Published: August 01, 2014
As if the Olympics in 2012 were not enough, the UK is now experiencing the balmy joys of the Commonwealth Games in Glasgow. But with a lot more tartan. Major sporting events, of which there have been a surfeit recently, always encourage one to consider the commitment, grinding effort and ultimate achievement of the athletes. But with the end of the transition period for SEPA migration now over (as of 1 August 2014, unless there is news to the contrary between the time of writing this and its publication) haven’t treasurers and transaction bankers themselves come to the end of a long and often painful regulatory, planning, technical and negotiation race? Congratulations! Success? Well, despite the fanfares that have accompanied most communications on SEPA over the past 12 years (yes, 12 years) the reality is rather different from what was originally intended. Has SEPA been a failure? No, probably not, but it has not (yet) been an unmitigated success either. What has become increasingly clear over the past couple of years is that rather than an end point, the SEPA migration deadline is really the beginning and many of the potential achievements of a harmonised payments landscape are still to come.
One of the biggest concerns since the 2008 SEPA Credit Transfer (SCT) and 2011 SEPA Direct Debit (SDD) launch dates was that migration was far slower than the European Payments Council (EPC) and others had hoped. What therefore started as an initiative that was intended to be market-driven ultimately had to be enforced. Even then, migration was very sluggish in many countries right up until the February 2014 deadline and indeed beyond. This was particularly the case amongst organisations that operate domestically as there was little advantage to migrating, and the new instruments were often considered less sophisticated or efficient than those they replaced. Multinational organisations had more of a reason to migrate. Firstly, cross-border payments are now cheaper as they are treated as domestic payments and charged accordingly. Secondly, SEPA offered the potential to standardise and centralise cash management, payments and collections, and simplify bank account structures across the Eurozone. Furthermore, by leveraging a common, XML-based format, many of these benefits could also be extended beyond SEPA to other regions. Vanessa Manning, Head of EMEA Payments & Cash, RBS says,
“Our multinational customers had typically already migrated to SEPA payment instruments in time for the 1 February 2014 deadline, so the additional transition period just allowed some extra leeway for testing and process refinement.”
With the transition period now behind us, migration is close to 100% in most countries, as Mark Buitenhek, Global Head of Transaction Services, ING discusses,
“In some countries, there remain just a handful of organisations that have not yet completed SEPA migration, in others more than 10% still need to do so (July 2014). Consequently, the 1 August 2014 deadline is a ‘cut off’ date in some cases, while in others we could see an additional grace period.”
Recent progress in some countries has been remarkable. In Germany, for example, 58.5% of credit transfers in January 2014 were SCT flows. By June 2014, this had increased to 92.7% (source: ECB, July 2014). However, as Mark Buitenhek, ING continues,
“While the large majority of companies have now completed their SEPA migration projects, a substantial number of these have used conversion services to achieve compliance. This is not a permanent solution and these companies will still need to migrate to SEPA formats at some stage, not least as banks will not be in a position to support these conversion services indefinitely. Larger corporations that have greater volumes and complexity of payment and collection requirements can use this opportunity to concentrate their cash and treasury management activities. This takes time, but there is significant opportunity for end-to-end automation and efficiency by moving away from conversion services.”
For those that have completed this process, there is the potential to centralise and harmonise cash and treasury operations, as Vanessa Manning, RBS explains,
“Now that the heavy lifting in IT for SEPA migration has been done, customers are looking to see what changes they can make to their accounts and account structures. The reduction in fees for cross-border payments is a major advantage of SEPA for multinational businesses, but treasurers are now looking to create further cost savings and efficiencies by rationalising accounts and simplifying account structures, such as making payables and receivables on behalf of group companies through a single account (POBO and ROBO respectively).”
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Although migration is more or less complete, at least in some shape or form, what has really been the point? Is SEPA really an improvement on the pre-SEPA landscape? Arguably, much of the benefit of SEPA is derived from the Payment Services Directive (PSD) that sets a harmonised legal framework for SEPA; secondly, the value of harmonisation is as much to do with the use of XML which is a trend we are now seeing across a variety of markets, not only SEPA. On the plus side, as indicated above, cross-border payments are cheaper now that they are treated as domestic instruments, which benefits multinational organisations. Cross-border payments, however, represent less than 5% of total euro flows within the SEPA countries. Harmonisation opportunities have also been limited by the decision in some countries to introduce variations on the CGI XML standards. Few people have good things to say about SDD which, as a compromise solution across quite different national instruments, is widely considered to be inferior to these legacy instruments. Vanessa Manning, RBS outlines,
“While the SCT migration has largely been a success and relatively straightforward, SDD has been a far more painful journey, not least because it was entirely different from every other instrument that it replaced. Implementing SDD meant a complete change in behaviour, risks and processes as well as the technical changes, and inevitably, it has taken time to implement. With the additional transition period that was allowed in many countries, companies have been able to use SDD intensively for four or five months. We are now helping them to refine activities such as credit and collections, reporting and reconciliation. In theory, SEPA should enable these areas to be standardised, but the single standard that was anticipated has not yet materialised. Therefore, we are helping customers to overcome the complexities that result from differences between banks and countries, and achieve the degree of centralisation, harmonisation and efficiency that they require.”
