SEPA 2.0: Realising the Potential
by Bas Rebel, Emiel Kuiken and Didier Vandenhaute, PwC Corporate Treasury Solutions
The last weeks before the SEPA deadline of 1 February 2014 have proved, for many a project manager, to be hectic. Now that that the European Commission has proposed an additional transition period of six months till 1 August 2014, companies might take a step back and reassess their approach to implementing SEPA. Quite a few organisations had underestimated the effort of migrating to SEPA, and the time pressure might have forced them to go for a ‘quick and dirty’ approach. In many companies, compliance and business continuity have been given priority over seizing the SEPA opportunity. With the official deadline now behind us, it is time to realise the full potential of SEPA, often branded SEPA 2.0.
It is easy to lose sight of the benefit potential of SEPA ‘once fully embraced’. A study by PwC (‘Economic analysis of SEPA – Benefits and opportunities ready to be unlocked by stakeholders’) assesses the potential benefits per stakeholder if SEPA was fully implemented throughout Europe as of 1 February 2014. Our study concludes that the corporate sector has much to benefit from SEPA. However the benefits do not result from compliance only, but from streamlining cash management across the SEPA zone. The study shows that SEPA represents for the corporate sector a savings potential of up to euro 13.2 bn annually and may unlock up to euro 180 bn of idle cash and credit lines. Other benefits may be harder to unlock as they depend on other EU initiatives and on agreement at industry and market levels. So SEPA should not be assessed in isolation but as a catalyst and change agent.
SEPA as catalyst for benefit
SEPA enables organisations to streamline and centralise their payment processes and improve the effectiveness of their cash management structures across the Eurozone. It makes organisations independent from in-country bank accounts for their payment processes. The standardised and integrated clearing mechanism and harmonisation of payment products across Europe makes the location of payor and beneficiary accounts fully transparent. Furthermore, the file formatting now standardised on XML ISO 20022 (‘XML’) and in the SEPA Rulebook caters for tags (fields) that identify the party ordering the transaction (ultimate payor/beneficiary) and the owner of the bank account (payor/beneficiary). These tags facilitate the concept of Payments and Collections on Behalf of (POBO/COBO). Consequently SEPA allows for:
- pruning the number of stand-alone bank accounts across the Eurozone (payment harmonisation);
- improving the effectiveness of cash pool structures (concentrating bank account structures at house banks); and
- improving effectiveness of an in-house bank and payment factory (POBO/COBO).
So SEPA provides the opportunity to unlock liquidity and credit lines otherwise required in the payment processes. SEPA has also advanced the XML ISO 20022 as a preferred interface standard for banks and software applications, which benefits organisations beyond the Eurozone. As many cash management banks have embraced the XML ISO 20022 CGI standards, the development and maintenance of multi-bank interfacing has become much less cumbersome.
Corporates moving to SEPA 2.0
While some organisations have considered or even incorporated an overhaul of their euro cash management, the vast majority have given priority to compliance only. So the full potential of SEPA will not be realised in 2014 unless more organisations go beyond compliance. Some approaches to be considered include:
A. Cash management and payment hub
Before SEPA, organisations required a range of payment formats, standards and protocols for bank communication. The new standard bank communication format, XML, allows organisations to implement a multi-bank communication hub based on the XML ISO 20022 messaging standards. The hub not only provides central control and visibility over bank communication, it also allows companies to implement improved process and IT controls on bank communication. The payment hub provides effective input for liquidity management.
B. Bank rationalisation/cash pooling infrastructure
Another key driver of cash management costs is that of the number of bank relationships and the efficiency of the account infrastructure. Most companies still maintain stand-alone accounts or in-country cash pools that are not linked to an overlay cash pool structure. This is typically the result of a trade-off between the need for in-country bank accounts and the cost and effectiveness of (multi-bank) cash pooling and the hassle of manual cash transfers.
SEPA enables the concentration of all external euro bank accounts and transaction volumes within one bank (branch). This makes the cash pooling most effective which unlocks liquidity and credit lines.
C. In-house banking
Consolidating bank accounts at house bank(s) and making use of the XML format for POBOs and COBOs creates opportunities by linking the payment factory to the in-house bank or the administration of intercompany lending. The settlement of all payments can be done over the intercompany current account at the in-house bank, which can reduce the number of external disbursement accounts and transaction volume over external accounts. Furthermore, depending on the model implemented, the in-house bank can optimise the FX-conversion volume.
D. Streamlining of reconciliation and taking advantage of status messaging
SEPA also introduces a new standard for electronic bank statements called CAMT, also based on the XML ISO 20022 standards. Prior to SEPA, many banks and clearing systems would overwrite or truncate payment remittance information, which created the need for a separate remittance messaging process with negative impact on reconciliation processes at the beneficiary.
SEPA introduced the obligation to transport structured remittance information alongside the payment instruction end-to-end from ultimate payor to ultimate beneficiary. This feature standardises reconciliation across the Eurozone enabling higher auto-matching in source systems automated reconciliation of payments.
The CAMT format offers even better structured information with more and more comprehensive error reporting than the current bank statements. Even if your organisation does opt not to use the CAMT statements but the upgraded MT940S messages, you will still be able to benefit from this standardised reporting structure. Your organisation may use this enhanced information by setting up automated workflows to such error reporting – again, reducing the need for manual handling of payments. Although we currently see the XML CAMT adoption rate is still low, we highly encourage you to use the benefits it can offer.