Published: January 01, 2000
The mandatory move from national payments and collections instruments to Single Euro Payment Area (SEPA) instruments on February 1, 2014 offers German corporations, and multinationals based in Germany, a huge opportunity. At a stroke, many of the barriers to treasury efficiency will be removed. Moreover, from a payment perspective, companies will be able to expand as easily within the SEPA area (which includes the 27 EU members, as well as Iceland, Liechtenstein, Norway, Switzerland and Monaco) as they would domestically.
Despite these attractions relatively few companies in Germany have embraced SEPA to date. A European survey by PricewaterhouseCoopers in January shows that 21.6% of respondents have yet to define and plan their SEPA readiness activities while a worrying 43.5% of respondents that have initiated a SEPA project expect to complete it uncomfortably close to the 2014 deadline. German preparedness for SEPA is thought to be at similar levels, although many large companies have already completed their SEPA preparations.
The reluctance among many companies to respond positively to SEPA is understandable. SEPA has been discussed for over a decade, and has suffered from a lack of clarity regarding important details and deadlines, causing many companies to lose what little interest they had. Furthermore, in recent years, corporations in Europe have had more pressing concerns than SEPA given the financial crisis, the global recession and the Eurozone debt crisis.
However, the time for prevarication has passed. SEPA has a firm deadline and there is no political will to delay it. Failure to be ready will leave companies unable to make payments and collections and, therefore, unable to operate. To avoid any disruptions, companies should start working closely with their banks now to ensure they are ready for the deadline. While there has been a recent welcome rise in interest in SEPA among corporations in Germany, any company that has yet to begin planning and implementing a SEPA strategy is endangering its business. Moreover, the later such a project is left, the more difficult it will be for companies to access suitable support.
Companies must start by analysing their existing payments and collections to quantify the scale and nature of their SEPA challenge. Then they must devise a plan to upgrade their infrastructure to the necessary standard in the time available – making sure they leave plenty of time for testing.
The requirements for the SEPA Credit Transfer (SCT) are relatively straightforward. Companies should collect international bank account numbers (IBANs) from their counterparties, including suppliers, customers and employees, so that they can continue to make payments after the deadline. Given the thousands of counterparties a company may have, this process could take time.
While it is preferable to collect IBAN information directly, short cuts are possible: one-off conversion services are available from some banks. While SCTs require only IBAN information after February 2014, it is still advisable to collect bank identifier codes (BICs) to help ensure certainty of payment.
SEPA offers Core and business-to-business (B2B) direct debits. The Core scheme has a 13-month refund period – with the first eight weeks allowing a no-questions-asked refund – while the B2B scheme does not allow for refunds and, therefore, offers better protection and risk management for businesses. However, it should be remembered that most legacy direct debit schemes offer refunds. Companies can use a mixture of schemes for different customers.
While the B2B scheme offers better protection, it also requires the re-signing of customer mandates and additional data compared to legacy direct debits. There is still time for companies to re-mandate but they should assess whether it is necessary to use the B2B scheme for all customers or just those that require greater risk management.
Under SEPA, mandates are a company rather than a bank responsibility. In Germany, this is similar to existing arrangements: companies are used to holding mandates. However, they are not used to managing mandates and, initially at least, this may be challenging: mandates may exist in multiple formats, including paper or voice recordings, or may have been lost.
Some banks offer SEPA mandate management services. These include old mandate migration and enrichment to include SEPA information (even for mandates that have been lost), the creation of new mandates (by producing customer letters in multiple languages and inputting the returned information) and keeping mandates up to date.[[[PAGE]]]
Germany currently has both business-to-consumer (B2C) and B2B direct debit schemes. To date, there has been reluctance by some corporates to move to SEPA direct debits (SDDs) because the Core scheme has a longer cycle of submitting collections and getting funds credited to an account – D-3 days – than existing direct debit schemes in Germany. Consequently, some companies in Germany are waiting until the Core 1 direct debit scheme – which offers a processing period of D-2: similar to existing direct debit schemes in Germany – is more widely deployed by banks before implementing SDD.
In addition, some companies are thought to be delaying implementing SDDs until the European Payment Council, the banking industry payment group, finalises details of the Fixed Amount Scheme, which is expected to become part of the SEPA Rulebook in the future. This scheme offers no refunds and is, therefore, accommodative of schemes such as Germany’s popular Elektronisches Lastschriftverfahren (ELV), which uses a debit card as a digital signature for a direct debit mandate. Germany has requested that ELV be treated as a niche scheme and be allowed to operate until 2016.
However, waiting for either the wider deployment of Core 1 by banks, or the incorporation of the Fixed Amount Scheme in the SEPA Rulebook, is risky. It is advisable for companies to implement the Core scheme where appropriate and retain ELV for the time being. If Core 1 or the Fixed Amount Scheme offer additional benefits, then upgrading at a later date will be relatively straightforward.
An important consideration for German corporates seeking to use SDDs cross-border is that some countries, such as Switzerland, require specific customer authorisation for SDDs. Companies must work with their banks to understand local requirements and avoid SDD failure.
SEPA requires companies to send payments and collections information in the ISO 20022 XML format. For companies that have not begun already, there may not be sufficient time to start an XML project to meet the 2014 deadline. Instead, they should continue to use legacy formats and use conversion services, either from their banks or a third party. Uncertainty remains about whether conversion will be permitted in each country, especially after 2016. So, in the longer term – and because of the broader efficiency benefits – companies using conversion services should consider an XML project as a post-SEPA priority.
SEPA is a mandatory requirement for companies making euro payments and collections. Moreover, the ability to collect and receive payments is vital to a business’s working capital and, therefore, to its overall health. As well as being essential, SEPA will improve corporates’ efficiency and lower costs. It will also allow easier access to new markets by lowering barriers, and offering contingency benefits by providing access to additional channels.
Given the limited time before February 1, 2014, corporations must act now to avoid an end-of-year bottleneck. Banks can help their clients navigate the migration process and educate them about the logistical and operational challenges. Treasurers need advice and value-add conversion services to relieve the burden on their time and resources. Banks that have built up close relationships – and that offer fully integrated solutions and trusted advice – will not only retain clients but also have the opportunity to attract new ones.
Banks also have a role to play in helping companies view SEPA not simply as a format compliance requirement but as an opportunity. In the longer term, SEPA should be used as a tool to advance treasury automation and centralisation. By standardising payments using XML, it becomes easier to streamline and automate the entire value chain from purchase order to invoicing: SEPA could ultimately help companies achieve many long cherished objectives.
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