Published: April 01, 2008
On 28 January 2008, the SEPA Credit Transfer went live, with a number of the larger banks issuing press releases almost immediately emphasising not only their ‘SEPA Readiness’ but announcing the first SEPA transactions. Many of the early transactions were bank-to-bank payments, not corporate-to-bank payments, so what does SEPA mean in practice for corporates?
The launch of the SEPA Credit Transfer is only the first step in a far longer process towards payment harmonisation.
The launch of the SEPA Credit Transfer is only the first step in a far longer process towards payment harmonisation. With the SEPA Direct Debit and Payments Service Directive, both huge undertakings, due for launch in November 2009 and an arduous transition process, we can expect to see the SEPA saga continuing for some years to come.
‘SEPA Ready’ and ‘SEPA Compliant’ are terms which have littered press releases and marketing literature for some time now, but with SEPA in such early stages, to what extent can corporates realistically take advantage of SEPA - and what advantages are there to be taken at such an early stage? To find out, TMI recently issued an exclusive SEPA Survey across twenty of the top banks operating in Europe to find out what SEPA capabilities banks are making available to their corporate customers today and the plans they have in place to develop these in the future.
All the banks we surveyed started offering SEPA Credit Transfers on the launch date of 28 January. Most banks expect to offer the full range of SEPA payment products in due course - one did not anticipate offering direct debits and two did not envisage providing card payments.
The date at which banks can introduce SEPA Direct Debits will depend on the official launch date, which is currently scheduled for November 2009. Not all banks seemed clear on this, with some saying that they were planning to offer SEPA Direct Debits later in 2008 and some during the first half of 2009. In reality, I think we can be safely assured that as with Credit Transfers, the banks will be gearing up to offer the new direct debit product from the 2009 launch date.
The introduction of SEPA cards is more variable. Twelve of the 18 banks supporting SEPA Cards already do so, whereas the remaining six are planning to introduce services over the course of the next two years.
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One of the benefits which many corporations want to achieve from SEPA is the ability to standardise their bank connectivity i.e. to use the same file formats for connecting to all their banks. With banking interfaces both costly and resource-intensive to maintain, this is potentially an important consideration. Furthermore, with ISO 20022 messages enabling richer payments information, standard formats should enable companies to implement more automated reconciliation, exception handling etc. irrespective of the bank from which the information was sourced.
Furthermore, there has been much discussion about SEPA prompting corporates to rationalise their banking relationships in Europe, potentially to a single pan-European bank. However, fig 2 illustrates that many corporates will be unable to achieve this in the short term:
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The same question was asked of Direct Debit formats, but as the new format has not yet been defined, the responses refer primarily to existing direct debit formats. However, for some companies seeking pan-European services, supporting local direct debits will be as important as credit transfers. So again, banks seeking to offer truly pan-European services will need to support both credit transfers and direct debits in their clients’ countries of operation.
According to some companies, and their banks, the local direct debit product seems likely to remain for far longer than the official transition periods. In some countries, such as Spain, where there are no direct debit mandates at present, the move to SEPA direct debits will be a huge undertaking and consequently, companies with large numbers of direct debits, such as utilities, telecoms and mortgage providers, are likely to be slow to move unless there are specific benefits to doing so.
The banks we surveyed were unanimous that SEPA brought benefits to corporates, and there was mostly agreement about what these benefits will be. One of the key things which corporates tend to think of when they think of SEPA compared to cross-border payments is lower cost, but this view was not shared by a quarter of the banks we surveyed - 75% banks indicated lower payment cost as a benefit for corporates.
For some companies seeking pan-European services, supporting local direct debits will be as important as credit transfers.
Bearing in mind the responses to the previous questions, which revealed that many banks do not yet support their corporate customers’ preferred payment formats, it is perhaps surprising that 100% of banks thought that an advantage would be standardised file formats. This emphasises that while it would appear that market participants are all committed to standardisation, there is still some way to go before this is truly a reality.
