The Closing Chapter in the SEPA Story?

by Helen Sanders, Editor, TMI

From the launch of SEPA Credit Transfers in 2008, to the final end date in February 2014 – and the ‘final final’ end date six months later, the intervening six years marked a period that heralded great opportunity, but was often troubled by inertia and contradiction. A year later, what stage have treasurers reached in achieving the benefits that SEPA promises?

Beyond compliance

Although extended migration periods were required in many European countries to support the inevitable flurry of last minute adoption, banks, corporations and public sector organisations have now completed their migration to SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD), with new instruments, processes and formats now largely bedded down. The benefits of a harmonised euro payments area have been documented extensively: centralise cash management, payments and collections; rationalise banking partners and accounts, and standardise connectivity and integration. However, while a number of companies used their SEPA migration project as an opportunity to centralise, standardise and increase efficiency in cash management, a larger group of organisations approached SEPA from a compliance perspective. As Natalie Willems-Rosman, Head of Payables & Receivables, EMEA, Bank of America Merrill Lynch says,

“The focus of many companies’ SEPA migration projects was compliance, and many adopted a ‘lift and shift’ strategy: effectively transferring existing processes and formats to meet the new requirements. With the compliance deadline now passed, they are able to leverage this investment and look at the opportunities that SEPA presents.”

The challenge now for treasurers and finance managers is to transform their view of SEPA (and that of their board) from being an exercise in compliance to a platform for financial and operational efficiency improvements, both in Europe and more widely. For example, many treasurers are now seeking to leverage XML-based formats on which SEPA payments are based to standardise the flow of transactions and information in other currencies and countries. There are still differences between banks in their adoption of XML formats, but standardisation projects are becoming easier. Format standardisation is often a part of corporate initiatives to rationalise bank connectivity through multi-banking channels such as SWIFT, or through cloud-based/ SaaS (software as a service) cash and treasury service offerings, as Gabriele Schnell, Head of Payments and Cash Management, Germany, HSBC explains,

“With the SEPA migration phase now coming to an end, corporate clients are now looking at how they restructure processes to achieve greater efficiency, such as extending standardised XML formats to other currencies, and rationalising bank connectivity through host-to-host or SWIFT-based communication for enhanced straight-through processing.”

Degrees of centralisation

A major area of potential advantage that SEPA offers is centralisation of cash management processes and information. Treasurers are looking at this opportunity in various ways. For some organisations, the goal may be regional or global centralisation of financial processes; for others, such as corporations with a decentralised business culture, achieving a single view of cash and risk may be the primary objective. Gabriele Schnell, HSBC highlights, 

“A harmonised environment for payments and collections is encouraging larger clients in particular to centralise key cash management processes, with payment factories and in-house banks becoming increasingly common. In addition, achieving a single view over liquidity and risk is a universal requirement irrespective of the degree of treasury centralisation.”

Amongst those seeking a more centralised approach to cash management, extending (or implementing) payment/ collection factories and in-house banks to make payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) is becoming increasingly common. Under a POBO model, a payments factory collates payment files from participating entities, processes them in line with the company’s procedures, and channels payments through a single account, usually owned by the holding company, on behalf of the relevant group entity. Payments are accounted for through the in-house bank. The key benefits include the ability to reduce the number of external accounts, and to minimise cross-border payments by processing payments through a local account in the relevant currency. A COBO model operates on a similar basis, with comparable benefits. In many cases, companies use virtual accounts to automate reconciliation and account posting of incoming payments, as well as providing customers with a local account number.[[[PAGE]]]

In theory, SEPA and the PSD should already allow companies to rationalise accounts across the Eurozone, and all euro payments within SEPA, including those between member states, are treated as domestic payments. The opportunity for POBO and COBO extends beyond SEPA, however, by allowing treasurers and finance managers to incorporate other regions and currencies into an efficient payments structure, and achieve automation using tools such as virtual accounts. Andrew Reid, Head of Cash Management Corporates, EMEA, Deutsche Bank explains,

“Now that we are entering a post-migration era, corporate clients are keen to discuss how they move to the next stage in their cash and treasury optimisation strategy, such as rationalising bank accounts and achieving further centralisation. For example, clients are increasingly adopting in-house banking structures, including POBO and COBO, and integrated models to leverage standardised XML-based formats. These are opportunities that have been discussed for some time, but treasurers and finance managers are now in a position to implement them, for which they rely on our solutions and advisory services.”

