Published: May 01, 2011
Sharp-eyed readers, or those suffering from some obsessive compulsive disorder, may remember an article that I wrote last year entitled ‘SEPA: Are we nearly there?’. The year before that, I wrote something similar – and indeed the year before that, and so on. Indeed, I remember writing a SEPA piece in 2006 entitled ‘The road to 2008’. Well, 2008 (the year in which SEPA Credit Transfers were introduced) is certainly memorable, but not because we all saw the SEPA flag waving over our nearest European city. So for at least the past five years, articles about SEPA have, not surprisingly, been read by perspicacious readers whilst in some sort of déjà vu haze. Constant entreaties to get on with migration to SEPA and to use the opportunity to enhance payments and collections processes appear, however, to have fallen on almost deaf ears. With an overall Eurozone volume of around 10% SEPA credit transfers and a staggering 0.07% of SEPA direct debits, progress has been fairly pitiful. So five years on from the industry’s original exhortations to start planning for SEPA, many of us are still happy to pop it on a ‘to do’ list next to ‘sort out cash flow forecasting’ and ‘find yacht for retirement’ without any great expectation that we will ever get around to it.
Unfortunately for the dreamers and prevaricators, which I think comprises most of us, we probably have to leave our yacht-finding for another year, and start looking at SEPA. Really, I mean it, I don’t want to have to write yet another article on this next year, and definitely not the year after. With defined deadlines now set for the retirement of domestic payment instruments, to be replaced by SEPA payments, treasurers cannot reasonably expect to delay their migration to SEPA beyond late 2012 for credit transfers and 2013 for direct debits. “Why”, I hear you chortle, “that’s still 18 months away, hand over the yachting magazine!” Well, no.
To take full advantage of SEPA typically requires centralisation of financial processes.
Firstly, by waiting until the dying throes of the old generation of payment instruments, the most your banks or technology suppliers will be able to do is throw you a migration guide and wish you luck.
Secondly, migrating to SEPA may be quite a time-consuming task. The more countries in which you operate, and therefore payment instruments and formats that you use today, the higher the number of banking relationships, and the greater the complexity of your systems environment, the longer the migration to SEPA will take. And that’s just for credit transfers. Direct debits are a different proposition entirely, not least because of the complexity of the mandate management process.
The third reason for not delaying SEPA until the sun sets over the domestic payments horizon is that migration can be seen as either simply another obstacle in the otherwise smooth sailing that we hope to, but never do achieve in treasury; alternatively, it can be seen as a catalyst for change. The longer you leave it, however, the less likely it is that you can derive much in the way of benefit, and instead, you’ll invest in the migration process but have little if any return on investment. Spend a little more time and money, and you’re far more likely to reap the rewards.[[[PAGE]]]
So why implement SEPA? And more importantly, why look wider than SEPA? It is important to remember that both treasury payments (i.e., high value, low volume payments) and commercial payments (low value, high volume), cross-border and domestic must be migrated to the new payment instruments. This has considerable implications for large volume payments and must be handled carefully to avoid disruption to the business; however, there are also opportunities. For domestic payments, there is the potential to move payment processing to jurisdictions that are most efficient, such as Belgium, the Netherlands or Germany, irrespective of where the company itself is headquartered. For companies with a large number of cross-border payments, costs can also be reduced as these are treated in the same way as domestic payments. Cash receipts that may currently be collected using different payment methods in each country, contributing to difficulties in centralisation, will also be standardised, making it easier to centralise collections.
To take full advantage of SEPA typically requires centralisation of financial processes.Centralising payments, and in particular collections, is often challenging, bearing in mind the differences in formats and payment types across Europe. SEPA reduces this fragmentation considerably, if not entirely, and is therefore a catalyst for achieving greater centralisation. Centralising payments, including establishing an in-house bank and introducing subrogation to make payments on behalf of other entities, enables the number of external banking relationships and accounts to be reduced, cuts costs and enhances process efficiency and control. For collections, the objective is not necessarily to collect cash into a single account, but to define consistent credit policies, including establishing customer credit terms according to payment behaviour, and collect cash more proactively.
Some of the potential benefits when implementing SEPA, and in particular using it as an opportunity to centralise and rationalise processes, include:
Rationalising banks and bank accounts
Reducing the number of cash management banks and accounts in the Eurozone brings considerable advantages, not least in cost, security and integration. However, while a reduction in accounts is certainly achievable under SEPA, the much-feted ambition to reduce to a single euro account is in many cases unachievable, except for companies that operate in a select number of countries. In Spain and Portugal for example, local regulations mean that in-country accounts are still necessary for tax and central bank reporting purposes. Furthermore, some local payment methods, such as Spanish Recibos, are not replaced by SEPA, leading to some exceptions. Still, the ‘80/20’ rule applies in many cases, and if treasurers can rationalise 80% of their accounts, and manage the bulk of transactions more efficiently, this is already a significant step forward.
While the elusive ‘one euro account’ is not only largely unachievable, it is also undesirable. In only a few cases do treasurers who have steered their company’s cash through the crisis now seek to appoint a single bank for their entire cash management business. While there are various reasons for this, not least the potential concentration risk, it perhaps does not matter that the academic objective of a single account may not be achievable.