Similarly, with the developments which still need to be made to support local formats as well as SEPA payments (which many banks are not prioritising, preferring to work with partner banks, as it does not seem a valuable long-term investment) it is seems unlikely that the possibility of reducing the number of accounts or even banks, both cited by 90% of bank participants, can be realised.
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Other potential benefits cited by the banks (specifically Santander, Dresdner and Nordea) included:
While 50% of banks agree that there are few or no disadvantages of SEPA for corporates, the remaining 50% either believe that there are some issues with which corporates will need to contend, or are tactfully silent. Most of the perceived disadvantages are transitory i.e. they are issues to deal with during the implementation of SEPA and/or during the period of migration from domestic to SEPA payment products, as opposed to longer-term disadvantages.
The banks we surveyed were unanimous that SEPA brought benefits to corporates, and there was mostly agreement about what these benefits will be.
Only 15% of banks thought the SEPA payment products less sophisticated than domestic payment types; this is not necessarily the experience of all corporates, particularly with direct debits, but much of this is still to be finalised.
Eighty-five per cent of banks highlighted that their corporate customer would need to modify their existing systems and 80% to focus on integration and file formats. This is an issue not only of SEPA but also the phasing out of some existing formats such as ETEBAC 5 in France. Standardisation is a key point once again, and this will require investment by corporations as well as banks. With most banks having more than one connectivity channel e.g. web based platforms, host-to-host platforms or SWIFT, many corporates are seeking more detailed guidance from their banks on how to take advantage of new connectivity and standardisation opportunities.
Only one bank (Santander) mentioned that there would appear to be few benefits for SMEs and corporates operating domestically. This is a view with which many corporates sympathise, particularly domestic companies with large consumer bases, such as utilities, pension schemes and governments.
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If it seems that banks are not quite as ‘SEPA ready’ as we might have been led to believe, the banks do not think that their corporate customers are ready either - these two points are likely to be related and form either a vicious or virtuous circle - if banks don’t believe their corporate customers are demanding or ready for SEPA, they will not prioritise it; if corporates don’t believe their banks are providing sufficient services around SEPA, then they will not push for SEPA migration.
Ten per cent of banks thought their corporate clients had made no preparations at all for SEPA; 50% minimum preparations and 40% some preparations. From our discussions with corporates, this appears largely realistic. There are, of course, early adopters who have been able to derive immediate benefits from SEPA Credit Transfers, particularly those who may be engaged in a payments project, such as implementing a pan-European payment factory. It is all very well to talk about the need to amend existing systems, as if this is a minor undertaking, but with many companies having multiple systems from which payments are generated, some of which will be easier to amend to support new formats than others, and in many cases, this project can only be justified as part of a broader initiative to enhance the payments process. Until a ‘D-day’ for existing payment formats is on the horizon, it seems likely that most corporates will not make the decision to move to SEPA payments unless the investment can be shared with another initiative such as changing banks, reviewing bank connectivity or a payments centralisation project.
It is clearly not in banks’ interests to maintain existing payments and SEPA payments in parallel indefinitely so it is reasonable that they will want to implement a migration plan for SEPA, although with so many elements of SEPA and the Payment Services Directive (PSD) still not yet in place, 30% of banks have not yet decided on the appropriate timescales. 2009 was given as the most popular date by banks, presumably for Credit Transfers, but with Direct Debits due in November 2009, it could be a very busy 2010 and 2011.
Most said that the timing of migration would depend on client demand, but the problem we discussed before - i.e. that many corporates will be unwilling to invest in SEPA except as part of a wider initiative, could extend the migration timescales almost interminably unless there are clear ‘cut-off’ times for domestic payment instruments to create the necessary momentum. Even then, banks cannot provide all the necessary support for corporate migration to SEPA, so they will need to work closely with the system vendors to provide a smooth transition.
