SEPA was always intended to be a benefit and not a hindrance and yet the conversation leading up to the compliance deadline in February 2014 would have many believe the intentions were purely negative. Commerzbank has the view that corporates should be getting ready to enjoy the fruits of SEPA.

Much of the talk about SEPA over the past few years has centred on meeting the initial February 2014 deadline. However, Frank-Oliver Wolf, Managing Director, Global Head Cash Management and International Business for Commerzbank urges corporate treasurers to refrain from viewing it purely as a compliance issue. Instead it should be seen strategically, focusing energy and resources on obtaining as many benefits from the initiative as possible, creating what he refers to as a “SEPA+” strategy.

Essentially this means corporates should recognise opportunities to move towards payments centralisation, standardisation of accounts payable and accounts receivable processes, as well as a single technical interface in terms of all payment instruction formatting.

Advantages to corporates of payments standardisation

What is often overlooked by treasurers is SEPA’s potential to realise initial cost savings. For example, Wolf notes that corporates can reduce outgoings by using low-cost markets for European payment transactions. Furthermore, cross-border payments can be substituted for SEPA transactions that are priced as domestic transfers only.

Elsewhere, as the initiative uses largely uniformed XML ISO20022 messaging formats, treasurers will be spared the technical inflexibility, complexity and cost of having to handle a number of different file standards. Uniform settlement periods and exception processes (such as returns) for all European countries will contribute to these savings by replacing cumbersome legacy processes.

SEPA payments can also improve security. By only accepting an IBAN (international bank account number) as the account identifier for SEPA transactions, treasurers can be more sure that their money is transferred to the right account and that they receive payments when due.

Beyond the short-term cost, efficiency and security advantages, SEPA will open up expansion opportunities. “By increasing the feasibility of new trade routes powered by new payment instruments, such as SEPA Direct Debit, it encourages small and medium sized enterprises to do more cross-border business within the Eurozone,” says Wolf. For corporates already trading on a European or global scale, SEPA will allow them to consolidate their bank accounts, enabling optimised liquidity management and perhaps the establishment of payment and collection factories.

SEPA can also improve straight through processing levels, not least thanks to the improvements in referencing that it entails (eg. fields for end-to-end reference, originator reference and transaction reference). Wolf further argues that companies and institutions can use SEPA migration as an opportunity to optimise their cash and treasury management processes and structures “above and beyond” euro bulk payments, which are the focus of SEPA. “There are significant efficiencies that can be garnered from optimising priority payments, payments denominated in foreign currencies and third-party bank payments”.

Key challenges to SEPA adoption

In general, the migration to SEPA is a strategic opportunity for optimisation of processes and structures in the cash and treasury management of business groups. For a limited number of corporates – usually those only settling domestic payments, with no foreign debtors or creditors – there will be no direct strategic advantages derived from migrating to SEPA in its present form. However, these companies will benefit from a handful of functional advantages, too (eg. the new reference files).

These companies will also be faced with considerable implementation challenges, too. For example, sales divisions will have to revise their contractual wording in order to replace direct debit authorisations with a SEPA mandate. Accounting departments will be required to replace old account numbers and bank codes with an IBAN and a BIC (business identifier code). And IT departments will be responsible for updating their companies’ hardware and software to make sure that the more memory-intensive XML data format can be processed.

In these cases, the onus lies with their bank and IT-vendors to ensure that the transition is as smooth as possible. “Certainly, purely domestic-focused corporates have become used to the efficiency of national payments, which rely heavily on domestic bank identifiers, account numbers, clearing and settlement systems,” notes Wolf. “Now, from a corporate perspective, SEPA payments have to achieve the same level of efficiency including special issues such as r-transactions (refunds, returns and rejects) and investigations.”

In particular, the transference of domestic payment codes to SEPA codes is a key, yet daunting, task for corporates to execute, especially when they have little to gain from doing so. Tasks such as converting account numbers and bank codes into IBAN and BIC and identifying errors in their transaction administration can be especially time-consuming. Many corporates may find that their actual data error rate is higher than the percentage of rejected transactions they experience as it is common practice for banks to fix these problems when settling payments unbeknown to corporates.

The need for action

While corporates with global aspirations should be moving towards payments standardisation regardless of SEPA – or risk falling behind to more progressive competitors – the need for SEPA compliance has added urgency to the situation. Indeed, notes Wolf, the past few years have seen a continuing battle to catch the best resources and specialists in consultancies, vendor companies for electronic banking, enterprise resource planning (ERP) and treasury management systems (TMS), as well as experts in banks, all continue to be in high demand. Certainly, the right banking partner will be equipped to help corporates assess their existing operations against the new regulatory requirements and create the scope of their SEPA planning, but the speed of migration is also crucial.

Corporates should complete the remainder of the journey as quickly as possible in order to avoid maintaining two separate sets of data in parallel. Given the limited banking resources available in the market to help with the migration, the time for corporates to act is now.

The sushi principle – SEPA solution components for companies

Quick solutions are called for but companies should also contemplate what their “emergency solutions” might look like should their migration projects not meet the deadline. “When a company is looking for external support for their in-house SEPA project, their first port of call should be their primary bank,” suggests Wolf. Indeed, he acknowledges that many banks provide support not only in the form of advice, but also through rigorous test and migration services. “This brings to mind the image of a sushi conveyor belt, where the best solution components can be hand-picked from the wide selection on offer to meet individual requirements.”

Wide variety to choose from

Using the ‘sushi belt’ analogy, the conversion of account master data is the hosomaki among the solution components. This is when local account numbers and bank codes are converted into IBAN and BIC. Depending on the bank offering, multiple countries may be supported.

As you work your way down the sushi menu, the next item is the more intricate futomaki, which equates to the validation of account data. As part of this process, banks check the debtor and creditor account master data stored in the systems of their clients to make sure they are valid. This helps avoid r-transactions and incorrect bookings, which need to be rectified for the submitting party not only in the case of transfers, but also in the case of direct debits – “a time-consuming and costly procedure”, Wolf notes.

Sushi aficionados know that temaki offers a very special taste experience. Within the context of the SEPA test and migration service, this is the equivalent of the account information test data used to check whether in-house systems are compatible with SEPA. To do this, banks provide test files that contain diverse SEPA transactions. “In an ideal scenario, the files are created using account master data that are as realistic as possible so as to enable production-like downstream processing tests,” explains Wolf.

Almost the polar opposite of temaki is gunkan maki, which in SEPA terms makes it possible to check test files relating to payment orders. “It has proven worthwhile to arrange test file transfers with the bank before SEPA payment orders are transmitted for the first time,” says Wolf. “Ideally the bank will send back a meaningful and understandable protocol so that any necessary changes can be made as quickly as possible.”

For companies faced with the challenge of converting existing direct debit mandates into SEPA direct debits, the nigiri among the solution components could provide a special indulgence; ultimately the submitting party has to send the payer a one-off notification before the first SEPA direct debit is executed. Here, too, banks can provide support in the form of individual solutions where appropriate.

The sashimi solution: format conversion

In spite of the best possible preparations, should the SEPA project not be finalised by the SEPA cut-off date, banks can offer “emergency solutions” where required. “Even if the thought of this speciality may appear particularly appetising to some, the company’s top priority should nevertheless remain an on-time migration,” Wolf advises. Ultimately conversion solutions may prove only a fleeting indulgence, because sooner or later a “real” migration will be necessary. In addition, conversion solutions require some effort in terms of implementation and should therefore be planned with ample lead times. “At the end of the day, it is all about buying time – something that, returning to our sushi analogy, unnecessarily delays the enjoyment of the typical post-sushi dessert, daifuku.”