Published: May 01, 2009
Dutch airline KLM was one of the first companies to implement the SEPA Credit Transfer on a large scale. What lessons can we learn from its experience?
The first phase of the Single Euro Payments Area has arrived. Many payment users - companies, public sector bodies and consumers – have enthusiastically embraced it while many others continue to use national Euro payment products and are likely to do so for years to come.
So what is it, in the corporate world at least, that convinces some companies to move quickly to SEPA standards while others are content to carry on as before? What are the advantages of SEPA products over the old ones? And how do companies handle the changeover?
The fact that KLM is active in so many countries in Europe made it obvious there were big benefits to be had from harmonising payments and collections.
The answers to these questions can be provided by the experience of KLM Royal Dutch Airlines, an early SEPA adopter and a valued and long-standing Citi client. Citi created a state-of-the-art global payment factory together with the airline several years ago, located in its Amsterdam treasury management centre, and this has brought with it significant efficiencies.
“When SEPA appeared on the horizon, KLM saw it as an opportunity to drive further efficiencies,” recalls Edwin Hartog, Global Client Manager for KLM in Citi’s Global Transaction Services. Edwin worked closely with David van Mechelen, a Senior Manager in KLM’s Treasury and Corporate Finance department, to draft a SEPA implementation plan. “The two most important objectives were, first, for the global payment factory to adopt the SEPA Credit Transfer (SEPA CT) as soon as it became available in January 2008 and, second, to change the payment format to the XML standard used by SEPA,” says Hartog.
The two organisations’ IT teams ran a small pilot on the XML format, after which plans were made for a full roll out of the format and the SEPA CT in all 22 SEPA countries where Citi provides KLM with transaction services.
“It was quite a challenge, but because of the thorough testing of the format, the roll out in January 2008 went smoothly,” says Hartog. “At the time we were unaware of any other SEPA roll-out of this scale.”
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Why did KLM want to be an early adopter of the SEPA CT? David van Mechelen takes up the story. “KLM was –because of its particular situation- well-positioned for SEPA. KLM already had a high quality centralised payment factory for European and global payments, so the SEPA CT was a logical next step to improve efficiency further,” he says. “The fact that KLM is active in so many countries in Europe made it obvious there were big benefits to be had from harmonising payments and collections.
Gerda van der Landen, Treasurer at KLM, continues: “Another important consideration is that, we are able to operate our foreign establishments globally under the same (Dutch) entity, which makes cash management easier, and therefore SEPA easier to implement. She adds that matters were helped by having excellent relations with their three key cash management banks. “All are well positioned for SEPA, have a clear view of what they want to achieve, and want to be market leaders.”
Van Mechelen: “Another reason to adopt early SEPA is that at KLM we also like to innovate in the finance department, not just talk about it. Innovating provides an opportunity – and forces you -to gain truly in-depth knowledge of your own operations and processes. For that reason I have actively followed the developments of SEPA during the past years and meanwhile we did our internal homework and preparations, so that we were ready to take advantage of SEPA whenever we felt it was the right moment for KLM”
However, because no SEPA migration end date has been set by European authorities national payment schemes, will still continue to exist.
“Although SEPA is operational in all countries, domestic ACH (Automated Clearing House) payment channels are still in use everywhere, and banks are still using them, so in quite a few cases –for various reasons- we still have to use non-SEPA (ACH) methods to make low-value Euro payments to suppliers,” says Van Mechelen. More than 4,500 banks now offer the SEPA CT on a voluntary basis, but SEPA can only become the standard if domestic schemes are switched off.
KLM currently refrains from using the SEPA CT for salary payments. The main reason behind this is that for SEPA CT no payment date can be specified within the D+3 maximum execution time cycle. Consequently, the company prefers to use domestic ACH methods which provide greater certainty of payment date.
KLM did a cost benefit analysis during the planning phase to calculate the costs of migrating to the SEPA CT and the savings that would subsequently be made.