Gabriele Schnell, HSBC continues,

“A small, but growing number of organisations are using SEPA as a catalyst to implement POBO and COBO in order to reduce external bank accounts and streamline transaction processing and reconciliation. When implementing these techniques, the devil is often in the detail to take into account legislation in each country. Therefore, although POBO and COBO are still at a relatively early stage of adoption, we expect use of these techniques to grow substantially.”

Andrew Reid, Deutsche Bank also emphasises the potential regulatory obstacles, explaining how Deutsche Bank is helping to manage the issue of diversity across markets,

“Implementing POBO and COBO can be complex given the diversity of regulations across markets. We have conducted a global due diligence exercise across 50 markets to ascertain in detail the POBO/ COBO dynamics and implications for both holding companies and subsidiaries. Based on this detailed investigation, we have designed a comprehensive portfolio of solutions to support clients’ centralisation objectives that are tailored to meet regulatory requirements in each country of operation, including virtual accounts and operational solutions such as automated reconciliation.” 

Corporations have typically sought to optimise payments processing before tackling collections, which are more challenging and commercially sensitive, and adoption of POBO to COBO is following a similar course. Andrew Reid, Deutsche Bank comments, 

“Clients often start with POBO to become familiar with the concept and then turn their attention to collections. Consequently, POBO is now a well-established technique and we have completed a large number of POBO projects with clients across a wide variety of industry segments. While COBO is at an earlier stage of adoption, we have successfully completed a number of projects with clients. Clients typically take a phased approach to any major centralisation, standardisation or rationalisation initiative, including POBO and COBO, with accumulated benefits over time.”

From operational to financial efficiency

Alongside initiatives to enhance the efficiency, transparency and standardisation of cash management processes, treasurers also seeking to leverage a harmonised payments environment for working capital purposes. This includes, for example, encouraging customers to use more automated payment methods in order to increase the timeliness and predictability of collection. Rob Allighan, Euro Payables & Receivables Product Director, EMEA, Bank of America Merrill Lynch explains,

“Many clients are reassessing working capital processes, resulting in a substantial shift away from paper-based instruments such as cheques, a trend that we expect to continue. Conversely, the use of direct debits has risen in recent years, with an increasing number of organisations across Europe taking advantage of the opportunity to enhance collection and reconciliation. With Germany representing 40% of the European direct debit market, the benefits are already well-understood amongst German corporations, but we are now seeing direct debit adoption as a wider trend.”

In the business-to-business space in particular, improvements in collections also facilitate working capital financing, as Andrew Reid, Deutsche Bank comments,

“A consistent theme we are seeing, which has accelerated since the advent of SEPA, is the juxtaposition between the role of the treasurer in value creation and the link with working capital optimisation; consequently, not only are treasurers becoming increasingly engaged in payments and collections management, but also monetisation of these flows. To facilitate this trend, we have a working capital advisory unit with expertise in both cash and trade.”

Overcoming obstacles

Despite the opportunities in cash and working capital management, there are a number of outstanding obstacles to treasurers’ centralisation and efficiency objectives. Gabriele Schnell, HSBC outlines,

“Variations across countries, particularly the use of legacy instruments such as LCR in France and RIBA in Italy, continue to pose obstacles to efficiency in some organisations, depending on their particular payment and collection needs. Larger corporations in particular are likely to start offering incentives to migrate to SEPA payment instruments to enable them to rationalise accounts and streamline processes.”

On this basis, the migration away from legacy instruments may be commercially-led rather than driven by regulation. Not all organisations are impacted to the same degree, as Andrew Reid, Deutsche Bank illustrates,

“The implications of the ongoing use of legacy instruments in SEPA countries and variations in XML formats differ by company, depending on their industry, type and volume of flows, and degree of centralisation. While for some, these issues have little or no impact, for others they can appear to be barriers to full centralisation and harmonisation. In reality, however, these can be overcome with the right banking and technology solutions.”

