Published: August 01, 2013
With the 1 February 2014 deadline for compliance with SEPA only five months away, and following clarifications from the European Payments Council (EPC) that there will be no postponement and no ‘plan B’, some companies are having to rethink their approach to SEPA compliance. PwC surveyed 150 companies in June as a follow-up to its January 2013 SEPA survey and found that more companies are actively working on SEPA readiness and that the understanding of the task at hand has improved significantly. However, we also found that 34% of companies are still at risk of not being ready in time. PwC SEPA specialists Bas Rebel, Jens Kohnen and Emiel Kuiken look at what action companies need to take.
According to the findings of the June update of our January survey, corporates still expect the 1 February deadline to be softened. Merely 20% of respondents believe that the regulators will strongly enforce the deadline and disallow legacy formats to be processed by the banks. The majority of the 47% expects a grace period (22%), during which banks will still process legacy formats or otherwise repair or convert (25%) the files to SEPA-compliant format. A few respondents (7%) expect an actual postponement of the official deadline.
Clearly there is inconsistency of views between companies and the regulators. If the corporate sector plans for a postponement that does not occur, this may lead to severe disruption of the international payment infrastructure. Our survey also indicates that corporates are sceptical about the readiness of their clients: approximately 40% expect that their customers will not be compliant in time. In the first few months after the deadline, companies should anticipate a slowdown of their cash conversion cycle by, say, up to 15 days, as clients may have difficulties in executing payments. This is an issue for companies whose margins are low and are therefore highly dependent on efficient working capital management. This could cause severe disruption to supply chains and increases in working capital requirements.
Given the looming deadline and lack of ‘plan B’ from the regulators, some companies – especially those that operate cross-border or have many operational entities and/or rely on in-house build solutions – may find themselves short of time. Our analysis of the responses to a number of questions in the survey suggests that around 34% will not be ready.
In addition to the internal complexities, external risks arise from a growing shortage of supporting resources at banks, consultants and IT vendors. Here are some suggestions for actions to take now.
The risks of non-compliance are unacceptable to many corporates; the risks will force senior management to take stock of their current status and assess the need to change course. We recommend those who fall into that category assess the project planning, staffing and SEPA readiness of the IT landscape. During this assessment, you would need to determine whether work-arounds would solve the time issue. Work-arounds can be found by increasing the scope of the project or outsourcing some parts of the complex procedures.
Experience has taught us that SEPA projects take on average 6 to 12 months. However, heavy direct debit users, decentralised organisations and corporations using in-house developed IT systems may need up to 24 months. Although allocating more resources to the project seems to be the obvious answer, other solutions may prove to be more effective.
Many corporates operate complex financial logistical infrastructures based on many different bank relations and IT systems. These companies may face migrating tenfold their ERP systems and bank interfaces in order to become SEPA-compliant. Instead of implementing separate XML Pain messages for all those bank interfaces, you may want to limit the amount of banks you use for making payments or direct debiting.
The simplest way of decreasing bank interfaces is to start by assessing the amount of banks used in multiple countries. Quite often global cash management banks are able to cover several countries with the same interface, which can heavily reduce the amount of required bank interfaces. Where local entities use several local banks for payments, they may also choose to prioritise one or two banks and migrate the others after the deadline. In an ideal situation, you have one SEPA-compliant bank interface per country before the February deadline; however, SEPA does offer the possibility of covering all countries from one bank interface.
Another, perhaps easier and quicker, approach to reducing the scope of the SEPA project is to assess the payment products that are in scope of the project. Based on our experience, credit transfers are easier and quicker to implement than direct debits. For this reason, you might choose to change the payment solutions offered to the client. Quite often corporates already have alternatives available, such as e-invoicing or online payment formats, which could be used as alternatives. Having such alternatives in place will reduce the stress of setting up mandate-management solutions and will reduce the time and effort. It should be noted that this solution is the least preferred from a treasury point of view because of the possible impact on liquidity. Late payments and/or increasing receivables may void the benefits gained by reducing the SEPA scope.
Some corporates, typically those who use legacy software, may find that updating IT systems is simply not feasible. Likewise, companies that have heterogeneous IT landscapes may find a large IT stake in their SEPA project. Such companies should assess the possibilities of outsourcing part of their payment infrastructure to conversion-software providers, which often operate ‘Software as a Service’ (SaaS) platforms. These SaaS solutions may be positioned between the company and the bank.
Such SaaS solutions can be used, in their simplest capacity, to convert legacy credit transfer payment files; or more comprehensively, as full-service solutions covering the direct debit process, including mandate management. The file conversion will allow the corporate to upload legacy payment files to the platform and download the SEPA-compliant XML format, which can then be sent to the bank. Quite often they also offer a conversion for the electronic bank statement into your legacy formats. Some of the SaaS solutions also offer a similar service for converting direct debit payments. These are more complex due to the required mandate-related information, which needs to be included in the XML messages. The process from collecting mandates until digitalising and storing the digital-mandate-related information for inclusion in the payment file is included in the service.[[[PAGE]]]
Unfortunately, outsourcing the payment file conversation does not let corporates off making all required changes for SEPA. Updates of master data, communications to clients, updating of bank contracts, etc, are still required before one is truly SEPA-ready. Another unfortunate fact of external file conversion services is the loss of control mechanisms on the payments. The current control mechanisms such as hash totals may no longer be available when the file is converted. This introduces the risk that your payment files can be changed during the conversion, which may go unnoticed. We highly recommended assessing the offered security around outsourcing solutions to minimise such risks. Other points to consider are the costs associated with outsourcing and the dependency on a single external party for an extended period of time.
Before making a decision on outsourcing, you should determine the period for which this outsourced solution will be in place. Where the outsourcing is permanent in nature, you should carefully assess the associated risks and costs. Because the marketplace is flooded with numerous conversion services, all with varying quality and offered services, it is wise to start a selection process before selecting a partner. Specific SEPA expertise is required in order to make the right selection. It’s also important to notice that SaaS solutions are not put in place instantly – the roll-out of the conversion service may take up to six to 10 weeks.
Some of the risks associated with non-compliance are the inability to make or receive payments, loss of automated processing of payment information and serious increases in payment receivables due to unpaid bills by non-compliant clients. All these risks will have an effect on the company’s liquidity position and may increase the working capital requirement. Those companies with low operational profit margins or those that heavily rely on working capital may need to prepare for distortions in their processes.
Have you considered what will happen when your systems are no longer able to produce payments on your ‘go live’ date? With the deadline drawing near, you may find that there is little time left between your ‘go live’ date and the SEPA deadline to repair your systems if you make a mistake. So we highly recommend establishing a back-up plan in which you define the actions you need to take to continue with business as usual.
The back-up plan should provide a clear scenario that can be followed should you be unable to make payments after the ‘go live’ date. The easiest scenario is to temporarily switch back to the legacy payment schemes which will give some time to make the required changes. This would only be possible if there is sufficient time before the deadline. Another scenario is to prepare for using a conversion service to produce SEPA-compliant payment batches. It is vital to understand that conversion services are not easily turned on and that such a solution should be carefully prepared. Also, switching back to legacy systems may not be possible either, without careful planning beforehand.
In addition to the payment batches, you might also include a communication plan to inform your stakeholders about delays, have a credit facility standby to cover short-term liquidity dips (in case your clients are unable to make payments) and prepare alternative payment products, such as bill payments, online money transfer schemes or other payer initiated payment schemes, to be able to get paid.
To view the June survey findings in full, please see ‘Treasury
research and insights’ at http://www.pwc.com/en_GX/gx/audit-services/corporate-treasury-solutions/cts-publications.jhtml
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