Published: June 01, 2012
As we have seen in this month’s Treasurer’s Voice, there remains a large proportion of companies of all sizes that have not yet embarked upon, or completed their SEPA migration. As Gerard Hartsink, outgoing Chairman of the European Payments Council (EPC) emphasised during the interview we publish in this edition of TMI, the setting of a defined end date for national payment schemes is a major milestone in the evolution towards a Single Euro Payments Area. As Karsten Becker, Senior Product Manager, Corporate Receivables, Deutsche Bank comments,
“With end dates now defined, SEPA has come full circle, from political to market to regulatory.”
Corporate treasurers and finance managers can therefore lose no time in progressing their SEPA migration projects. In this article, we feature expert comment from Frank Taal, Global Head, PCM Product Management, ING, Willem Dokkum, Global Head of Sales Payments & Cash Management, ING and Karsten Becker, Deutsche Bank, who share the benefit of their experience of SEPA projects.
Karsten Becker, Deutsche Bank notes that a defined end date is perhaps the catalyst that many corporates were seeking,
“With the end dates for national payment schemes now set, the situation for treasurers is quite simple: SEPA is no longer a voluntary project, but a regulatory requirement. In a sense, this is what corporates have been waiting for, as in many cases, there has not been sufficient incentive to migrate in the past."
Different countries, as well as individual organisations, have different starting points in terms of SEPA migration, which adds complexity to projects for multinational corporations, and also means that the experience of migration can differ substantially across Europe. As Willem Dokkum, ING comments,
“Although the SEPA end dates are now set in law, and parts of northern Europe are relatively advanced in their implementation, some parts of southern Europe have not progressed as far in their migration plans. Consequently, some institutions may not be ready in time. Some central banks and national governments have indicated that they may extend local formats and payment instruments until 2016, but this is not yet confirmed, so it would be better for companies to work towards the 2014 deadlines.”
Talk of extensions and exceptions can easily become a distraction from the primary message: SEPA is here and migration is a mandatory requirement.
Firstly, what does SEPA migration really mean? Karsten Becker, Deutsche Bank outlines,
“As a minimum, companies must be able to send ‘SEPA-capable’ (although this is subject to interpretation) transactions to their bank. Therefore, as a first step, they need to understand what transaction formats their bank will accept.”
Banks and vendors offer different conversion services, as Karsten continues,
“Some companies are seeking to minimise migration effort by reviewing what file conversion services their banks or vendors can provide, but this remains a grey area. This may be particularly advantageous for those that would not otherwise be SEPA-ready, but in general it is recommended that corporates implement XML formats wherever possible.”
Essentially, companies need to convert their current payment formats into messages that comply with the SEPA Rulebooks for Credit Transfers (SCT) and where appropriate, Direct Debits (SDD). These use XML-based formats, that have the advantage that they can be rolled out more widely to achieve standardisation not just for payments in the Eurozone but globally. For SCT and SDD, this involves adding the IBAN (International Bank Account Number) and in the short term, BIC (Bank Identifier Codes) to settlement instructions.[[[PAGE]]]
One of the major questions involved in a SEPA migration project is how far it should extend. There has been a great deal of literature produced citing the potential advantages of SEPA, including opportunities for centralisation, streamlining and standardising processes and information flows. The issue is therefore how far a SEPA migration project can be extended to deliver some of these additional benefits. Willem Dokkum, ING comments,
“Some companies will treat SEPA migration purely as a regulatory project, while others will use it as an opportunity to enhance working capital management and standardise formats and processes. Issues such as cash flow forecasting, control, and risk mitigation are now major priorities for treasurers compared with a few years ago. In this instance, treasurers and finance managers need to determine the project scope carefully to ensure sufficient time to complete the project before the mandatory end date.”
The challenge now is that for many companies, there is insufficient time to achieve SEPA compliance and extend the benefits further. As Willem Dokkum, ING warns,
“If companies are starting a project of considerable scope from scratch, without having put any thought into it so far, then it is probably already too late. However, if some initial decisions have been made, there is still time to achieve more than basic SEPA compliance.”
For many companies, however, a phased approach which first addresses compliance, and then leverages the opportunities for standardisation, process optimisation and centralisation will now be more appropriate than attempting the entire project before the 2014 end date. Karsten Becker, Deutsche Bank confirms,
“Timeframes for SEPA migration are short, so it is important to mitigate project risks, such as avoiding dependencies between SEPA compliance and wider centralisation and optimisation objectives. If these can be achieved within the same timeframe, then many corporates will certainly wish to do so, but they can equally be achieved as a second phase.”