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One of the benefits of SEPA for corporates which has been discussed for some time is the opportunity for banks to provide additional optional services (AOS) on top of the basic SEPA payments product. This is largely made possible as the ISO 20022 standard allows more information to be recorded on a payment and therefore used to support other services such as reconciliation. Some banks said they are still deciding what AOS they will provide around SEPA whereas others (such as Dresdner) could articulate clear and detailed plans. Data enrichment was the most commonly cited service which banks plan to provide (80%) - which is potentially very valuable for corporates so long as their technology allows them to exploit this information effectively.
If SEPA is a catalyst for improving a company’s payments processing, perhaps by implementing a payments factory or rationalising bank connectivity, it is of interest to corporates to know what types of payment file their banks can process, particularly during the transition period of supporting local and SEPA payments. Companies will still need to be able to make different sorts of payments, and the objective would be to make these through a single channel and in a single file. We asked the banks what files they could support - in particular, whether they could support multi-country, multi-product files. The majority of banks could support single and multi country messages in the same file, which would be significant for a payments factory (95% and 85% of participants respectively), but a lower proportion could support multi-product messages - 60%. This could potentially reduce the efficiency of a payments factory, however strong the company’s internal technology, as multiple files for multiple products need to be transmitted - this is exacerbated even further if different files need to be sent to different banks.
Finally, one of the concerns which some corporates have raised is that they fear an increased error rate on payments, particularly during the transition period, in the case of missing IBANs etc. We asked two questions relating to this in the survey - firstly what banks were doing to minimise the number of failed payments, and secondly, the potential cost to the corporate for doing so.
Corporates need to be aware that 'SEPA-compliance' is effectively determined according to a bank's own criteria.
This question had the most ‘abstentions’ which suggests either that those banks do not have the capability to repair or enrich payment instructions automatically, or that they are still developing their capabilities in this area. Some banks who did not respond specifically indicated that it would depend on the arrangement they had with their customers.
Thirty per cent of banks would either re-route a SEPA payment with insufficient information through a non-SEPA channel while 30% would aim to repair or enrich the instruction. These approaches are likely to be the most attractive for corporates to avoid the inconvenience and cost of repairing payments themselves, particularly if a value date is missed. The most common approach, taken by 60% of banks, would be to reject just the incorrect instructions and return them to the sender, but two banks of the 20 surveyed would need to reject the whole file. This is potentially an important issue for corporates to be aware of when working with their banks.
A related question for those banks which repaired or enriched the payments file was the cost to customers of doing so.
Consistent with the assumption that not all banks had fully developed their capabilities in this area, 25% had not yet determined if there would be an additional charge to corporates for correcting or enriching a payment file. In some cases (15%) certain types of enrichment/reformatting would incur a cost and could also depend on the arrangement with customers. An equal number indicated that there would be an additional cost. [[[PAGE]]]
Corporates seeking to explore the opportunities of SEPA need to understand specifically what their banks mean by ‘SEPA Ready’. The large banks can all process a SEPA payment, but is that enough to be SEPA compliant in terms of the service which their corporate customers demand? As we have indicated, unless a company already has a highly centralised and efficient payments process, most corporates will not wish to invest simply in replicating their existing payments processing and bank connectivity for SEPA payments as it is not always possible to justify the investment. Consequently, corporates are looking to their banks to provide greater standardisation and facilitate more efficient connectivity, for which SEPA is simply a catalyst.
Different companies’ requirements for a ‘pan-European’ bank will differ - some only require cross-border payments, while others require domestic capabilities in certain countries. SEPA will not sweep away local payment products straightaway, so these companies need to understand clearly a ‘pan-European’ bank’s support for local as well as cross-border payments.
SEPA is still in its early stages and neither banks nor regulators yet have all the answers. Corporates need to be aware that ‘SEPA-compliance’ is effectively determined according to a bank’s own criteria and will therefore need to determine for themselves whether their bank has sufficient capabilities not only to support SEPA but a company’s wider payments and connectivity requirements.
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