One of the major challenges associated with the ongoing use of local payment instruments is the need to hold in-country accounts, which may be at odds with a treasurer’s aim to rationalise accounts and centralise payments and/ or collections processing. Rob Allighan, Bank of America Merrill Lynch notes, however,

“There are still some hurdles to treasurers’ centralisation and rationalisation objectives, particularly the ongoing use of legacy payment instruments in some countries, which means that local accounts still need to be maintained. However, on the whole, treasurers are making good progress in reducing the number of bank accounts. One valuable opportunity is to use virtual accounts, which support a high level of visibility and control over payment and collection information without the cost and administration of managing physical bank accounts. Bank of America Merrill Lynch has taken a pioneering role in virtual account management (VAM), by using the IBAN as the key reference point. This helps for reconciliation, which is far easier to implement than using separate references and benefits from richer information and automated reconciliation.” [[[PAGE]]]

Rob Allighan goes on to emphasise the strength of industry appetite for further harmonisation, which should also result in current obstacles becoming less onerous,

“We are seeing unprecedented levels of collaboration across banks in the euro payments area. For example, as a member of the EBA SEPA workgroup, we are looking at how to move away from local practices in favour of greater harmonisation, and promoting more consistency in the way that direct debit returns are handled across each member state.”

He continues,

“Local variations are not limited to the ongoing use of legacy payment instruments: there are also differences in XML formats, such as in Italy and Germany. This is another important area of industry collaboration, not only amongst banks, but amongst corporates too, such as through the Common Global Implementation (CGI) working group co-ordinated by SWIFT.” 

Gabriele Schnell, HSBC also points to the important, ongoing role played by independent standardisation bodies,

“As a bank, our focus is on delivering comprehensive product capabilities in a cohesive way across the region. We are proactively engaged with TWIST for standardised billing and have invested heavily in solutions such as global liquidity and reporting.”

A catalyst for innovation?

Collaboration is only one of the ways in which the SEPA vision will be achieved. In addition, regulation, legislation and innovation will be required to support changing needs in payments and collections, such as real-time payments and mobile payments. While PSD2 (the second payments services directive) will be the next regulatory step in the evolution of a harmonised payments environment that meets the needs of today’s payment users, there has so far been a hiatus in payments innovation during the years in which banks and vendors were focused on SEPA migration, as Gabriele Schnell, HSBC outlines,

“SEPA is a definite catalyst for technology innovation, but given the relatively short time that has elapsed so far since the SEPA migration end date, we are not yet seeing the investment that has been taking place reach fruition. In the year ahead, therefore, we expect to see a number of new opportunities emerging, such as the use of mobile technology deployed in new ways.”

Natalie Willems-Rosman, Bank of America Merrill Lynch continues,

“We see a great deal of innovation on the horizon in the payments area, particularly in the increased use of mobile technology. These are still at an early stage: after all, there is not yet one mobile solution across Europe, but initiatives in individual member states, such as PAYM in the UK, and the harmonisation opportunities created through SEPA are very promising.”

Gabriele Schnell, HSBC notes that in the rush to be first in innovative payment solutions, providers need to take an intelligent view of users’ payment needs, and how they engage with different technologies,

“One of the significant research findings from our innovation team as part of the PCM business is how users access bank information at different times of day, and therefore the functionality they require. For example, typically we see people using smartphones in the mornings, PCs and laptops during the working day, and tablets in the evening.”

Natalie Willems-Rosman, Bank of America Merrill Lynch also emphasises the importance of understanding and responding to changing consumer demands, which are quite different to those that existed with SEPA was first conceived,

“SEPA payment instruments are a starting point rather than a destination for harmonised euro payments. Increasingly, consumers are demanding immediate payments, a capability that already exists in countries such as Australia, Singapore and UK, particularly given that most online consumer payments are now initiated outside office hours. Consequently, we anticipate a shift towards an ‘instant euro payments market’ in the future.”

