits. What is happening there?

There is activity in terms of RFPs. We had not, until very recently, seen any major movement of migration by SDD creditors, ie the large utilities and telecoms companies. The reason for this is that until now not all banks have been reachable in order to debit customers’ accounts. That was only compulsory from 1st November 2010.

However, we are now seeing some movement, such as a major French customer which has now decided to move to the SEPA Direct Debit. This is not a customer of ours, but we will be on the receiving side of that. It is an interesting indication that despite some issues we still have around SEPA Direct Debits, there is movement in the market.

What benefits have your customers seen from SCT so far?

In the cross-border space, price. I think, also, they are benefiting from the certainty that the SEPA Credit Transfer gives customers because it is defined in the rule books and supported by the Payment Services Directive (PSD) exactly what customers can expect and how their payments will be treated. It is that certainty and consistency of treatment across the whole region that is of benefit.

There are other specific benefits too. For example, in Malta the SEPA Direct Debit will represent a new direct debit market. Until now, all direct debit payments have been what they call ‘on us’ transactions – where both the debtor and the creditor have accounts in the same institution. What the SEPA Direct Debit will bring to Malta is the ability for a creditor to have his account in one institution and the debtor to have his account in another. It will open up that market completely.

Over and above that, other benefits our customers see from SEPA include reduced maintenance and administrative costs as they look to simplify their account structures. That should reduce their need for reconciliations and also reduce the number of queries on their accounts by virtue of the fact that there are fewer of them.

I think the other major area – and this is not specifically SEPA – is reducing funding costs within our customers’ treasuries. With SEPA there should also come more efficient liquidity management. A treasurer will be able to know where his balances are and be able to manoeuvre those balances within the organisation as required in a less complicated way than he has been able to up to now. In other words, optimising the use of his surplus cash. It is early days, but we are beginning to see these advantages.

In short, the first step is ‘let’s migrate’. Step two will be to take the benefits of rationalising structures once the initial move has been made. It really depends on the type of customer – whether he is centralised or decentralised in terms of treasury, and the size of his international operations across the region.

What sort of obstacles do corporates face when migrating?

As far as SEPA Credit Transfers are concerned, I’m not seeing a huge number of obstacles in terms of the product itself. I do think though that in a number of communities, we are seeing a requirement from customers for additional information, which treasurers may be getting from their legacy systems today and which is not strictly part of the SEPA rule book. So we are having to do some extra work on the ‘value added’ features that customers want to see in order for them to continue to do their business modelling, cash flow forecasting, liquidity management, even reconciliations, in-house in the same sort of way that they have done until now.

In terms of the direct debit, there are a couple of issues. In Germany, in particular, there is still the legal issue of whether existing mandates can be used in the SEPA environment without the need of any new customer involvement. This issue has dragged on for a while and, as far as I am aware, it has not been resolved yet. Obviously, it is very important for the German migration plans. There is nothing to stop the banks from being reachable – the question is whether the creditors will migrate and they are the ones who will need to work closely with the debtors in terms of switching the mandates across.

There is also an issue in France and Italy over the paper mandates, which are seen by some customers as a bit of a barrier. They would prefer a dematerialised mandate – an e-mandate or digital solution. Communities are coming together to discuss the issue. The European Payments Council (EPC) recommended such a solution and we are aware that some software houses are now actively selling software which would provide digital mandates, but I think this is something that the whole market would need to move to because it would be difficult to operate both paper and digital mandates in the same space.

Ideally, there would be a mass migration to the digital mandate. Some communities will want this; others will be satisfied with the paper mandates. It needs to be looked at as the SEPA Direct Debit takes hold. In fact, it is actively being discussed in France by all stakeholders in the community.

What is the significance of the EC’s expected announcement on the SEPA end-date?

We understand that the announcement has recently been delayed, but it is a highly significant event and we are keen to see the announcement. It’s a substantial piece of legislation and needs to be right because it is a major step. It will provide focus to all stakeholders as they move from their legacy into a new euro payments environment. The draft is expected to give a deadline for SEPA Credit Transfers 12 months after the regulation comes into force, whereas for direct debits it will be 24 months. The key question then; is how long the regulation will take before it is approved in the European parliament?

I think the banks have a very significant role to play in helping corporates through the migration period. We have been in ‘build’ mode for some time and we have had our sales force and others out talking to customers and generally trying to spread the message about SEPA. We see that activity will be increasing quite significantly once the announcement is made.

What advice are you giving clients in light of the impending announcement?

It depends on the type of customer we’re talking to, but generally what we are saying is that by now we hope that most of our customers are in a position – if they are internationally active – to really know how many customers and suppliers they have across the region and to know how many euro bank accounts and bank relationships they have – and then to be gathering statistics on the volumes of payments and collections that could become SEPA.

There is also work to do internally around automation of processes, looking at liquidity structures if they have them in place already or if there is an opportunity to introduce them. The big factor really is the degree of treasury centralisation that may or may not have already taken place and if there is a cultural desire to move in that direction because SEPA would lend itself to a more centralised treasury function.

In a nutshell – they should analyse payments traffic; look at the formatting of their SEPA payments now to make sure they have the BIC and IBAN in their database now for their business partners; and consider the systems’ analysis and the degree to which they wish to centralise their treasuries.

At the same time, with this EC draft regulation expected at any time, treasurers need to keep an eye on the outside world to see when that regulation comes out and what it contains.

Do you believe the European Commission will release a PSD Mark II to iron-out the problems with the original directive?

We know that there will be a review in 2012 and I guess it depends on what comes out of that review. A couple of things that we are seeing in the market – and I think this is reasonably common in the banking fraternity – is that not all banks are as yet fully applying, as we see it, the interpretation of the PSD in terms of the ‘full amount’ principle and the value dating on payments, insofar as a customer’s account being credited the same day as the funds are being received. We don’t see that yet universally being applied right across the board, so that is something that will need to happen in the next 12 months or so, leading up to the review in 2012. I think it is just the banking community getting used to the way of doing business here.

One other area where we have had feedback from our customers is in the charging convention of ‘SHA’, which to our understanding is very clearly interpreted in the PSD as being the only charging option available. Some of our customers – in particular where salary payments and pension related payments are involved – actually preferred the ‘OUR’ option, so that they could be sure that the person receiving the salary or the pension would get 100% of the payment as it came through. Their bankers – as a beneficiary bank – would not take a commission from that. Obviously, under a ‘SHA’ arrangement the beneficiary bank has that right, provided they agree the amount of that commission with their customer beforehand.

And your final thoughts on the future of SEPA?

A lot is happening in the market and there are still a lot of open questions, and these are ones we are grappling with. At the same time, as an institution, we are trying to put to bed our investment plans for next year, which are more or less there now. It really is a case of careful management and being very alert to developments in the market to make sure that we are investing in the right things at the right time.

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