By Olivier Denis, Senior Product Manager, EastNets
The single euro payments area (SEPA) migration is much more than a European compliance headache. From a strategic perspective, SEPA offers opportunities to Banks and Corporates outside Europe to achieve greater benefits by rationalising EURO payments practices with European counterparts, enhancing processing quality and reducing cost and risk of EURO payments.
The fundamental change that the single euro payments area (SEPA) brings from an operational perspective is the standardisation of EURO payments through the ISO20022 XML messaging standard and the payment schemes harmonizing service conditions for credit transfer and direct debit execution across Europe.
Although SEPA was initially launched in 2008, since 2012, the European Commission has issued a SEPA migration roadmap with legal deadlines accelerating the migration of all payment market infrastructures in Europe to the new SEPA standards. The EURO zone, group of 17 countries in the Europe using EURO as domestic currency has to complete the migration by February 2014. The rest of SEPA zone grouping 15 countries that are either part of the European Union or committed on voluntary base to adhere to the SEPA schemes has to migrate by February 2016 latest. All together, the SEPA market unifies of more than 500 Millions citizens in 33 countries served by a community of more than 5000+ Banks processing roughly more than 90 billion electronic EURO payments per year (European Central Bank figures 2012).
The great benefit of the SEPA payments schemes is that all businesses that make euro payments, including EURO businesses outside Europe, can do it using a single euro account processing all SEPA compliant payments with the EURO zone by 1 February 2014 and with the rest of the SEPA zone by 1 February 2016.
SEPA Migration: A Strategic Opportunity for Banks outside Europe
At first view, the Financial Institutions and the Corporates headquartered outside Europe and with operations in Europe may simply view SEPA migration as an European compliance issue with limited relevance to them, leaving it up to the European affiliate to deal with the compliance deadlines.
Nevertheless, from a more strategic perspective, SEPA offers an opportunity for Banks and Corporates to achieve greater benefits by rationalizing payments practices, enhancing processes and reducing cost and risk of EURO payments processing. One major reason for Financial Institutions’ ability to achieve these benefits is that SEPA will enable them to make all their euro payments out of one account, significantly reducing the number of bank accounts and simplifying the clearing and settlement structures and relationship with European counterparts.
Banks and Corporates can even use a payment-on-behalf-of (POBO) model for SEPA payment model to make payments for their entire group from one single euro account and go for a SEPA cloud processing model to minimize impact on IT infrastructure and resource, hence accelerate their readiness and business agility to comply with the tied SEPA migration deadlines.
In a nutshell, compliance of EURO payments workflow with SEPA means that the euro payments and collections in the SEPA zone have to apply the SEPA operation rulebooks for Credit Transfer and Direct Debit, as issued by the European Payment Council (EPC).
The SEPA operations rulebooks for Credit Transfer and Direct Debit are a common set of conditions and operation rules from a legal, formatting, processing and end-user service conditions point of view. Since one single account per legal entity is enough to reach and be reached by the entire SEPA financial community, Financial Institutions have the ability to simplify their account structures and operations, which means they can reduce their risk and further lower the cost of payments.
Today, the SEPA migration is a reality for millions of customers and thousands of Corporates and Financial Institutions and progressing steadily. According the European Central bank monitoring on Monthly base the SEPA migration and the volume of SEPA payment processed across Europe, more than in average 35% of total volume of Credit Transfer in Europe is already SEPA compliant and some countries the total volume of Credit Transfer is approaching 100%.
Banks outside Europe that have multiple EURO accounts and multiple European Counterpart across the eurozone can gain significant assets from streamlining their EURO payments so that they use one account (per legal entity) to make and receive payments in the same manner.
Several Financial Institutions and Corporates from Asia, the Middle East and North Africa, although not tied at all to the legal SEPA migration deadlines in 2014, have been joined of the SEPA schemes , implemented SEPA workflows for EURO payments and are already grabbing the operational benefits of optimized EURO payments.
Using one EURO account concentrates funding and liquidity for EURO payments, thereby reducing the need for physical and or notional forms of cash pooling, which simplifies the process of managing liquidity and enables better operational risk management.
