European CFOs and treasurers know well the efforts that people have gone to to try to make the Single European Payments Area (SEPA) interesting. The regulations for SEPA have been among the least enthusiastically adopted rules ever to emanate from the European Commission in Brussels, despite the opportunity they offer to cut the costs of making and collecting payments.
The latest edition of the World Payments Report — produced by CapGemini, RBS, and the European Financial Management Assn. — shows the extent to which the banking sector is ready for SEPA, and the extent to which it has yet to be embraced by banks’ clients.
Although the single European currency was introduced in 1999, only now is Europe moving toward a banking payments system that works seamlessly across borders. In fact, the rules don’t even come into effect until February 2014. With SEPA, corporates will be able to make and collect payments between any two countries in Europe — including those outside the euro zone, like the United Kingdom and Sweden — using standardized payment protocols, messaging, bank-account number formats, and so on. There is a cost saving from what would otherwise have been, in effect, cross-border transactions (even if in the same currency). However, considerable investment is required from companies to take advantage of it.
The report says that 4,559 banks, responsible collectively for some 95% of the volume of payments in Europe, can now be reached using SEPA credit transfers, and yet only 27.2% of payments were taking advantage of this functionality as of March 2012.
In addition, the take-up rate for direct debits — in which one person or company withdraws funds from another’s bank account — is amazingly low. Although almost 4,000 payment service providers (PSPs, in the jargon), covering some 80% of payments volume, were reachable using SEPA direct debits, only 0.4% of payments used them. (Culturally, direct debits are well understood and widely used in the United Kingdom but they are almost a foreign concept or excessively regulated in much of Europe.)
Several things appear to have held back the rate of adoption:
- For several years there was no deadline for implementing SEPA. The European Commission believed the commercial benefits were sufficiently clear that the market would push ahead at a good pace without the need to be forced to comply. Now, however, there is a deadline in early 2014.
- There has been some confusion about how to interpret some of the regulations.
- Banks haven’t always been quick to adapt their systems to cope with SEPA, in the absence of evidence that clients really want it.
- Companies have been slow to push for SEPA payment solutions because of concerns about whether their own clients would be reachable (it’s pointless for a company to invest so it can directly debit some customers’ accounts if it can’t do it with all of them). They have also been concerned about the ability of their banks to help in the migration process.
For corporates, SEPA is “a major undertaking,” the report acknowledges, requiring dedicated planning and the active engagement of stakeholders, “especially because the short-term benefits may seem neither clear nor assured at first.”
Key success factors for companies, the report says, include the following:
- A comprehensive IT assessment and road map are needed. SEPA migration potentially affects many aspects of IT infrastructure and processes, from the front end to the back.
- The scale and scope of the SEPA migration project need to be analyzed by constructing a profile of accounts receivable and accounts payable across geographies. Then the company can plot a transition plan.
- Payments databases need to be updated to ensure payments will be processed reliably and accurately. SEPA involves a shift to international bank account numbers, with new message formats based on the ISO 20022 XML standard. Many corporates will, therefore, need to change the way they collect bank details from their vendors and employees, as well as the bank-code information from local issuing authorities — and also the way they manage mandates for direct debits.
Just as important as these technical planning details is the fact that companies are going to need strong relationships with their banks as they work with them to deal with the migration issues, the report notes. But that’s while banks themselves deal with not only their own technical issues but also the pressures on their revenues from increasingly commoditized payments and the rise of competition from new nonbank payment-service providers.
But there are advantages to adopting SEPA. Larger companies will be able to take fuller advantage of major process changes, such as the implementation of payment factories (shared service centers focused on the accounts-payable function). And smaller companies will find it easier to compete across borders by being able to offer their customers easy payment facilities such as SEPA direct debits.
These are all good reasons for companies to embrace the SEPA initiative, and with the implementation deadline approaching, the rate of take-up seems certain to accelerate. But the report adds that the volatile macroeconomic environment and the ongoing euro-zone crisis could divert resources away from the harmonization program. SEPA may simply continue to be very uninteresting to corporates and banks compared with the excitement of never-ending economic and financial chaos.
Andrew Sawers is editor of CFO European Briefing, a CFO online publication.