Having scoped the project, the next step is to project planning in the same way as for any other large, complex project. Frank Taal, ING explains,
“However wide the project scope, a SEPA migration project needs to be planned and scoped with a budget, resources and priorities.”
One of the challenges is that in only a few cases all payments in an organisation emanate from a single point. Frank continues,
“There is never just one person responsible for payments in a large, complex organisation, so a SEPA project needs to involve every department that initiates or receives payments in the SEPA zone, which may not be limited to the obvious business functions such as accounts payable, treasury, HR, procurement and call centres. For example, one client found recently that 16 separate departments needed to engage in credit transfer migration alone. Consequently, a vital early project step is to complete a full analysis of all the business functions and geographies, processes and systems that need to be migrated.”
This can take time and in some cases, education about the need to migrate, and an exploration of the relevant systems. For this reason, Frank urges a realistic approach,
“Typically, we find that a phased approach to project migration is most successful. Consequently, treasurers and finance managers should be scoping their project during the remainder of 2012 and implement in 2013 in order to be ready for 2014.”
Once the relevant people and departments have been identified and engaged, resources and budgets need to be found. As Karsten Becker suggests, this should now be easier to secure than perhaps it was in the past,
“Now that corporates have clarity to assist with their planning, they must identify a budget, but a business case per se should no longer be required.
Frank Taal, ING emphasises,
“Corporations are finding that the cost of migrating to SEPA is typically a little higher than they first anticipated, so the process of defining a budget and monitoring costs needs to be done carefully.” [[[PAGE]]]
Technology is a major element of a SEPA migration project
Technology is a major element of a SEPA migration project, in terms both of amending formats and of recording IBAN/ BIC data. This may require system upgrades or, in some cases, even a system replacement or consolidation of different systems across the enterprise. Karsten Becker, Deutsche Bank outlines,
“As it is mandatory to include IBAN and BIC on payment instructions (although BIC will be phased out) each of the relevant systems from which payments are generated need to be analysed to determine whether these data fields can be recorded and used in payment files. This may require a system upgrade or in some cases even an additional system, which is inevitably a major undertaking for a large, complex organisation.”
Frank Taal, ING concurs,
“It is also worth looking at how some project activities could be made more efficient. For example, one client had to upgrade three separate payment systems in different locations. It turned out to be less expensive and resource-intensive to implement a new solution across all three locations, which brought the added advantage that upgrading payments technology would be easier in the future.”
While some system vendors already support SEPA migration and XML formats, some will have their own timescales for compliance, which need to be factored in to their customers’ project plans, as Willem Dokkum, ING outlines,
“Treasurers and finance managers need to engage early with their technology vendors’ and factor vendors’ compliance timescales into their project preparations and risk analysis.”
Furthermore, internal IT departments may also need to play a significant role, as Frank Taal, ING highlights,
“A large proportion of companies have some proprietary technology in place, particularly those that have grown through M&A, so internal IT departments also need to be engaged in SEPA migration projects.”
The process of adding IBAN and BIC information to settlement instructions is often considered one of the major tasks of SEPA migration projects, not least as it involves contacting customers and suppliers to confirm this information, as Karsten Becker, Deutsche Bank explains,
“In addition to recording IBAN and BIC data, companies need to source this information from their customers and suppliers in the first place, which may be particularly onerous for companies with a large number of counterparties. While there are some conversion solutions available for specific countries, this may still be a major undertaking.”
Some banks, such as ING, indicate that the process is becoming easier, as Willem Dokkum, ING, points out:
“As part of the end date regulation, it was determined that BIC codes will disappear, so only IBANs will be required to process payments. ING will facilitate IBAN-only payments from January 2013, even though there is no requirement to do so until 2016. Bank communities are now well equipped to convert BBAN to IBAN, so this is rarely a challenge in current projects, and there are a variety of tools available to do so.”
Willem also notes that awareness of IBANs is increasing,
“IBANs appear on many invoices now, and we are seeing an increase in publicity campaigns by central banks, such as in the Netherlands, for retail clients.”
Karsten Becker, Deutsche Bank also emphasises that SEPA migration involves a range of other issues too, related to new formats and payment instruments, that need to be considered,
“In addition to format and data considerations, corporates also need to look at tactical issues such as the use of optional fields, cut-off and execution times.” [[[PAGE]]]
A more complex issue than SCT is the adoption of SDD, as EDF discuss more fully in their article. Karsten Becker, Deutsche Bank explains,
“SDD migration is more challenging and typically takes more time than SCT due to the additional steps that are required. For example, creditor IDs need to be obtained, and while mandates were previously managed by the debtor bank in some countries, the debtor is now responsible for this. In some cases, new mandates are required, which could be a major logistical exercise for some. With the end date for domestic direct debit schemes approaching fast, most corporates will only have time to replicate the direct debit schemes that are already in place as opposed to seeking new opportunities.”
