Pragmatic but potentially problematic is how I would describe the recent European Commission (EC) decision to extend by six months the transition period for migrating to the single euro payments area (SEPA) instruments, says Ad Van Der Poel, head of payments and receivables, EMEA at Bank of America Merrill Lynch (BofA Merrill) in this blog examining the implications of the delay.
On the one hand, the EC decision was clear-cut. There were fears that too few corporates had advanced the SEPA migration process and that this lack of readiness for SEPA credit transfers (SCTs) and direct debits (SDDs) could cause significant disruption to payments. If payments were sent in formats that beneficiaries could not receive and process, liquidity flows could be substantially interrupted.
Many large European corporates have been preparing for SEPA for some time and were already beyond the point of no return in their migration projects, so the delay won’t impact their compliance efforts and technology overhauls. For smaller firms however, any blockages in the payments system could have seriously impinged their working capital positions and their ability to finance day-to-day operations.
That said, I and my colleagues at BofA Merrill were disappointed in the delay for two principal reasons. Firstly, it impacted the perception of the European banking and payments industry. Our market is predicated on reliability, efficiency and indeed innovation. Failing to meet the SEPA deadline and reverting to long-denied ‘Plan B’ sent a very different message to the public and our stakeholders. Secondly and unwittingly, extending the SEPA migration deadline to 1 August 2014 has simply heightened the industry’s attention on the deadline ‘D-Day’ itself.
I see SEPA as a three step process. The initial step is becoming compliant and being ready for the go-live. Beyond this, corporates need to be prepared to deal with immediate teething issues in the days and weeks that follow. There is a final stage of migration too, which is to look further ahead and explore the full benefits of what a single payments area could bring.
It is not a case of putting SEPA instruments in place and walking away. We’re recommending corporates establish a virtual command centre for the go-live, with the aim of spotting and escalating any emerging issues in a timely manner. Banks and service providers are likely to have extra resources in place during this transition period too, to support clients with investigations into SEPA direct debit returns and rejects for instance.
What this looks like will be different for each company. Some treasurers already look at transactions on a real-time basis, while others with lesser volumes may monitor incoming and outgoing payments only a couple of times each day. The earlier that firms consider this stage, the better placed they will be to allocate extra resources to monitoring transactions and trouble-shooting in those first few weeks.
Firms that have completed their migration to SEPA ahead of the original 1 February deadline will have the contingency of reverting to legacy instruments if there are unforeseen circumstances with making payments to vendors and employees or collecting money. They will also avoid suffering from any bottleneck in resources that might occur if banks and providers are simultaneously supporting multiple investigations. In this way, one could consider an early migration to SEPA as simply pragmatic risk management.
SEPA in 2015 and beyond
The drawback of the recent focus on deadlines is that it risks treating SEPA as a hindrance. Many payments professionals have been talking for years about how standardisation could create more automation, leading to treasury centralisation and rationalisation, and ultimately helping companies with efficiency gains in all areas of business.
This could be the moment when it finally starts to happen. Some companies have already passed through the immediate go-live teething phase and are starting to reap the benefits of value-added migration services like international bank account number (IBAN) enrichment. Rather than debating deadlines, in my opinion we should be encouraging an early adoption of SEPA so that companies can move into this exciting phase and start profiting from the longer-term advantages of a single payment zone.
Consider receivables for example. SEPA means that account receivables (A/R) and not just payables could be centralised for the first time. At the moment it is a highly decentralised system for companies operating across Europe with many corporates working with different banks in different countries with specific national formats.
Following SEPA adoption, the receivables process in each country will look roughly the same with one XML file format containing some variations. This will enable corporates to go back to first principles on what best-practice looks like in treasury, and ask whether centralisation is indeed possible, and if so, how? How could we support country variations? If we standardise, what language or languages would we use?
There are other scenarios possible in a post-SEPA compliance landscape that previously would have been unimaginable. Consider reusing the same standards and data elements in the invoice and in the purchase order for example, it could be done, and would lead to enormous efficiencies in a corporate’s value chain. And imagine creating an innovation such as a new mobile payment method where the underlying instrument covers the entire eurozone. This would mean that the reach of an innovation is immediately expanded from one to 34 countries.
SEPA has long been discussed as a potential catalyst for greater visibility and control. There is now an opportunity for automation and rationalisation and for greater efficiency gains that can benefit all areas of business. It is likely to lead to new conversations between corporates, their banks and services providers in the near future. Efficiency projects that were difficult to embark on in the past, because of the variety of formats and processes used across Europe, could now be back on the table for treasurers.
Effective and early migration can build the foundations for greater efficiency and innovation in the years to come. I think the industry must of course recognise the EC’s extended transition period, but we must keep up the pace of implementation, so that businesses can start getting the benefits of SEPA as soon as possible.