The introduction of a standardised payments markets across the euro area is expected to bring new opportunities for corporates involved in cross-border trade. Banks, meanwhile, are leveraging Sepa to create new early financing solutions. Liz Salecka reports.


The Single Euro Payments Area (Sepa) became a market reality in August 2014 when corporates in the euro area completed their migration to the new standardised Sepa Credit Transfer (SCT) and Sepa Direct Debit (SDD) payment instruments.

Today, despite some in-country variations in the adoption of Sepa, corporates’ focus is switching to how they can capitalise on Sepa compliance in their wider trade and treasury operations.

“Despite concerns over the August 1, 2014 deadline, it passed without any major events,” says Rob Allighan, euro payables and receivables product manager, GTS Emea at Bank of America Merrill Lynch. What’s more, the rejection rate on Sepa Credit Transfers (payments that do not go through because they are not truly Sepa-compliant) is now as low as 0.16%.

“Corporates across the euro area are now benefiting from consistent timeframes for making and collecting payments and the removal of legacy payment processes which have been replaced by one standardised system,” he says.

The use of harmonised payment instruments for both credit transfers and direct debits has brought a number of new opportunities for companies trading across the region.

In the first instance, it has further strengthened the case for them to centralise their euro payments and collection activities in one location.

Moreover, the greater efficiency payments standardisation brings is expected to boost opportunities for trade, prompting more euro area corporates to enter new trading relationships in a wider span of countries.

“Being able to trade in a single currency clearly eliminates an element of risk. Being able to effect settlement through a standardised system increases efficiency. These two things combined should serve to promote trade within the eurozone itself,” says David Hennah, head of trade at Misys.

“It is not a silver bullet but it will make a further positive contribution to a single European market in which goods, labour and capital move freely. It provides another standardised platform that a community of corporates can use,” adds Andrew Reid, managing director and co-head of corporate cash management, Emea at Deutsche Bank.

Meanwhile, Allighan points out that one of the key objectives of Sepa was in fact to promote cross-border trade in the euro area.

“Sepa brings ease and efficiency to payment and collection processes, allowing companies to buy materials as easily from Bulgaria, for example, as they can from France.”

“It widens the breadth of countries that corporates can look to when sourcing,” he says

Allighan adds that Sepa should also make cross-border trade within the euro area a much smoother process than intra-regional trade in other parts of the world, where individual countries have their own distinct currencies and payment systems as well as different governing regulatory frameworks.

“The standardisation of payments and collections in the euro area with Sepa will put this region at an advantage over, for example, Asia and Africa, where there are different regulations in different countries,” he says.

Scope for centralisation

Sepa is expected to accelerate the existing movement by corporates towards centralising payments and collections activities in order to cut costs and secure improved visibility into incoming and outgoing cash related to their trading activities.

Allighan explains that many corporates are now looking to achieve savings in their treasury operations by setting up centralised payment factories and collection factories.

“Payment factories have been around for some time and are embedded in many corporates strategies. They are now making decisions on moving towards a centralised model for collections,” he says. He notes that this is an organisation-wide decision and needs the buy-in of all parties.

“Now that they have invested in the compliance and standardisation side it would be surprising if many corporates did not use the opportunity to establish a payments and collections factory in the near future,” agrees Hennah.

Corporates have been moving towards centralisation in a number of areas, including treasury, cash management and payments, for many years – and it is now seen as corporate best-practice.

“Sepa is a catalyst that will drive this movement further in payments,” says Reid at Deutsche Bank. Centralisation is seen as a way of improving efficiency, achieving economies of scale, improving risk management, and also presents opportunities to leverage centralised technologies.

Fewer banking relationships

The standardisation of payments across the euro area – coupled with the movement towards centralisation – is also expected to lead many corporates to reconsider their banking relationships.

In the first instance, it will enable them to reduce the number of banks they work with, thereby lowering the cost of electronic banking and reconciliation, as well as account and transaction fees.

