Published: April 01, 2008
January 28 2008 marked one of the most important dates in the history of the European Union. No, not your wife/husband’s birthday, your anniversary, or the day you were meant to take the dog to the vet - although of course, it could be these things too. Did you notice? No, nor did I. January 28 was the launch date for SEPA Credit Transfers, the first, long anticipated step towards a single Euro payments area. Actually, that’s not quite true, I did notice, not necessarily on the 28th but certainly on the 29th or 30th as I received first a trickle and then a barrage of press releases from banks announcing that they had made their first SEPA payments, including corporate-to-bank SEPA payments.
Isn't it right that the banks should be pushing their corporate customers to migrate their credit transfers to SEPA Credit Transfers?
So what actually happened on January 28? Who were these eager treasurers ready on day one to make SEPA payments? To be fair, I know of one, and I’m sure there were others, but a couple of banks actually admitted that they had taken a customer’s normal cross-border payments and converted them to SEPA payments, without the customers themselves knowing anything about it. Somewhat questionable you might think, as the basis for a press release, but actually, isn’t it right that the banks should be pushing their corporate customers to migrate their credit transfers to SEPA Credit Transfers (SCTs)? After all, the primary beneficiary of SEPA is the corporate community, so what are we all waiting for?
Although January 28 2008 was an important date, it is really only the start. The Payments Service Directive will be incorporated into national law in European Union member countries in November 2009 which is a necessary condition for the launch of the SEPA Direct debit, scheduled for the same time. More cynical commentators (and most of the time, I am not one of these) argue that SEPA cannot really exist until then. In the purest sense of the term ‘SEPA’, this is true. Furthermore, companies with very high volumes of direct debits, such as utilities, telecoms, mortgage providers and similar organisations, are understandably apprehensive (and reluctant) as a lot of effort will be required to replace (or in some countries such as Spain, set) direct debit mandates with customers. However, even though there is still some way to go, this doesn’t mean that we shouldn’t make a start. I would urge all companies, of all sizes to review actively their euro payments activity and to determine the benefit of migrating to SEPA Credit Transfers sooner rather than later, rather than waiting until there is no choice (when you will inevitably have all sorts of other things happening!). It will not go down well with the CFO if s/he hears about a competitor making thousands of euros in savings on payment costs, only to hear that his/her own treasury department has not bothered.
An important issue related to SEPA is the file formats which are used to communicate payment messages both between banks and corporate-to-bank. The mandatory format for bank-to-bank payment messages is an XML format known as UNIFI ISO 20022. The European Payments Council (EPC) has recommended that the same format should be used for corporate-to-bank messages but it is not obligatory. Support for ISO 20022 formatted messages between corporates and banks is something you should be insisting on with your banks, however. As anyone who has been involved in a bank interface project before (particularly with more than one bank) will know, the formats used by every system are slightly different, so the cost and resource required to set up interfaces can be substantial (commonly cited as e15,000 - e35,000 per interface, per year). There are other implications of having different formats: firstly, it increases a treasurer’s reliance on an individual bank, due to the cost and inconvenience of changing; secondly, different formats usually means that slightly different information is provided, hindering processes such as payments and collections reconciliation. If the same standards are used, corporates have far greater bank independence, lower costs and the ability to implement more automated processes as a result of having access to more consistent information. Discussions about standards, and indeed anything prefixed with ‘ISO’ tends to make the keenest of us glaze over. There is a very good article by JPMorgan in this issue explaining ISO 20022 in more detail. [[[PAGE]]]
But how should you go about establishing a cost/benefit for SEPA? There are really two possible answers. Firstly, there is the cost/benefit simply of switching from domestic payments to SEPA payments. In theory, this sounds relatively straightforward; however, it becomes more complex when you take into account both treasury payments (i.e. high value, low volume payments) and commercial payments (low value, high volume) - both cross-border and domestic, which will become one and the same going forward. The greater benefit is likely to be for the higher cost cross border payments initially;
[[[PAGE]]]
However, having worked this through even roughly, it leads to a second issue: should you be simply migrating to SEPA payments but leaving everything else unchanged, or is this the opportunity to optimise the way you make payments - and potentially collections too. After all, payments, and particularly collections may not be fully centralised across Europe today. There might be various reasons for this, but one of them is often because a company needs to deal with domestic payments/collections in each country. With SEPA, this requirement is eliminated, potentially opening the door for a more centralised approach such as setting up a payments hub and/or collections hub, either as independent functions or as part of a financial shared services environment. The potential advantage of SEPA expands significantly if it is approached in this way and the tangible and qualitative benefits can be substantial. We have discussed the benefit of payment centralisation many times in TMI, and will have a special feature on payments later in the year, but to summarise:
We will look at collections in more detail in the next edition of TMI, but this too is an important area to consider in terms of efficiency, supplier relationships and working capital optimisation for which SEPA can again be a catalyst.
If you haven’t already done so, do take a look at the TMI SEPA Survey and commentary which is in the International Cash Management Guide 2008, which you should have received with this copy.
Bearing in mind the operational and strategic benefits which SEPA will ultimately bring (albeit in stages) why let your competitors get early mover advantage?
SEPA will continue to resonate around the financial world for a few years yet, and there is still a long way to go. With the PSD and SEPA Direct debits taking effect in November 2009, there is as yet no ‘D Day’ for domestic payments, but while SEPA is not yet a home run (and its success will be incremental rather than triumphant) the fact that it is being implemented in stages does not make it an own goal (and apologies for mixing my sporting metaphors. You should just be relieved that I’m not gloating about the remarkable and somewhat surprising success that the UK has suddenly had in cycling - a sport which has gone from complete obscurity to something rather cool in the space of two weeks). Until this date looms, it seems likely that many corporates will not make the decision to move to SEPA payments. However, the proposition changes if the investment required to migrate to SEPA can be shared with another initiative such as changing banks, reviewing bank connectivity or a payments centralisation project, and the benefit enhanced. SEPA should be the catalyst to embark on such a project and bearing in mind the operational and strategic benefits which SEPA will ultimately bring (albeit in stages) why let your competitors get early mover advantage?
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
