Regulation & Standards

SEPA: here we go again

Published: Mar 2014

In the end, they did the sensible thing. Just weeks prior to the Single Euro Payment Areas (SEPA) migration date, the European Commission added a six month transition period to give companies more time before legacy payments systems are switched off for good. As a result, banks and businesses in Eurozone countries will have until 1st August 2014 to comply with the new standards for direct debit and credit transfer transactions.

The grace period will surely be welcomed by those businesses still struggling with the many technical challenges associated with SEPA compliance. They are more than a few in number. The latest figures from the ECB, released mid-January, reveal that 83.13% of credit transfers and just 60.23% of direct debits were SEPA-compliant in December 2013. But the reality is that the transition period offers nothing more than a little breathing space for these companies. The eyes of most corporates should now be fixed firmly – like those of the banks and the regulators – on the next stage.

But what will phase two of SEPA look like? For corporates, it will largely depend on the geographical footprint of the business and how the treasury is organised. What is clear though, is that following compliance, corporates will see opportunities for efficiency gains in a pan-European payments landscape. In fact, SEPA is just the beginning. As the remaining businesses in Europe go live with SEPA’s ISO 20022 XML standards, some industry experts are predicting that those same formats could be the key to extending bulk payment instructions beyond the Eurozone and pushing far greater adoption of e-initiatives.

The single account dream

Up until this point, corporates have mostly tended to view SEPA strictly as a compliance project. The number one priority was to ensure the terms of the SEPA regulation were met, allowing the business to continue to process transactions without disruption after the so called end-date of 1st February 2014. Those who have successfully migrated their systems can now begin shifting their focus away from pure compliance to the opportunities that SEPA brings.

By far the biggest opportunity for companies with a pan-European footprint is to use SEPA to centralise payables and receivables. They can do this by shedding their framework of in-country euro accounts in favour of a payments/collections factory which can execute and process transactions on behalf of one or more subsidiaries. A corporate may also reach a point where only one operational euro account is needed across the entire continent.

“That should be the end goal,” says Steve Everett, Managing Director, Global Transaction Services, RBS. “Companies will now be thinking about rationalising down, as far as possible, all their euro bank accounts and the administration that goes around them.”

European multinationals (MNCs) will already be well aware of the efficiency gains that centralisation has to offer. Reduced bank fees are the most obvious of these, but precisely how much can be saved will vary from business to business. Some corporates, like Ages Maut System, a Germany-based provider of transnational toll systems across Europe, are expecting to make only modest savings. Treasury performed a cost-benefit analysis early on in the migration process which indicated that reduced bank fees could save the business as much as €10,000 a year. “There are a number of accounts we don’t need any more and typically they were a lot more expensive than our accounts here in Germany,” says Peter Frambach, Head of International Payment Services at Ages Maut System.

Those who have successfully migrated their systems can now begin shifting their focus away from pure compliance to the opportunities that SEPA brings.

Frambach could be forgiven for not feeling as though he has just hit the jackpot, however. For creditors doing direct debits on an ‘at sight’ basis, shortened cut-off times and longer presentation periods for direct debits can mean an inevitable and substantial loss on the interest returned on deposits or spend on loans. Although rates are presently at all time lows, Frambach calculates that with interest rates closer to their 20-year average of 6%, a company with a monthly turnover of €20m collected with direct debits loses just under €60,000 each year on such delays for B2B and COR1 direct debits. If the company were to opt for CORE direct debits, the interest gap rockets up further. This is even before taking into consideration the €400,000 the company has already spent becoming compliant in the first place.

Tangible cost savings will not be seen at every European company and will often not level out the costs implied with SEPA compliance (whether direct debit-related or otherwise), although there will likely be efficiency and process improvements. As Frambach acknowledges, the benefits that can be drawn from SEPA vary from business-to-business. Certainly, companies like the Dutch multinational AkzoNobel that found SEPA beneficial when establishing payments and collections factories.

Unlike many companies beginning to look at centralisation now after compliance has been achieved, AkzoNobel’s treasury began work back in 2010, two years prior to the official announcement of the SEPA end-date. First, a payments factory was established to make payments on behalf of the company’s European entities. SEPA was not essential for the establishment of the payments factory, but the abolition of charges on cross-border transactions was certainly beneficial. The end result was one account for euro payments. The process has since been replicated in receivables, with the establishment of a collections factory.

“We quantified the savings internally and it is in the millions,” says Gerwin Braam, Senior Bank Manager and SEPA Project Manager at AkzoNobel. But are there not benefits beyond savings on bank fees, such as greater control and visibility? “Exactly, that is also another big benefit,” says Braam. “You have much more visibility over cash flow and can see quite easily where money is at any given time.”


In the next few years, SEPA is also going to be a momentous driver of innovation in the transaction banking and corporate treasury world. Many treasurers have been using the momentum of SEPA projects to restructure or improve their operations, while banks are beginning to develop new products and solutions to facilitate the treasury drive towards greater efficiency.

An example of this is virtual accounts. “That’s becoming a really hot topic,” says RBS’ Everett. Essentially, virtual accounts are structures that enable businesses to establish a number of subaccounts within one master account. These structures address the reconciliation difficulties that arise through bank account rationalisation by enabling a corporate to provide a unique identifier to each of its clients. Individual transactions can then be directed to a particular virtual account against which receipts can be directly noted. “They could, in practice, get a virtual account for each supplier,” adds Everett. “It enables corporates to achieve a much more streamlined, automated approach around reconciliation.”

