It all started on 9 January 2014 when the European Commission (EC) recommended that the single euro payments area (SEPA) end date be extended beyond the original 1 February 2014 migration deadline; a date that had resisted being extended since it was defined back in February 2012, says Sarkis Akmakjian, director of payments market management at Accuity. In this blog he examines the implications of the delay.
The much anticipated original 1 February 2014 SEPA deadline has since now passed and earlier this month the European Parliament (EP) accepted the European Commission (EC) proposal to extend the date by six months. It is now likely that the European Union member states that comprise the Council of the EU will pass this extension too anytime soon. After this, the extension becomes law. The question now becomes, therefore, what are the implications of this SEPA compliance delay and does the new deadline of 1 August 2014 have any teeth?
Whatever the legal uncertainty and regardless of the debate about whether it would have been better to stick to the original migration timeframe for this cross-border European payments harmonisation project, the fact is that we are, where we are now. Corporate treasurers, banks, public bodies and others in the compliance chain should just focus on what centralization and efficiency benefits they can achieve and aim to get them as soon as possible, in my opinion, and not worry about the politics of it.
The Benefits of Adoption Are Not Delayed
Notwithstanding the six month extension, the benefits of SEPA adoption are already in action and there for all to see. Those who comply now should be able to recognise the following benefits (if they implement it well):
- Lower costs for payments.
- More efficient payment processing.
- Greater flexibility due to the centralisation of payments within the SEPA eurozone.
SEPA creates greater possibilities to have a more agile approach when working with banking partners. This can lead to revisiting existing service agreements and any established service level agreements. Ultimately, this leveraging power with the banking partners potentially provides a cost saving to corporates.
Why is There an Extension?
The SEPA six month extension until 1 August 2014 came about because the rate of compliance throughout the effected SEPA countries in the eurozone had previously been much lower than anticipated. This slow adoption rate had been obvious for many months and some nations gained little to no momentum while approaching the deadline. It is still surprising that the EC proposed the extension, however, since all communications so far have held to the established 1 February 2014 deadline.
By providing six additional months, the thinking was obviously to ensure a smoother transition towards the SEPA credit transfer (SCT) and direct debit (SDD) formats. In more practical terms, the industry wants to avoid what could potentially have been a massive disruption in payment flows. Certainly with any kind of extension, there is the real risk that some many may procrastinate in terms of adopting SEPA and this is a worry. This is particularly true for small-to-medium-sized enterprises (SMEs - generally the compliance laggards) that have been slow to accept the technical burden of having to migrate to the required ISO 20022 XML messaging standard.
Although the European Central Bank (ECB) has released statistics showing that the pace of SEPA migration quickened towards the end of 2013, corporates and countries that have been holding back now have more time to achieve compliance thanks to the EC. The original 1 February 2014 deadline served as motivation, with the threat of potential fines in addition to other consequences of non-compliance, such as delayed payments, increased costs, and possible cash flow disruption. Will the ‘stick’ still work, however, for the new 1 August 2014 deadline?
There is still a real fear that the burden of SEPA would add stress to the fragile economic recovery in the EU. This fear is countered, however, with SEPA’s promise to improve payment efficiencies across the EU - this is the compliance ‘carrot’ for corporates and others. Greater velocity in payments has both short-term and long-term benefits, all waiting to be realised via the adoption of SEPA.
SCT and SDD Compliance
Many countries were slow to adopt it, but the SEPA credit transfer (SCT) compliance momentum increased in the fourth quarter of 2013, as the ECB showed, but the picture is different on a country-by-country basis. Finland’s SCTs have been at 100% since the last quarter of 2012. Slovakia has been SCT compliant since Q1 2013. In December 2013, 74% of EU credit transactions, or 565 million, were SEPA credit transfers, an increase of 349 million from December 2012.
One of the early leaders in SEPA direct debit (SDD) adoption was Slovenia, where SEPA transactions rose to over 99% in 2013. The overall number of SDD payments for the entire EU increased to 41%, equivalent to 301.2 million transactions, in December 2013. This is a major change of 289.5 million transactions from the previous year so the SDD compliance picture is improving too.
Germany Among The Slow Adopters
Despite the overall rise in compliance late last year, Germany’s conversion rate remained particularly delayed. As the largest market in the EU, Germany’s SEPA adoption is integral to the complete success of the project. Through Q3 2013, less than 1% of German payments were SDDs. In Q4, however, Germany’s numbers jumped to almost 11%. This is a big improvement, but it is still far from the 100% goal.
There is time for countries, corporates and others to comply thanks to the six month extension. The SEPA delay is especially helpful for SMEs, which would have had to pay the majority of SEPA non-compliance fees. The EC move gives these businesses the time to implement their changes in time for the beginning of the new enforcement of 1 August 2014.
Additional extensions are unlikely and shouldn’t be relied upon. The EC has given no indication that there will be an additional delay, and we at Accuity do not anticipate another unforeseen extension either. For those corporates and countries that are not yet SEPA compliant, now more than ever it is time to act. The benefits are clear: easier transfers across and within borders will ultimately cost less for countries and those operating across the European continent. Non-compliance after 1 August this year will incur immediate fines. After years of preparation and anticipation, there is no turning back - SEPA will become a reality and you had better be ready.