Use Your Time Wisely: Final Steps Towards SEPA

An Executive Interview with Simon Jones, Head of Corporate Sales, EMEA at J.P. Morgan Treasury Services

In the Executive Interview this month, Simon Jones, Head of Corporate Sales, EMEA at J.P. Morgan Treasury Services, talks to Helen Sanders, Editor, about how treasurers and finance managers should be focusing their attention during the final few months before the SEPA migration end date in February 2014.

Based on your experiences, how far have corporate customers progressed in their SEPA migration plans so far?

By and large almost all the large corporations that we deal with have started their SEPA migration project. Although they are in different stages in their migration plans, the majority are aiming to achieve SEPA compliance by Oct-Nov 2013. This is also reflected in the ECB payment statistics which currently (ECB, May 2013) show that ~44% of EUR ACH Credit Transfers are SEPA payments.

However, progress on the SEPA Direct Debit front has been less promising so far and the corresponding statistics currently stand at only ~2.65%. We expect these volumes to go up later in the year when the consumer-facing companies that have large volumes of direct debits such as insurance, utilities and telecoms become SEPA compliant.

Payroll continues to be an area our clients are leaving to the latter stages to convert and this is a concern. One of the key criteria is that a number of payroll providers still need to convert their systems to support their customers on their SEPA projects. We believe much progress will be made in the industry in the next few months.

What is continuing to hinder their migration plans, and how might these be overcome?

SEPA migration projects are mainly involved with making changes to data formats and processes, so they are very technology and resource intensive. In addition, the SEPA migration project for a typical corporate involves multiple business units beyond treasury, such as sales, procurement, HR, accounts payable and accounts receivable. In our experience, many corporates have been challenged to identify and involve all the relevant stakeholders. Also, gaining the necessary internal approval for additional budgets and resources has been challenging for a few companies. Overall however, direct debit conversion has been the most challenging part of a SEPA migration project because the nature of the change is quite significant.

For example, existing Direct Debit mandates need to be digitised so that key information is exchanged with the bank for every transaction. Secondly, the mandate has to be updated with BIC/IBANs, a Creditor ID and a Unique Mandate Reference number.

For corporates who have still not migrated, time is very short and treasurers should be discussing their conversion options with their banks and IT service providers. Broadly speaking, companies now have two choices for direct debit migration: either keep mandate management in-house or outsource it to a bank or IT service provider. For example, major banks including J.P. Morgan have developed direct debit mandate conversion solutions fully integrated with a leading IT service platform. Alternatively, corporates can engage directly with these IT companies to access their conversion services.

What are the possible implications for companies that don’t manage to migrate by the February 2014 deadline?

Ideally, corporates should be planning their SEPA projects so that they are compliant in advance of the due date. However, if a company is not likely to be ready, it should have a back-up solution in place, such as using the SEPA conversion or repair services of its bank. As I mentioned, leading banks such as J.P. Morgan offer services to convert or repair SEPA non-compliant payment files into a compliant version. Again, banks require adequate lead time to offer these services, so companies should be discussing these options with their banks now.

In what ways is J.P. Morgan supporting customers through the migration process, and what do you think are the unique features of your approach?

The first thing we have done is to contact all customers and briefed them on the SEPA changes well in advance of the due date. We have been actively engaging with each customer on how to phase their migrations so that they are compliant in good time. In January 2013, we organised a webinar series to which we invited all our customers, to discuss best practices for SEPA migration.

One of the unique offerings from J.P. Morgan is our consultative approach to encourage customers to leverage SEPA to centralise their treasury processes in Europe. SEPA offers a great opportunity to rationalise banking relationships and bank accounts. A large number of customers are also implementing payment factories or simplifying their legal entity structure though a trading hub. J.P. Morgan has deep expertise in Europe for supporting such advanced treasury structures.

Finally we have invested significantly in our SEPA+ migration services with a leading IT services company. The SEPA conversion service is integrated with our internet platform, J.P. Morgan ACCESS, and our file transmission services so customers do not need to interface with another separate platform to manage these services.

Corporates have received our SEPA+ services very well, including both existing customers and new customers that are mandating J.P. Morgan for SEPA and pan-European banking. We have many significant implementations over the next few months.[[[PAGE]]]

Bearing in mind the timescales, with only six months to go, to what extent is it feasible for companies to take advantage of the potential advantages of SEPA as opposed to focusing primarily on compliance?

With only six months remaining, we are advising our customers to prioritise SEPA compliance before the end date to avoid any adverse impact on the cash conversion cycle. However, companies that have already achieved SEPA compliance can start focusing on leveraging SEPA for efficiency.

To benefit from SEPA, companies should look at rationalising bank relationships and account structures to reduce the complexity of their treasury processes. Many corporations are already doing this and benefiting from significant pricing and cost-efficiency benefits. We have noticed that a typical large corporate may have four or five banking relationships in the US, yet for a similar size business in Western Europe, they would have between 30 and 50 cash management banks. While a few local banks are required for tax and historically payroll payments in some markets, a vast majority of the supplier payments and payroll payments can now quite easily be centralised into fewer banks.

Another opportunity to evaluate is advanced centralised structures such as a payment factory or trading hub. Payment factories leveraging ’Pay-on-Behalf-of’ (POBO), ISO 2022XML and SWIFT and even ’Receive-on-Behalf of’ (ROBO) are becoming increasingly popular in Europe. Efficiency benefits for corporations by using such structures can be substantial, with lower bank charges, reduced staff involvement, fewer systems and a simpler banking technology infrastructure.

Many other corporates can focus on simplifying their legal entity structure in the EU. We have seen a few corporates setting up centralised trading hubs in Europe. These legal entities act as a central purchasing and selling entity for the company’s operations in Europe. This type of a structure centralises receivables and payables without even needing to use the ’on-behalf-of’ method.

What is the degree of awareness of SEPA outside the Eurozone, and what plans should companies headquartered outside Europe, but which have payments and/or collections in euros be making?

Non-European companies have, by and large, been made aware of SEPA by their European subsidiaries as well as by global banks that support them in their home market. These companies should be approaching the SEPA project in exactly the same way as companies headquartered in Europe. Relationship banks often need to play a role in helping regional European teams position the SEPA project correctly to HQ to ensure the necessary budget and resources for the migration project.

Based on your experience, what factors contribute to a successful SEPA migration project and how can companies reduce their project risk?

Much like any other project, a successful SEPA project requires advanced planning, adequate budget and resource allocation. The project can become very large and we have seen great success where clients have reduced the number of applications and banks that need to be converted, therefore significantly reducing the complexity of the project. The other important element of a SEPA project is the need for central sponsorship and leadership given the number of stakeholders. Most often, the European treasury team takes this leadership role. Central leadership of the project is even a greater requirement for companies running decentralised payables and/ or receivables processes to ensure compliance at a local level.

Once the SEPA deadline has passed, how do you recommend companies move beyond compliance to leverage the opportunities that SEPA presents?

Once the SEPA deadline has passed, corporates should look at the next phase of their SEPA project to identify opportunities to centralise their cash management, liquidity and treasury processes in the SEPA markets. Organisations should benchmark their cash management efficiency, including the number of bank relationships and accounts that they hold in other significant currency zones such as the US in order to identify opportunities for improvement. It is always easier to start the centralisation initiative from the payables side before the receivables.

Overall, it is important to emphasise that companies should seek to leverage the harmonisation opportunities offered by SEPA to maximise the benefits and gain financial and operational advantage.