There is quite an apparent shift amongst banks and vendors from twelve months ago, in that there is now more enthusiasm, as well as ability, to invest in innovation, as Andrew Reid, Deutsche Bank demonstrates,

“A harmonised euro payments environment is a catalyst for innovation, with Deutsche Bank investing €1bn in transaction banking as part of our 2020 strategy, with digitisation at its heart, including the development of three innovation centres.”

The renewed focus on collaboration that SEPA has helped to encourage, should also bring opportunities for innovation, as Andrew Reid, Deutsche Bank continues,

“European harmonisation has opened up a range of opportunities for working capital optimisation and process improvement. For example, we have established a number of key technology partnerships, including with Bankable, a leading fintech company, for prepaid card programmes as a growing number of clients recognise the benefits and variety of applications for these solutions.”

The regulatory journey continues

From a regulatory perspective, there are already changes under way to ensure that the legal framework supports the needs of an evolving payments environment. For example, the second payments services directive (PSD2) is due to be presented to the European Parliament this summer, which could mean that the new rules will be adopted by 2017. Natalie Willems-Rosman, Bank of America Merrill Lynch emphasises that this is just the next step in an ongoing regulatory process,

“New regulations such as PSD2, which aims to improve payment security for consumers and enhance competition in the euro payments marketplace, will become increasingly important in the months ahead, but there will undoubtedly be more to follow. For example, as consumers’ use of online services continues to grow, and new market phenomena, such as digital currencies, emerge, new regulations will be required to help protect the interests of consumers and businesses.”

So far, PSD2 has not yet been a major focus for corporate treasurers and finance managers, not least due to uncertainties about its timing and content. As Gabriele Schnell, HSBC explains, however,

“We are not yet seeing a great deal of discussion amongst the corporate community on PSD2, but we expect more focus on this during the third quarter as the industry as a whole prepares for implementation.”

Until now, the detail of the PSD2 has been unclear, with some important changes between drafts. However, a final draft has now been published (which we will cover in detail in future editions of TMI) but as the European Commission press release, 5 May 2015. summarises,

“The agreed proposal aims to improve consumer protection against fraud, possible abuses and payment incidents, such as disputed transactions. The new measures will also ensure that all payment providers active in the EU are subject to supervision and appropriate rules. This should create the right incentives for the emergence of new players and the development of innovative mobile and internet payments in Europe. This means more choice and better conditions for consumers and businesses.” [[[PAGE]]]

Inevitably, changing regulations impact on corporations as well as banks, and as Rob Allighan, Bank of America Merrill Lynch outlines, this creates new demands on banks,

“Corporate treasurers recognise that regulations, and regulatory change, are a fact of corporate life, and want banks to help insulate them from negative impacts on their business, and convert inconvenience to opportunity. The enforced use of XML is one such example, where a regulatory requirement has become widely recognised as an opportunity to standardise the exchange of information on a global basis, not only for payments, but across a range of activities such as reporting, bank account management, eInvoicing and eBilling. Initiatives such as the EU Digital Agenda will help to drive these further, with benefits across the full spectrum of market participants.”

Andrew Reid, Deutsche Bank notes that it is not only specific payments regulations such as PSD2 that will impact on payments and collections,

“Regulatory change will have an impact on European payments and collections in the years ahead, both specific regulations such as PSD2, which will have implications in terms of market access, liabilities and payment security, but also wider regulations such as Basel III. For example, changing attitudes to lending are prompting a move towards working capital financing techniques such as supply chain financing, which are closely linked with payment and collection activities.”

While SEPA migration is now a memory rather than a day-to-day challenge, it is a starting point for a new generation of innovation, organisational transformation and, inevitably, regulation. For organisations operating in Europe alone, a harmonised payments environment will ultimately be highly advantageous by creating an essentially domestic market for euro payments across all member states. For those acting in other regions, Europe becomes, as one treasurer noted recently, “… just one country. Sadly, we have many others to deal with”. What should not be ignored, however, is how SEPA is now becoming a catalyst for innovation, standardisation and centralisation that will benefit payments and cash management not only within SEPA but potentially globally. The SEPA story may have ended in migration terms, but from treasurers’ perspectives, it is only just beginning.