Another challenge is that as SDD was introduced more recently than SCT, and adoption has been far slower due to the need to resolve issues such as mandate conversion, not all banks have the same experience in SDD migration as they do for SCT. Frank Taal, ING illustrates,
“Belgium is at the forefront of SDD adoption, so we have acquired considerable expertise in mandate management that we can share with our clients. In the Netherlands, for example, direct debits are the most commonly used payment methods, so ING is ideally equipped to support these companies in their adoption of SDD and mandate management.”
There remain outstanding challenges in countries such as Germany and France, but companies still need to plan for adoption, even if they do not take the final steps towards migration until some of the issues of mandate conversion and interchange fees are resolved. There are changing complexities too, as Willem Dokkum, ING discusses,
“New SDD regulations intended to enhance consumer protection, such as the maximum allowed frequency of direct debits, complicate the implementation a little by making it less clear how SDD will be used in practice in some situations.”
SDD will ultimately bring advantages to companies that currently need to use multiple direct debit schemes
As with SCT, however, despite the challenges of adoption, SDD will ultimately bring advantages to companies that currently need to use multiple direct debit schemes, as Frank Taal, ING describes,
“Treasurers would ideally like to implement a single direct debit scheme across Europe to improve cash predictability and visibility, and allocate cash more easily. SEPA will undoubtedly assist with this, by creating a single SDD scheme, which will in turn enable companies to reduce their banking partners and use of credit lines. Therefore, by taking early advantage of the opportunities presented by SDD, benefits will accrue to the business. One such opportunity is to develop a pan-European collections factory, which has rarely been possible in the past, and companies are often choosing to leverage ING’s expertise in this area.”
Karsten Becker, Deutsche Bank continues,
“With SDD volumes still low, there will inevitably be some teething troubles, such as reaching all debtor banks, but these will be resolved as volumes increase. Furthermore, market practices will become better established as experience in SDD across the industry as a whole develops.”
There are also local initiatives to try to address some of the perceived limitations of SDD today, as Willem Dokkum, ING discusses,
“Developments such as eMandates are still pending, which will particularly benefit companies with large volumes of direct debit mandates such as telcos and utilities. Efforts so far to achieve an eMandate capability have not been successful, so in the Netherlands banks have decided to work together to provide an eMandate solution which will be available in early 2015. Although a huge undertaking, and initially limited to the Netherlands, it represents a major step forward and a model for other countries.”
As Gerard Hartsink, EPC explains in the interview featured in this edition of TMI, it is not necessarily desirable that local solutions emerge, which may compromise the objectives of SEPA, but it is hoped that these will converge or expand to incorporate the European payments area as a whole.[[[PAGE]]]
There are undoubtedly still questions and challenges relating to SEPA, but this is inevitably the case with an industry-wide initiative across such a vast geographical territory and such a diversity of countries. These, however, need to be addressed pragmatically rather than being used as excuses or project roadblocks. As an early 20th century essayist said, “The person who is waiting for something to turn up might start with their shirt sleeves.” 2014 is approaching quickly, and a large proportion of companies of all sizes still need to start or complete their migration projects. Karsten Becker, Deutsche Bank emphasises,
“Companies that have not already started migration should do so now, as from experience, such a project typically takes longer than first anticipated. Engage banks and vendors from the beginning to secure the necessary resources, seek advice and expertise, and ensure that all systems and business partners are compliant in good time.”
Frank Taal, ING also stresses the importance of securing the right resources, which will become more difficult as the end date for national payment schemes approaches,
“If you wait too long to migrate to SEPA, there will undoubtedly be problems trying to secure advisory and technical resources from banks and technology partners. By starting in good time, there is sufficient time to prepare and implement the project properly, which will give a better outcome.”
Karsten Becker, Deutsche Bank concludes,
“Despite some of the challenges that are inevitable in any large, complex project implementation, SEPA brings benefits to many organisations, not least the potential for greater centralisation and consolidation of payments and collections. However, with limited time now before the mandatory end dates for national payment schemes, the potential to realise these advantages as part of an initial project phase is now reducing. Consequently, the initial focus is typically now on compliance, with plans for payments, collections and liquidity optimisation scheduled as a secondary phase.”
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