Another weakness of SEPA is that it has not replaced all legacy instruments, which also limits multinational organisations’ efforts to standardise and centralise. Vanessa Manning, RBS continues,
“One of the failures of SEPA has been to allow the continuation of local instruments. For example, many corporations would like to process payments and collections for all countries through a single offshore account. In reality, in countries such as Spain, there is still the need to maintain local accounts to manage local payment instruments and process sensitive payments.
“While SEPA sought to achieve technical standardisation and harmonisation of rights, obligations and processes for users of payment services, the rules for bank accounts are still managed in-country, hence the motivation for POBO and ROBO.”
While one challenge has inevitably been the diversity of each market within SEPA, not least in payments culture, another major problem is that the SEPA objectives were initially set in 2002. According to a US study, for example, 28.7% of US citizens had a mobile phone in 2000, which rose to half by 2002 (source: Ownership and Usage Patterns of Cell Phones: 2000-2005, Peter Tuckel, Department of Sociology, Hunter College). Today, 91% of adults globally have a mobile phone, two-thirds of which are smartphones (BI Intelligence). Payment methodologies and culture are changing too. Although Paypal was formed four years earlier in 1998, it only became part of eBay in 2002. Mobile payments and innovations such as contactless payments are now also emerging strongly. As Mark Buitenhek, ING emphasises,
“It is important to remember the context within which the SEPA objectives were set, now more than a decade ago. SEPA represents standardisation of the old world, but this is not the world that we now inhabit. For example, the SEPA direct debit (SDD) instrument was already a compromise to try and reconcile the differences in payments culture and instruments that existed in each market. Since then, there have been huge developments in technology, payment systems and consumer preferences, so the instrument now needs to be developed – and quickly – to reflect the requirements of a new world, such as eMandates. Furthermore, we need to work out how the needs of consumers, businesses and banks have changed, and accelerate the delivery of appropriate solutions to meet these needs. For example, the rapidly increasing use of mobile technology for payments and 24/7 real-time payments processing give a new perspective on existing instruments that potentially eclipses SDD.”
So while SEPA was intended to address one set of problems that was pertinent when it was first conceived (in which it succeeded partially if not fully) the payments landscape has changed dramatically in the meantime. Some issues, such as the large-scale use of cash and paper instruments, have been addressed, as we are seeing a gradual decline. However, this has not been the result of SEPA (and SEPA has not replaced cash or paper instruments) but due to more convenient and secure means of payment emerging. T+1 SEPA payments also risk obsolescence due to the introduction of 24/7 real-time payments in a growing number of markets.
The challenge now is how to harness some of these initiatives to create a SEPA for today rather than for a decade ago. Vanessa Manning, RBS notes that this is starting to happen,
“SEPA was intended to address the prevalence of cash and paper instruments, hence the development of an electronic direct debit solution for example. Consumer and business requirements have evolved in the meantime, however, and there are transformative opportunities emerging to address these changing needs. For example, 24/7 payments are increasingly becoming a reality in a large number of markets globally. The EU is responding by placing a ‘faster SEPA’ on the eAgenda and is now in discussion amongst working groups.”
A major focus for many organisations is to enhance the SDD instrument, by addressing the significant perceived limitations in efficiency, risk and payment timing, despite only now coming into widespread operation. The fact that there is now a large number of market participants using SDD will be significant in driving improvements, as Vanessa Manning, RBS illustrates,
“Now that there is a critical mass of SDD users, which was not the case even a few months ago, we have reached a baseline to be able to drive further automation, such as eMandates and eInvoicing. It will, however, be important to learn some of the lessons from the way that SEPA was introduced and address the lack of market confidence that has resulted.