Simplifying cash management structures
Rationalising account structures means that complex and often expensive cash management structures can be simplified. In some cases, this also means that same-day value is achieved on account sweeps which is not always the case today. By making payments on behalf of group companies (which is possible in most, but not all European countries, such as Portugal) the number and complexity of account structures can be reduced.
Reducing the number of banking interfaces
Working with a smaller number of banks and centralising financial processes where appropriate means that the number of banking interfaces can be reduced. While the estimated cost of maintaining an electronic banking interface varies widely between €10,000 to €35,000 each year, it is material in every organisation. Reducing the number of interfaces not only cuts costs, however: there are also advantages by standardising security protocols and limiting the number of users.
By centralising control over payments, working capital can be enhanced and payment runs processed more regularly.
Standardising communication formats
SEPA instruments are based on XML ISO 20022 formats, which provide a global standard for payments transmission. While many companies see the benefit of standardising communication, not only for SEPA payments but on a global basis, there are inevitably challenges. XML formats have different flavours, and one bank’s version may not be identical to another; however, the work required to manage these discrepancies is typically much lower than trying to manage totally disparate formats.
Managing days payables outstanding more effectively
Before establishing central control over payments, many companies struggle to establish consistent payment terms with their suppliers, and to manage payment dates effectively. For example, some companies will have fortnightly or monthly payment runs, so some supplier payments will be early, while others will be late, potentially compromising supplies and relationships. In some industries, there will frequently be times when suppliers are paid before receipt of cash from the customer. By centralising control over payments, working capital can be enhanced and payment runs processed more regularly. This enables payments to be made on the correct date, and avoids ‘spikes’ in cash balances.[[[PAGE]]]
Leveraging best-in-class technology
Fragmenting processes across different locations and systems often results in higher costs, disparate rules and processes and inconsistent reporting. Centralising processes (physically or virtually) presents the opportunity to implement consistent technology that is ultimately more cost-effective, and provides greater automation, enhanced reporting, efficiency and a lower risk of fraud and error.
Improving cashflow forecasting and reducing working capital requirement
The benefits of having greater control not only over cash, but over information relating to it, are clear to every treasurer: make better decisions; structure debt and investment maturity profiles more accurately to reduce short-term debt, and maximise returns. By centralising processes and rationalising information platforms, this becomes far more achievable.
Access alternative financing
With bank financing no longer cheap or readily available, companies of all sizes are seeking to use their financial assets as collateral for financing, with factoring and other forms of supply chain financing becoming increasingly popular during the crisis. Even now, alternative financing remains an attractive financing option and treasurers recognise the role it plays during a variety of economic conditions, stormy or otherwise. Centralising and standardising cash processes and information flows makes a major difference to the total amount of financing that can be obtained, and at what rate.
Making strategic use of surplus cash flow
Centralising cash flow means that less cash is fragmented across the business so more can be used to benefit the business and its shareholders directly, from M&A, share buybacks and dividends through to direct investment in achieving business strategy. Furthermore, investment decisions can be made with a more consistent approach to counterparty risk and diversification.
Much has been, and continues to be said, about the limitations of SEPA, and indeed there are many. Different central bank reporting requirements, legacy payment methods in some countries that SEPA has not quite swept up, diverse interpretations of XML standards all contribute to a more complex project than many of us would like. However, although the tidy plans with boxes and arrows drawn up on the whiteboard may end up being less straightforward than everyone’s best intentions, this does not means that SEPA should be dismissed out of hand. If 90% of payments can be centralised, and a similar proportion of collections, cash flow forecasting accuracy improved by 30% and short-term debt reduced by even 10% or 15%, the benefit to the company would be material, even if there remain exceptions.
The bank and vendor community are also rising to the challenge of easing the migration to SEPA, often in partnership. SEPA Direct Debit solutions from companies such as Sentenial and Logica, settlement instruction validation from Accuity all help to relieve the migration burden whilst also enhancing processes on an ongoing basis.
There is a sketch by a well-known comedian in the UK where he discusses plane travel. In particular, he talks about those who sit in the airport lounge ignoring boarding calls, saying “the plane won’t leave without me.” He then wonders what would happen if everyone did the same (actually, it sounds quite dull – it was quite funny at the time, honestly). However, boarding early (or at least on time) means that you get to store your luggage in the rack, and avoid having to climb over a number of fat people who can’t get out of their seats as you fight your way to the window. SEPA is like the plane, only it will take off without you. Early boarding is no longer an option, but timely boarding is still possible if you run. So, while I’ve said it before, and doubtless will say so again, those who have not already migrated, or planned to migrate to SEPA, are potentially losing an opportunity to deliver additional value to the business. While dealing with complexities and exceptions may be irritating and spoil the tidy, organised plans that we would love to implement, they should not stop us from maximising the value of standardised payments (and collections) across the Eurozone, and potentially beyond, as far as we can. Implementing SEPA, which inevitably requires resources, and then asking for more budget to optimise processes, is likely to be difficult; making a business case for both as a single project is likely to have a greater chance of success. Otherwise, you’ll be stuck with your luggage under the seat, your knees up to your chin and an army of fat people to climb over.
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