The European Commission (EC) six month delay to the single euro payments area (SEPA) migration deadline (recently accepted by the European Parliament) has provoked varying reactions, says Marcus Hughes, director of business development at Bottomline Technologies. He has observed relief among some corporates, especially those worried about small-to-medium-sized enterprise (SME) payments being bounced in the financial supply chain, to disappointment among banks which face maintaining expensive national payment infrastructures running in parallel. In this blog exploring the implications of the SEPA delay, everything from ISO20022 XML messaging technology to the mandate management challenge under the SEPA business-to-business (B2B) direct debit (DD) scheme and the role of outsourced SEPA conversion services is examined.
The EC SEPA extension proposal, which gives “an extra transition period of six months during which payments that differ from the SEPA format can still be accepted”, has caused relief among some corporates but disappointment among others. It has also given rise to confusion, due to the proposal coming just three weeks before the original 1 February 2014 migration deadline, which has only just passed.
As I write, the EC six month delay has just been ratified by the European Parliament, which voted on 4 February to confirm the SEPA extension until 1 August 2014. Formal adoption by the European Council of national ministers is expected to follow in the coming days, providing further much needed legal certainty. The European Central Bank (ECB) and Eurosystem collective of central bankers had been encouraging corporate treasurers to continue pressing towards a quick compliance deadline in order to achieve efficiency benefits, and even rushed out figures recently showing SEPA compliance had “gathered pace strongly”, with SEPA Credit Transfer (SCT) compliance now at 74% and 41% for SEPA direct Debits (SDDs). They too will fall into line now though with the EC; easing the legal uncertainty which has been prevalent in recent weeks over the extension. Getting your compliance project done as quickly as possible is still no bad idea, but it isn’t now mandatory until the summer.
Despite all the confusion, one thing remains certain: organisations that haven’t yet adopted the SEPA payment formats need to act quickly if they are to achieve cost reduction and standardisation benefits, regardless of whether the original 1 February or the new 1 August 2014 deadline is adhered to as your timeframe.
While a six month ‘grace period’ provides breathing space, and eliminates the risk of non-compliant euro payments being delayed, rejected or incurring penalty fees, the extra time will soon disappear, so corporates should act quickly.
Rapid Compliance: SEPA Conversion Services
In my opinion one of the most practical and cost effective solutions for achieving fast SEPA compliance are outsourced SEPA conversion services, offered by technology providers such as my own firm Bottomline Technologies. These work as follows:
A corporate or bank submits a file of payments (in legacy format) to the conversion service provider *1 [see footnote 1 detailing how the ECB insists on a clear separation from a payment service providers (PSPs) other activities. Note: Some large banks are less keen on these conversion services as it may work against their investment in new services and cut volumes flowing to their platform -Ed].
The conversion service provider can transform legacy formats into ISO 20022 XML formats, and convert basic bank account numbers (BBANs) into international bank account numbers (IBANs) as necessary, while also validating IBANs and bank identifier codes (BICs) if so required.
Converted files are returned to the corporate or bank for submission to the paying bank in a SEPA-compliant format.
In a similar way, an organisation’s entire payment data can also be converted from BBANs into IBANs and matching BICs, which can then be uploaded into a corporate enterprise resource planning (ERP) or payment system. SEPA conversion services look set to remain in place for a long time yet, and the EC delay will only extend their lifespan. I expect to see increasing demand for them in the wake of the announcement of the EC’s six month grace period.
SEPA conversion services can be lower cost and faster to implement than upgrading an entire payments system. Although often created as a ‘quick fix’ to a major industry challenge and merely used to tick a SEPA compliance box, such tactical conversion solutions have a habit of staying in place for a long time once they are introduced. If they prove their worth in terms of longer-term operational expense and efficiency then they could yet remain in place.
Many treasurers are relieved at the SEPA extension which gives them more implementation time and testing breathing space. Even treasurers’ at large multinational corporations (MNCs), which are already SEPA-compliant and possess the treasury centralisation benefits it can help to create, will perhaps be reassured by the deadline extension because it allows more time to ensure the stability of their financial supply chains. Many treasurers’ had doubts about whether their suppliers and customers, especially SMEs, were fully compliant as the original 1 February 2014 deadline counted down, which could’ve had a negative impact on cash flows.
On the other hand, many banks are opposed to the extension, since they now have to keep their national payment schemes and SEPA formats running in parallel for a further six months, which will be costly and resource intensive to the European financial services (FS) industry.
SEPA B2B DD challenges
It is encouraging to see the significant increase in overall SEPA direct debit (SDD) volumes registered by the ECB in December 2013, with 41% of eligible euro DDs now being SEPA compliant, according to the ECB SEPA Indicators website, which was rapidly updated after the EC delay announcement to illustrate that SEPA take-up had actually “gathered pace strongly”, as the ECB had it, in the lead up to the original deadline. Despite this, it is B2B DDs which have given rise to the greatest challenges under the SEPA payment harmonisation project and they have long been viewed as the most challenging SEPA instrument.
A number of DD originators wanting to adopt the new B2B collection instrument have struggled with it and been disappointed by the relatively low volumes of signed DD mandates which they have been able to gather from their debtors. This means they are not in a position to present B2B DDs on a large scale, since two original signed copies of these DD mandates are required, one to be lodged with the debtor’s bank and the other to be held by the creditor. The legal updating and authorisation procedure can be torturous.