We are already seeing some successes that should help to build momentum and motivation. The experience of Finland, for example, where eInvoicing is now a regulatory requirement, shows that operations can be digitised and adopted quite quickly. We now have MyBank being piloted in Italy with adoption rapidly increasing. Looking ahead, eCommerce solutions, complemented with eMandates and eInvoicing will transform the ease with which transactions are handled.”
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One of the difficulties during the SEPA rollout, and with initiatives that are now under way, is that they are largely initiated in-country, rather than on a co-operative basis. This appears to be inconsistent with SEPA’s objective to create a harmonised European payments landscape. As Mark Buitenhek, ING notes,
“24/7 real-time payments are now a reality in nearly 30 countries and will ultimately become a standard expectation. However, with different clearing and settlement infrastructure in each case, it is difficult to achieve coalition.”
He continues,
“Most initiatives are taking place in-country, which has its limitations in terms of pan-European harmonisation, but as more than 95% of payment transactions are domestic, the opportunity for cross-border consensus and collaboration is limited. Furthermore, it is important to keep in mind what is most important to consumers and business, namely payment speed, simplicity and efficiency, with harmonisation not necessarily the priority for most financial participants. While an international approach would be preferable, this is probably not realistic given the need for rapid development and delivery of payment solutions that meet these needs. I would anticipate, however, that while most initiatives will develop in-country, many of these will converge for the last mile and therefore create opportunities that extend beyond borders.”
Vanessa Manning, RBS argues, however, that there is significant international co-operation taking place that will ultimately lead to improvements in standardisation,
“By 2016, we would expect to see a clearer pathway towards consistent usage of the SEPA formats. There are three key factors that will influence this. The first is the work that is taking place within the regulatory and interbank market within each country. We are seeing, and indeed participating in, a number of working groups to agree common standards for the country and map them against SEPA. The second is the influence of customers who are pivotal in driving standardisation. The CGI would not have happened without the influence and motivation of large multinational corporations and banks’ commitment and proactivity in achieving standardisation will become an even greater competitive requirement in the future. Thirdly, it is important to remember that standardisation is in banks’ interests too. It is expensive and potentially competitively detrimental to maintain proprietary standards, whereas collaboration and standardisation can contribute to a better quality of service to customers.”
One particular area in which we are likely to see developments is an extended focus beyond incoming and outgoing cash flows, and an emphasis instead on the entire transaction of which the payment or collection is just a part. MyBank is one step towards this by integrating eInvoicing as Vanessa Manning, RBS noted earlier, and mobile initiatives such as Zapp and Barclays’ Ping in the UK also open up new opportunities for consumer transactions. Mark Buitenhek, ING comments,
“Much of the SEPA dialogue has been about payments and collections; in reality, however, these flows do not take place in isolation, they are just one part of a transaction. Therefore, when looking at how best to achieve greater efficiency, speed and simplicity, we need to consider the transaction as a whole, rather than simply the cash flow that is attached to it.”
Beyond SEPA
Perhaps the biggest issue with SEPA is that we have expected too much. Creating a harmonised payments area for the euro was, and remains, worthwhile and indeed essential for a single currency. SCT is six years old but 24/7 payments have become a reality in the meantime. Consumer behaviour is changing, with new payment methods such as Paypal and mobile payments becoming increasingly popular. With migration now largely behind us, the focus should now be on improving the payment and collection experience for consumers and businesses to realise the promise of SEPA. Perhaps rather than considering SEPA as the end of the journey, we should consider it the starting point. With a consistent legal framework across SEPA, and a precedent for collaboration across market players, it should now be easier to develop and distribute solutions that benefit the financial community across Europe. Mark Buitenhek, ING concurs, but notes that in-country initiatives will continue to dominate,
“Looking forward, we need to build a coalition of the willing and move fast. There are a number of vehicles to drive innovation, such as SWIFT, EPC, internationally-active ACHs, central banks etc. but the biggest concentration of players will be in-country.”
Vanessa Manning, RBS concludes,
“Despite the limitations of SEPA, this is only one aspect of change in the payments and cash management space and we are at an exciting stage in the development of a new payments landscape. There is a clear and compelling pathway for banks in pursuing a digital agenda as the banking demands of consumers and businesses converge. In particular, treasurers and finance managers seek the same degree of visibility, responsiveness and convenience from a business perspective that they experience as consumers. This is a relatively recent trend in that four or five years ago, mobile banking, for example, was not a priority for treasurers as concerns about security were too great. Today, there is a far greater appetite for mobile solutions as they become ubiquitous in the retail space and security becomes more sophisticated.”
We’ve all now reached the start line: the challenge now is to run the same race, with the same end in sight.
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