Banks and Corporates outside Europe can achieve further gains by analysing the cost of payments across the SEPA zone, and re-evaluating where it will be most cost-effective and efficient to make their euro payments. For instance, a Bank that has a large payments volume in a specific European country where payment processing is expensive, for example, could shift payments to a lower-cost location in Europe and take full advantage of the single SEPA competitive market.
Along with replacing their current set of complex structures for EURO payments with fewer accounts, Banks and Corporates outside Europe have the opportunity to re-consider their business relationship with European counterparts and potentially working with banking partners offering the best conditions for SEPA. While it is not necessary to change banking relationships for SEPA, all the Financial Institutions in the SEPA schemes will essentially have the same reach across the SEPA zone from a payment point of view and Banks and Corporates outside Europe can take advantage of a single SEPA partner to instruct and collect payments across the whole SEPA zone.
Rather than just leaving SEPA migration to European affiliates as a local operational and compliance issue, Banks and Corporates outside Europe with operations of any size in Europe can benefit from focusing strategically on how best to rationalise their entire payments and collections process and practices during SEPA migration.
Once a Bank has decided on joining SEPA schemes and its strategy for SEPA migration, the implementation process has to be defined. The Bank will have to perform a technical analysis of their back-office and treasury systems to determine their ability to send/receive SEPA-compliant euro payments, as well as evaluate process improvements to streamline payments. They can then develop an implementation plan for any changes that are needed to rationalize bank accounts and banking relationships.
Since SEPA migration affects the market infrastructures of the 33 countries in Europe ( 17 of which using EURO as domestic currency ), Any Financial Institution or Corporate in Middle East, Asia, North Africa that initiates EURO payments in SEPA markets need to ensure that their plans include all payments in all markets that need to be SEPA-compliant.
Whilst the time required to adapt EURO payment workflow to SEPA may vary depending on the back office and ERP complexity and level of compliance (minimum requirements for interoperability or full schemes options implementation ) typically it can take six to nine months to become compliant using internal resources.
The duration of the migration can be significantly reduced when the bank outsource partially or totally that SEPA migration effort to a service provider and/or a technology provider. Going for a “SEPA POBO” or “SEPA in the cloud” service might help the reduce migration time to a couple of months.
The cost of implementation and technology also varies, depending on the level of sophistication and the size of the Financial Institution or Corporate. The cost savings, however, will usually far outweigh the cost of implementation. Many Financial Institutions and Corporates operating globally beyond Europe, being early adopters of SEPA since 2010 have already today exceeded the original break-even point of their business case to invest in SEPA compliant infrastructure. The European Payment Council has published case studies and success stories of SEPA migration in many countries.
Financial Institutions and Corporates outside Europe processing EURO payments should challenge their existing banking partner at a strategic level to use SEPA as a key driver to assess their current structure of euro accounts in multiple countries and determine how best to rationalize their euro payments operations.
Their banking partner of choice for SEPA migration should be able to provide them with advice at a tactical and operational level on switching EURO payment workflow and accounting practices to meet SEPA compliance requirements.
The Risks of Non-Compliance
Following the SEPA migration deadline of 1 February 2014, legacy systems that the EU affiliates in the EURO zone use for instructing and collecting EURO payments may no longer be usable. From an operational perspective, the risks of not meeting the deadline for SEPA compliance could range from simply not being in compliance with the rules and risk sanctions from National Financial authorities in the EU country monitoring SEPA migration and compliance, until payment service disruption/decline/rejection for some customers. The operational cost of an increasing volume of rejection/return/exception handling for Euro payments is also an important component of the business case justifying largely the migration to SEPA schemes.
Although Banks and Corporates outside Europe often regard SEPA migration as a European operational headache the benefits go far beyond simple compliance. Banks and Corporates outside Europe processing a significant volume of Euro payments with counterparts in Europe can take competitive advantage of the SEPA migration to rationalise EURO account structures and enhance payment processing efficiency to reduce costs, complexity and risks.