In several countries, particularly in Southern Europe, KLM noticed that even SEPA-compliant banks sometimes deduct high charges for SEPA CTs. This means that when KLM makes a small payment to a supplier, the supplier’s bank may deduct such a relatively high collection charge, that the payment (collection) becomes very unattractive for the beneficiary. “But we don’t want to start renegotiating pricing arrangements with our vendors to compensate for this because collection charges are primarily a commercial matter between the beneficiary and the bank. So where a bank applies such high charges for receiving SEPA CTs, we’ll opt for national ACH payments”, another reason to keep the ACM payment type active.
This problem will soon cease to exist when the PSD becomes law in November 2009 as from then on banks will only be able to deduct payment charges before crediting the beneficiary if they have their prior agreement to do so. In addition, the Euro price Regulation is currently under review and will also cover direct debits, which means that going forward SEPA direct debits will have to be priced at the same level as corresponding national Euro direct debits.
The general burden of Central Bank Balance of Payments Reporting has also not been alleviated under SEPA. [[[PAGE]]]
KLM did a cost-benefit analysis during the planning phase to calculate the costs of migrating to the SEPA CT and the costs that would subsequently be saved. “There’s a distinction to be made between the external and internal savings,” says Van Mechelen. “The external savings are straightforward. You compare the domestic ACH credit transfer rates with the SEPA CT rates charged, and the latter are cheaper. Also, SEPA offers opportunities to further reduce the number of bank accounts, including related direct cost.”
“The internal cost savings will be greater for KLM, and are therefore the main driver for us. They are in several areas. First, thanks to the SEPA pilot, which forced us to review all the processes from receiving the invoice to making the payment in each country, we identified and acted on a number of inefficiencies Second, we now get a better insight into the volumes and costs of the transactional services we use. As one of the consequences hereof, KLM replaced more expensive payment types with cheaper ones where possible..”
A third cost saving has come through standardisation, especially the XML messaging standard that the SEPA CT uses and which KLM now uses with its three cash management banks. “It’s an easy standard to use,” Van der Landen says. “There are some benefits already and there will be more in future. It gives us better control in routing payments. A final cost saving can be made in back office administration, which is perhaps the most important because with the reduction in the number of bank accounts that SEPA has brought there is a corresponding reduction in the need for monitoring, reporting and reconciliation.”
So what pearls of wisdom would KLM like to impart to treasurers in other large companies? “Centralising transactions through a global payment factory is the obvious first move to make, as it introduces most efficiencies and allows you to make considerable internal cost savings,” Van Mechelen says. “If you don’t have a factory in place, migrating to SEPA can be used to initiate such a project, or accelerate it if you have already started and are half-way through. If you do have a factory in place, then SEPA is the next logical step to gain further efficiencies.”
You also need to prepare thoroughly to ensure a smooth roll-out. Also for a corporate, implementing SEPA is heavily IT-driven, so you need to work closely with the internal people responsible for the software in the payment factory and the IT team in the transaction bank. “I think the IT teams did the most work. The XML format, the new security standards, the new connectivity checks, - things like that constituted maybe up to 80% of the work.”
Collecting BICs (Bank Identifier Codes) and IBANs (International Bank Account Numbers) from payees is difficult, but necessary, and it is especially important to check they’re correct. Nevertheless, in several countries, KLM ‘reconstructed’ the codes by itself, avoiding the need to contact all of its vendors. KLM has built a validation tool in its payment factory to check the combinations of BICs and IBANs in each vendor payment file, in the vendor data base and in the daily payment file sent to the banks. This tool then compares the BICs and IBANs with a constantly updated list bought from an external provider to ensure the combinations are still correct.
“As we see it, this validation tool is a must-have,’ Van der Landen says. “We first considered it as just a quality check, but we have noticed that the BIC and IBAN combinations change frequently and since they are so crucial for SEPA processing it’s now an integral part of our system and we are seeing the benefits.”
KLM’s SEPA story is a clear demonstration of first-mover advantage. However, for companies that have barely started, there is still time to follow the airline’s example and reap the benefits of harmonised Euro payments. But you need to hurry. 2009 will already bring advanced SEPA Credit Transfers and SEPA Direct Debits will complete the SEPA market offering from November.
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