Despite the availability of efficient outsourced paper mandate distribution and inbound scanning and capture services, the reluctance of some debtors to sign these B2B mandates is still causing a slower than intended take-up. This is due to the irrevocability of these instruments, meaning that once a DD has been debited the debtor / payer of a B2B DD does not have any right to a refund, unless the DD was not correctly authorised in the first place. This is in sharp contrast to the Core DD which entitles the debtor to obtain a refund, “no questions” asked, even for an authorised DD, during a period of eight weeks after being debited. Conversely, from the creditor’s perspective, using SEPA Core DDs for high value B2B invoices will often not be acceptable to credit controllers, given the risk that cash inflows may need to be refunded up to eight weeks after receipt.
The challenges around SEPA B2B DDs have led some countries to cease using DDs altogether. In particular, Finland has taken the innovative step of replacing DDs with a tight combination of electronic e-invoicing and SEPA Credit Transfers (SCTs); much the simpler SEPA format. It remains to be seen, however, whether this alternative approach will attract wider adoption in countries outside of Finland. Certainly, greater use of electronic e-invoicing figures high up on many corporate treasury and bank agendas, especially with the exciting potential for improved working capital management and efficient supply chain finance but it is viewed more as a longer-term option.
Migration towards to SEPA Core DDs is at last making encouraging progress in the eurozone, but it seems that more time is needed to allow SEPA B2B DDs to achieve the high adoption levels originally anticipated by their designers.
Strategic Treasury Opportunities: Global Payment Factories
Many corporates have been so focused on doing the minimum required to comply with SEPA as the compliance clock counts down, that they have neglected to take advantage of the wider strategic benefits offered by this major industry initiative. A payment factory (PF), for instance, can be rolled out simultaneous to a SEPA compliance project, or more likely as a second phase to keep it manageable but still get the cross-border benefits of this initiative.
For larger corporates in multiple locations, there are many strategic opportunities in the future to streamline payments and reduce costs by creating payment and collection factories. SEPA is expected to be a catalyst for many organisations to implement PFs on a global basis and collections projects are starting to be heard of too.
Beyond mere tick-box SEPA compliance projects, payment factories at corporate treasuries are ideally placed to become the core platform for streamlining multi-country payment and collection arrangements. They can be used to create a large-scale, standardised and efficient cross-border process. This is not just in the EU either, but globally relevant. SEPA is a good project from which to drive this efficiency initiative, and get budget released by the boardroom, but it should not be seen as a compliance project - it is an efficiency and treasury centralisation drive.
A payment factory involves using a single centralised platform, either hosted in the cloud or deployed locally. It is designed for:
All payment and collection types (spanning treasury, payroll, expenses, DDs, cheques and supplier payments).
For all balance and transaction reporting duties.
For all corporate to bank exchanges, such as foreign exchange (FX) and money market deal confirmations.
For two-way communication with all banks, typically via SWIFT, but also via other protocols such as EBICS (in Germany and France) and the Bacs payment platform in the UK.
When creating PFs, it is vital to take into account local differences in markets where the organisation has significant payment flows. For example, the UK payment system allows Direct Corporate Access to Bacs and the Faster Payments Service (FPS). This is different to most other countries, where corporate payment files are submitted to the local Automated Clearing House (ACH) via their payment banks. It is important to find a payment factory solution which incorporates these local requirements in order to ensure maximum flexibility and lowest cost routing.
ISO 20022 XML
There is a major advantage to implementing ISO 20022 XML messaging as part of a SEPA project. As well as being the required format for SEPA bulk files, this open standard is increasingly being adopted by major banks to enable their corporate clients to make bulk payments in other geographies outside of the eurozone. Over 30 banks and a handful of technology providers, including Bottomline, are collaborating on an ISO 20022 initiative, called Common Global Implementation (CGI).
The aim of the CGI industry initiative, co-ordinated by SWIFT, is to simplify global payment projects for corporates and non-bank financial institutions (NBFIs). Using Common Global Implementation formats and XML puts an organisation in a great position to create a truly global payment and/or collections factory, offering enterprises greater visibility and control, with important cost reduction and audit benefits; all driven by standardised processes [for more on this project please click on these earlier bobsguide CGI updates from Citi, SWIFT and Microsoft , among many others -Ed].
The increasing use of PFs, handling both payments and DDs in a standardised manner, is set to drive the wider adoption of payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO). This is a highly efficient way to manage the payments and collections of a large group with multiple legal entities. Improved visibility and control will at last allow organisations to reduce the number of bank accounts held internationally, which has long been a source of working capital inefficiency and a heavy drain on management and financiers time. Centralised reconciliation, automated sweeping and pooling, and virtual accounting all enable an organisation to establish a robust solution on a pan-enterprise basis, driving greater efficiency and working capital benefits across the group.
These are just some of the valuable strategic opportunities for treasury organisations achieving SEPA compliance, while also simultaneously positioning themselves for future growth and greater efficiency. The extra six month grace period presented by the EC will hopefully start encouraging more corporates to explore these opportunities.
* Footnote 1: regarding SEPA conversion services. The European Central Bank (ECB) has spelt out that the only circumstance where SEPA conversion services comply with the SEPA project’s legal requirements is where those services are clearly separate from a Payment Service Provider’s (PSP) normal payment activities. According to the ECB, an indication of separation should be:
Operationally independent from the payment service offered by the PSP.
It should be carried out before the PSP receives the payment instruction.
The information should preferably be passed to the Payment Service User before being initiated as a payment.
And finally, the service should be separately priced.
(Source: ECB Second SEPA Migration Report, October 2013).