SEPA: Corporate uptake and implications of the delay

3 February 2014

The joy of writing a topical blog is that things rarely stay static, says Gareth Lodge, a senior analyst with the Celent consultancy, in this corporate treasury focused single euro payments area (SEPA) blog, examining the issues aroused by the recent six month delay announced by the European Commission (EC). Will all European countries, finance, and bank compliance officers stand by the EC proposal or push ahead with the original 1 Feb 2014 deadline which is still law? Does crying wolf over the ‘immovable’ deadline mean a slackening off in uptake is now inevitable and what about small-to-medium-sized enterprises (SMEs) and the drive towards treasury centralisation and payment factories on the back of SEPA: is that still on? This blog will address all these issues.   

On 16 January last month I was due to publish a report lamenting the slow take-up of the single euro payments area (SEPA) harmonised payment formats. I had carefully created a series of scenarios which outlined by how much I believed the deadline would be missed by corporates. As my Celent report release date was hitting the wires started chattering out the news: SEPA deadline extended by six months. Oh no, there goes my report I thought! Quickly followed by the thought that this was just an EC proposal and wasn’t law. Unless European countries decided to make it so - and this could take six months in itself - what difference did it really make? What were the implications of the SEPA delay?    

The delay came as both a shock, but at the same time, not as a huge surprise because there simply weren’t enough corporates and SMEs at that time which had adopted the new SEPA Credit Transfers (SCT) and SEPA Direct Debit (SDD) formats. [you can see the latest constantly updated migration figures here on the European Central Bank (ECB) SEPA Indicators website. Interestingly, the ECB quickly rushed out a stats update showing that SEPA take-up had “gathered pace strongly” and implying that it didn’t necessarily agree with the EC proposal to delay the payments harmonisation project migration by six months, while still urging corporates to target the original 1 February 2014 deadline -Ed].  

The Heart of the Matter: Implications of the Delay  
At the heart of the problem is the low level of SEPA take-up ahead of the previously "immoveable" deadline of 1 Feb 2014. Corporates have complained that the original deadline was too soon. The original announcement of the deadline came in December 2011, after many corporates had already finalised their budgets for the following financial year, leaving effectively 13 months for compliance. Furthermore, survey after survey has shown a distinct lack of knowledge of SEPA, let alone preparation for it, particularly amongst SMEs, so a delay shouldn’t be such a surprise, but it does have consequences.

The move could be seen as showing a lack of understanding from the regulator. The ECB SEPA migration numbers show volumes from those companies that have migrated; it doesn't show those who could migrate, but who have chosen not to do so yet. At least one large biller I know of has claimed that their SEPA transaction pricing would be higher than their current pricing. As a result, they have stated that they aim to migrate at the last possible moment.  

Equally, those large corporates that embraced the vision of SEPA may already have consolidated their volumes to a payments factory (PF), with the net result that some countries volumes will increase (theoretically in low cost countries to over 100%), while other countries volumes will decrease.

Regardless of the actual impact of the delay, the point is that the numbers are only an indicator, and not a measure, which is how the regulator has used them when unveiling the six month ‘grace period’ for SEPA compliance. Indeed, for a change of this size, there seems to be a distinct lack of real measures that we in the real world have to apply to any project anybody else would do! 

SDDs, Corporates and Why the Original Deadline Could’ve Been Met
One of the things the regulator has highlighted to try to justify the delay was the low levels of SDD direct debit penetration. This is where my biller friend and their late-move planning would have made a substantial difference. In many markets, for instance, the top 100 billers account for over 80% of direct debits, so if they moved en masse compliance would happen quickly. If all the billers are of the same mind, over 80% migration could have been achieved easily by the original 1 Feb deadline, negating the need for any EC intervention at all.

In my planned whitepaper SEPA report for Celent, I highlighted two previous migrations of similar complexity and on national scales. In both case, despite a multi-year window, over 90% of the country market migrated in the last few weeks of the project. By not having the right measures in place, the regulator effectively lost its nerve.

Anger at SEPA Delay but SMEs Buy Time
The regulator seems not to have fully understood the implications of their delay statement. In many conversations I’ve had so far about it, the marketplace is not grateful but angry at the EC, excepting perhaps the SMEs who were nowhere near compliance and would’ve likely had to fall back on bank or third-party conversion services. The delay has created confusion and complication among large corporates, however, rather than actually helped the situation. Firstly, it's sent the wrong message to multinational corporates (MNCs). As one corporate treasurer told me: “We were in a standoff, but the regulator blinked first. Therefore, we believe that at a minimum they might blink again in the future, so perhaps we should just sit tight and not migrate at all?” Now, consider those who were planning to migrate at the very last moment, such as my biller friend who wasn’t to avoid moving to more expensive SEPA format payments for as long as possible. They may still do so, causing the figures to look far below where they should be even as the new deadline of 1 August 2014 approaches.

Secondly, when is a deadline, not a deadline? Or rather, when is an extension, not an extension? When it's no longer yours to extend is the answer. The competent authorities in each European country are the enforcers of SEPA compliance - whether that is France, Germany, Finland or whoever. One thing many have missed in this whole debate is that the EC delay is just a proposal, not a legal change to the SEPA Regulation. The press release announcing the six month grace period calls on the competent national and regional authorities, such as the ECB, to adopt the delay proposal and contains phrases such as:

 "....should the proposal still be in process of adoption on 1 February 2014...."

Fine. But how should a bank compliance officer react in that instance? Where is the legal certainty? A small poll I’ve conducted among contacts, shows that they believe they have to work on the assumption that 1 Feb 2014 is still the real legal deadline, not 1 August. For example, does the EC move require every national authority to agree to the proposal or is it on a country-by-country basis? How long will that process take? By the time there is absolute clarity, the second August deadline is likely to have passed!

Early indications suggest that several countries will continue to consider the original deadline as the only deadline. When some countries are proposing jail terms for non-compliance, then no wonder banks and corporates are looking for absolute clarity! 

Conclusions
The final point to admit is that the EC delay probably has helped the situation, and crucially given SMEs more time, but it hasn’t solved the ultimate problem that migrations need a hard and fast cut-off point. Successful migration projects starts with a switchover date, but it always takes months to reduce the numbers of failed and bounced transactions to the levels experienced in the heritage payment types. There will always be some problems but sometimes it is better to push ahead and deal with them as they arise.

The delay is good news for the large numbers of SMEs who, based on various recent surveys and my conversions with the marketplace, have yet to even hear about SEPA, let alone figured out the requirements that lie ahead for them. A delay could benefit awareness and uptake here but there are likely to still be some migration problems even after the extra time granted by the EC.

It is early days to assess the full impact of the EC delay. For most, the announcement came out of the blue. But, just as the boy who cried wolf was eventually ignored, the regulator who cried "No plan B!" incessantly may find that they have now created a series of problems for themselves further down the line.  

 

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