The European Commission (EC) announcement outlining an additional transition period during which payments that differ from the single euro payments area (SEPA) formats can still be accepted - effectively delaying the 1 February 2014 end-date by six months - came as a surprise to many in the treasury industry, says Nick Diamond, head of cash management and payment sales at Lloyds Bank. As his blog co-writer, Ian Dent, head of international payments and cash management product at Lloyds says, there wasn’t supposed to be a plan B, but after the European Parliament voted to accept the EC delay proposal it now appears there is. Regardless, treasurers should push ahead with early compliance.
The benefits of the single euro payments area (SEPA) project, which represents a critical step in European payments harmonisation and coordination, include simplified payments, lower costs, better decision-making via standardised payment information and improved competitiveness for European corporates. The proposed delay until 1 August 2014 put forward by the Commission and now ratified by the European Parliament (EP), with others likely to fall in-line behind them, does not mean that treasurers should simply ignore SEPA compliance for six months - these efficiency benefits will not accrue unless treasurers take action and the sooner they do so, the sooner they can enjoy them.
The current state of migration differs starkly across the euro area countries and market sectors [see the European Central Bank (ECB) SEPA Indicators website for an indication -Ed]. Overall adoption rates are not yet high enough to ensure a smooth transition to SEPA, hence the delay, amid fears that the risk of disruption to payments for consumers and to and from small-to-medium sized enterprises (SMEs) was too high. Disruption on a significant scale could have negatively impacted the relative stability the euro has achieved in the period since the Cyprus bailout, and naturally this scenario needed to be avoided.
Country-by-country SEPA Analysis
While a number of the strongest European Union (EU) member economies have shown robust progress in responding to the SEPA requirements that were first adopted by the European Parliament and the European Council of national ministers back in February 2012, there have still been slower rates of migration on a country-by-country basis. Among fiscally weaker countries, which are more vulnerable to euro instability, there has been a marked slowness of adoption. Late preparedness in some of the larger-scale EU economies has also exacerbated concerns over market disruption.
The rate of migration towards SEPA credit transfer (SCT) formats has been respectable, particularly for the top quartile EU member states. However, the greater area of concern is with SEPA direct debits (SDDs), where the adoption process has been sluggish across the board.
SMEs, which have previously been identified by the ECB as having a lower number of internal applications and, as such, require fewer resources and preparations to adopt SEPA schemes, have also been markedly slower than large corporations in migrating. Indeed, SMEs were highlighted as one of the key market participants that were not yet ready for SEPA in the EC’s 9 January 2014 delay announcement.
Small-to-medium sized enterprise (SME) Concerns
There is less awareness of SEPA in the SME segment, not only around what is required of them, but also the longer-term business impact of SEPA post-migration. Some do not have the resources to either complete an accurate cost-benefit analysis or implement the required changes. Many smaller businesses also misunderstand SEPA to be only for banks, an optional product or only applicable to cross-border payments. Most treasurers at multinational corporations (MNCs) understand that SEPA is coming, but even there a fear about bounced or penalised non-compliant SEPA payments from SMEs is a strong contributing factor towards the delay. Sooner or later, however, the nettle needs to be grasped and migration enacted.
Even if an SME business has the resources to track SEPA regulation and is fully aware of its requirements and the perceived benefits, they may be asking themselves: ‘what’s in it for me?’
After all, many SMEs’ trading is solely or predominantly domestic, so the cross-border cash transactional efficiencies, which benefit MNC treasuries, could be lost on them. SMEs also cannot deliver the same level of transformation change, in terms of treasury and payments centralisation, that large corporates can, with few real process standardisation benefits to be gained for SME finance professionals.
Most importantly, some SMEs may see no clear incentive towards migration therefore. They could easily view the SEPA regulation as simply a back office cost that they are being forced to absorb outside of their own investment cycles, which could expose them to operational risk. Others may be running old or proprietary enterprise resource planning (ERP) systems that are not cost-effective to update. While in reality SEPA migration is likely to deliver simpler payments and make SMEs more competitive in the future, unscheduled outlay of this nature can impact upon working capital in the short-term, making it hard to justify for a small business.
SME Migration Still Vital
It is important that SMEs do migrate to SEPA. They are critical within the financial and physical supply chain and must be able to react quickly to support it in the event of failure elsewhere. They are a major payroll originator, and also at greater risk of late payment should the market be disrupted as a result of non-SEPA transactions, so they should be protected.
The message to both SMEs and large corporates that are not yet ready for SEPA is simple: consult your banks and software providers without delay. Late comers have been afforded extra time, but they must make positive strides to accelerate change or risk costly disruption beyond the transition period.
Banks and payment service providers can deliver the conversion services to help corporates become compliant. For bigger businesses, third parties will be heavily relied upon, while smaller firms with limited back office changes may only require some complementary software integration and light touch advisory help. However, the level of investment is only relative to a business’ size and every case is different.
Don’t Delay Compliance
The best approach for banks and the one we adopt at Lloyds Bank is to set out the facts around SEPA and be clear about what the opportunities are for clients - which SEPA products or conversion services are appropriate and to lay out clearly the options clients have to locate financial activities in their financial centre of choice. This potentially creates efficiencies more closely aligned to clients’ treasury organisation and working capital structure.
A potential knock-on effect of corporations ‘late flight’ towards SEPA conversion service providers could be an over-reliance on third parties, which would need to be gradually scaled back over the coming years. Conversely, those that have worked closely with third parties for a longer period of time, avoiding a tick-box approach to compliance, have effectively embedded SEPA standards into their organisations already and are ready to realise the benefits.
The bookending of the 1 February and 1 August 2014 extended timeframe is expected to see a number of euro member states put in place timetables aligned to their national needs. This is a positive development, especially given the potential implications of just a few states or key market sectors failing to meet high levels of compliance.
Commissioner Michel Barnier at the EC has said that the transition period will not be extended beyond 1 August 2014. To introduce a third extended date now would be folly and increase complexity. It would ultimately undermine the intent of this transition period until the summer and could lead to amused talk of a plan C. Despite being incredibly unlikely, a further extension cannot be completely ruled out, however, if a similar slow adoption risk assessment is applied in another six months’ time.
While specific jurisdictions are carefully planning and targeting their migration rates in light of the extension until 1 August 2014, it remains to be seen how corporates and SMEs will respond to this ‘grace period’, and whether time alone will be a big enough incentive to encourage migration as opposed to penalties or the like. There is now an overriding imperative for businesses to move towards SEPA, and the implications for not doing so could be significant. In all probability there will not be a plan C.
SEPA will happen, and in time Lloyds Bank and other financial institution (FI) clients will see an end to all the SEPA-themed events and marketing material that they see today. However, the real story is about making the euro and the SEPA project work for both businesses and consumers. Until that time, it is incumbent on the cash management banks, which have developed the solutions to make the euro work, to guide their clients along the compliance journey. The opportunity cannot be missed and corporates can - and should - benefit from SEPA.