Published: January 01, 2014
With very little time to go before the deadline for SEPA (Single Euro Payments Area) migration, many companies will be challenged to achieve full compliance despite the additional six-month migration period which has recently been announced. One of the reasons that many have delayed full migration is the declining marginal benefit, so full SEPA migration is now treated as a compliance project rather than a catalyst for cash management transformation. Yet, while the degree of potential benefit will vary across organisations, the payments landscape in Europe is changing fundamentally. In this article, Guy Simons, Assistant Treasurer responsible for global treasury operations at TRW Automotive, takes a pragmatic view of SEPA, both from a compliance perspective and when considering the opportunities that it presents.
TRW Automotive recognised the value that SEPA offers to a multinational business early on. We executed large numbers of costly cross-border vendor payments in Euros between EU member states, with the average payment size around 25,000 EUR. We could immediately reduce our banking charges by replacing these with SEPA Credit Transfers (SCT) that enabled both domestic or cross-border EUR payments to be transacted on the same terms and at the cost of a domestic payment, from 2003 for amounts under 12,500 EUR, from 2006 for amounts up to 50,000 EUR and since 2008 for any amount. We therefore selectively updated settlement instructions with IBAN (International Bank Account Number) and BIC (Bank Identification Code), and started channelling more EUR payments through German banks where the costs were lowest. We did not however implement the XML ISO 20022 formats on which SEPA payments are based, instead relying on conversion of the legacy formats by our banks.
However, once we had migrated our cross-border payments, there was far less incentive to migrate other payments, in particular domestic supplier and salary payments that are processed in each country. Furthermore, third party vendors of systems that we use for local payment processing did not rush to offer IBAN conversion or support the XML ISO 20022 format. And then there was the volatile banking landscape which could frustrate early IBAN conversion, as IBANs are inherently more susceptible to bank network changes than the old account numbers were. It was only in 2013, therefore, that we looked again at SEPA migration, this time from the perspective of compliance rather than cost savings. A wider migration project brings a wealth of challenges. For example, with payments created in multiple systems across the organisation, many of which need to be upgraded to support SEPA, the overall migration project needed to be broken down into a number of parallel, smaller projects. We therefore identified the system owners in each case and awarded responsibility for SEPA migration to each one. Each of these smaller projects inevitably requires resources and carries the risk of non-compliance; in addition, particularly given the timescales involved, each system owner will inevitably follow the easiest route to compliance, which may not be the most elegant or efficient in the longer term. For example, we may have multiple connections to the same bank, but each one is being migrated individually rather than rationalised at this stage.
Another factor that creates fragmentation in SEPA migration projects, including ours, is the variations on the EPC standard of ISO 20022 that countries such as Germany have implemented. This means that despite the SEPA objective to standardise payment processing across the Eurozone, companies with activities in more than one country, and with multiple banks, end up needing to customise formats to meet the requirements of individual banks and countries.
In a complex environment, in which significant uncertainty still remains, it is important to remain pragmatic, particularly at this late stage. At TRW, we have a ‘global’ SEPA migration project in place, but this effectively monitors the progress of individual systems projects rather than attempting to manage each of these centrally. Implementation is progressing for our major systems but there are some minor systems that will not be compliant by the end date or will continue to rely on bank conversion in those countries where this will be permitted (e.g., Italy). In some instances, where the payment volume is not high, we will process payments as high-value payments. While this has costs associated with it, this is lower than the conversion cost or the potential cost of non-compliance.[[[PAGE]]]
And even while we are still focusing on completing the SEPA migration from a compliance perspective, we are looking at the future and how to leverage SEPA to harmonise and streamline cash management in Europe. This particularly applies to our own processes and systems infrastructure, where we plan to significantly reduce replication which no longer has any domestic justification. Although we may be able to rationalise our banks in the future, cash management efficiency is not our only consideration when deciding on our banking partners, and it is important not to damage relationships with the banks that provide credit. For example, before the financial crisis, it was our objective to appoint a single payments bank, but this would have required an intra-day credit limit of €300m from one bank, which is no longer feasible. Today, a BBB-rated company such as TRW would not be able to work with one bank, nor would such an arrangement be desirable from a risk management perspective.
However, there are wider implications of SEPA that offer considerable opportunity for treasurers. For example, XML ISO 20022 formats have global applicability and therefore could become the industry standard for financial messaging. The ability to communicate with banks globally brings major benefits for multinational corporations, and by introducing a common standard for Europe, SEPA is a major enabler of this ambition.
One of the most important, but often overlooked aspects of SEPA and the EPC XML format is the opportunity to implement a payments-on-behalf-of (POBO) and collections-on-behalf-of (COBO) model, which greatly improves the efficiency of a payments factory or shared service centre by introducing a dedicated field to indicate the entity on whose behalf the payment is made or to whom the ultimate credit belongs. This simplifies the reconciliation process for beneficiaries and therefore makes POBO and COBO feasible where before it was impractical. Introducing POBO and COBO enables companies to reduce the number of bank accounts that they maintain, as they no longer need to hold accounts for each entity, and streamline payments processing.
SEPA therefore brings both challenges and opportunities. While some of the theoretical advantages, such as reducing bank relationships, may be less realistic for some companies than others, this should not obscure the genuine advantages that SEPA can offer to multinational businesses. The reduction of cross-border payment charges is the most obvious of these. However, in addition to cost savings, SEPA could simplify cash management in Europe significantly. The introduction of a single currency was already a major step in achieving this, but SEPA goes further by creating consistency and removing many of the cash management barriers in Europe. With only three months to go before the migration end date, the primary focus for most companies will be compliance, but once this process has been completed, it will be important for treasurers to review their operations and consider how these could be enhanced within and beyond the new single payments area.
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