But the drive to greater efficiency will not stop there. Having already overcome the challenge of introducing XML as part of their SEPA migration, corporates may find it worthwhile looking at some of the other ISO 20222 XML-based solutions offered by their various banking partners. One of these is Electronic Bank Account Management (eBAM). To date, corporate uptake of eBAM solutions has been minimal but now, with swathes of companies across Europe using the corresponding messaging standard, we could be about to witness a spike in interest.

Bank account rationalisation might also be a catalyst of sorts. Until now, corporates with a large number of accounts with multiple banking partners have been holding out for a viable multi-bank eBAM solution to arrive on the market. But companies who have been successful in consolidating their European accounts down to a small number might find that the proprietary portals already offered by a number of major cash management banks are now all that they need.

AkzoNobel is one company moving in this direction. With the treasury team now fully relieved of its SEPA compliance workload, introducing eBAM is next on the agenda. “A lot of documentation is required to open, close and amend bank accounts,” says AkzoNobel’s Braam. “It has always been a heavy workload for treasury, but eBAM can replace a lot of it.”

Another innovation that is likely to receive more attention now the SEPA end-date has passed is e-mandates. “We’ve already seen pilots in three or four European countries,” Luca Poletto, Head of SEPA, BNP Paribas Cash Management tells Treasury Today. It is, he explains, a solution that is receiving an increasing amount of consideration from his corporate clients, especially those who have migrated to SEPA Direct Debit (SDD) and have business models which require them to collect a large number of new mandates each month.

One final innovation that is set to receive a huge boost from SEPA is electronic invoicing. Efficient e-invoicing and processing has been on the corporate treasurer’s wish-list practically since the birth of the digital age in the 1990s. Although adoption of such solutions offers a great means for companies to improve working capital and supply chain finance processes, uptake to date has been hampered by a combination of legal uncertainty and the absence of common pan-European standards.

According to figures published by the European Commission in June 2013, e-invoicing accounted for only 4-15% of all invoices exchanged in Europe.

Some industry experts are convinced that SEPA represents not just a transformation in the European payments market, but also the catalyst for an even bigger, global drive towards greater efficiency in payments.

Those hindrances are less relevant now given that the industry has defined an XML format for e-invoicing based on exactly the same data elements as SEPA XML. Consequently, experts believe companies in Europe will make a big push towards e-invoicing in the years ahead. “SEPA XML is all about payments,” says Ad van der Poel, Head of Payments and Receivables, Global Transaction Services, EMEA, Bank of America Merrill Lynch. If e-invoicing and SEPA Direct Debit together with an XML theme does finally begin to take off now, he adds, it would represent a big step towards the ultimate goal of automation across the value chain. “It is practically the final piece of the jigsaw to open the door for having XML integration.”

Results from Treasury Today’s 2012 and 2013 European Corporate Treasury Benchmarking studies appear to substantiate the claim that SEPA is beginning to drive greater uptake in solutions such as payments factory software, eBAM and e-invoicing.

In 2012, 18% of corporate treasury professionals surveyed already used payments factory software, while a further 19% stated that they planned to implement solutions in the near future. By the time of the 2013 study, those figures had increased to 24% and 27% respectively. Meanwhile, the proportion of treasurers stating that they plan to use eBAM and e-invoicing somewhere down the line rose by 5% and 9% (see Chart 1).

Chart 1: Which of the following systems do you use already or plan to use in the next 12-18 months?
Chart 1: Which of the following systems do you use already or plan to use in the next 12-18 months?

Source: Treasury Today Corporate Benchmarking Study 2013

Beyond Europe

Elsewhere, some industry experts are convinced that SEPA represents not just a transformation in the European payments market, but also the catalyst for an even bigger, global drive towards greater efficiency in payments. Beyond the Eurozone’s periphery, interest in adopting SEPA standards has already been expressed by a number of Commonwealth of Independent States (CIS) nations, notably Russia and Ukraine. These countries are currently lacking uniform payment systems and XML would seem like the most practical choice for messaging standards as they begin to develop and standardise payments infrastructure.

But message harmonisation in the cash management sector may, given time, stretch even further afield, perhaps even as far as the Americas or Asia. “Another area that corporates will want to explore in the coming years – brought by XML – is the possibility of extending the consolidation of payments, particularly credit transfers beyond Europe,” says BNP Paribas’ Poletto.

Marcus Hughes, Director of Business Development at Bottomline Technologies agrees. “That’s the big one,” he explains. But is any of this likely to be on the treasury agenda in the immediate future? Would extending the project globally not place an even larger and, more to the point, unnecessary burden on treasury resources? After all, for most corporates, SEPA migration in Europe was a difficult enough task.

The answer is that, as with eBAM and e-mandates, the efficiency benefits should more than justify the extra work (although this is of course easier said than done). Unlike in years past, there is also now a clear opportunity. Previously, differing national laws and regulations have meant global payments infrastructures remained fragmented. Thanks to the work that the SWIFT Common Global Implementation (CGI) initiative has put in over recent years, that could be about to change. Through the CGI initiative, over 30 banks and a handful of technology providers – including Bottomline Technologies – have collaborated to approve a suit of ISO 20020 XML standards that can be used for many different payment types, and so replacing the need for corporates to support bespoke, domestic formats.

Corporates in Europe who have migrated to SEPA will therefore be in a good position to explore such opportunities now. Those that do may find that, at some point down the line, they are able to reach the ultimate benchmark in cash management efficiency and transparency: a global payments factory working on behalf of all the business’s international entities. “That is exactly what XML is designed to do,” adds Hughes. “It is the logical follow on, and it really makes payment and collection factories possible, not just in the Eurozone but in other countries across the globe too.”

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