“Sepa provides a clear opportunity for corporates to further improve efficiency by using potentially one account to pay – and collect – euros across the Sepa region. We are already starting to see this happen,” says Michael Knetsch, head of cash product, Western Europe at RBS.

“Whereas they may have previously used multiple local banks for collections, they can now consider going to one regional provider. This will drive huge efficiencies in their accounts receivables processes,” confirms Allighan.

Meanwhile, Reid believes that Sepa provides opportunities for corporates to rationalise physical bank accounts through the use of virtual account-based solutions.

“Now that we have a more harmonised set of processes with Sepa, and payments no longer have to go through more than 35 different clearing systems, corporates can leverage these enhancements and put further value-added processes in place,” he says.

A big role for SDD in trade

Another significant new opening stemming from the introduction of Sepa is the opportunity to use Sepa Direct Debit Debits (SDDs) to secure payment for goods and services traded across borders.

“It will serve to lower the processing costs as Sepa DDs are clear to call. The process of cross-border dealing has been simplified and de-mystified, making it easier to do business,” says Dermot Canavan, head of trade product, Emea at RBS.

Moreover, corporates are expected to take advantage of SDDs where they are involved in ongoing trade relationships with business buyers across the euro area. This will help them to reduce the risks of late or non-payment in cross-border trade.

Allighan points out that, although direct debits have traditionally been used in the business-to-consumer space, companies can now take advantage of this instrument to collect from business trading counterparties.

“SDD will enable businesses to take more control over how a payment is made to them,” he says.

“We are anticipating slow but sure growth in the use of SDD in the business-to-business space as a method of collection. It gives the supplier much more control over the receipt of payment, and is another tool that can be used to make the receipt of payments safer.”

“Greater use of SDD by the business community is definitely anticipated, although this will depend on the industry,” adds Reid, identifying a strong potential for SDDs to play a part in encouraging and promoting cross-border trade.

This will enable companies to move into new markets without having to significantly increase levels of operational banking infrastructure to manage the collections process. “From a payments perspective, corporates will be able to connect with new customers and suppliers in a standardised way,” he says.

But some believe that there may still be some cultural dynamics to address regarding the willingness of buyers to allow their accounts to be debited on regular basis by trading counterparties across borders. Deutsche Bank’s Reid anticipates that as European companies become more familiar with SDD, take-up rates will rise.

“The key benefits of SDD are that it enables regular payments that are electronic, efficient and low-cost. Once put in place, SDDs are beneficial for both trading parties – and to a certain extent represent a relatively ‘light touch’ approach to making payments across borders, in comparison to other methods,” he says.

Use of trade finance

Although the bulk of trade across the euro area today is conducted on an open account basis, there are suggestions that the greater payments certainty provided by Sepa could encourage those companies that still rely on letters of credit to reduce their dependence on these instruments.

Greater payments certainty could also reduce corporates’ need for other types of bank finance.

“Most eurozone trade is conducted on open account so the ability of the supplier to obtain an assurance of being paid on time will help to mitigate risk,” says Hennah. “More efficient management of working capital will ultimately reduce the need for short-term finance.”

He, nevertheless, points out that although standardised payment processing could reduce the need for bank financing, suppliers should not discount the opportunities presented by joining supply chain finance programmes if they need early access to finance, where these facilities are made available to them.

Similarly, Canavan argues that Sepa will not detract from the need, and demand, for supply chain finance.

“The negotiated payment terms between buyers and suppliers will not be impacted,” he says. “Purely having their payment arrive by a SDD will not necessarily get the funds from the buyer to them faster.”

He adds that Sepa could indeed be beneficial to supply chain finance programmes. “It can serve to standardise the security and ease of payment across the eurozone as it will remove some of the possible inconsistencies and solutions at a local level,” he says.

It seems Sepa could actually boost the provision of supply chain finance. Banks themselves will benefit from not having to settle payments through more than 35 different systems across Europe, and when making payments across borders they too will be taking advantage of the same standardised payments processes.

“Sepa will make it easier to roll out cross-border supply chain finance programmes throughout the euro area,” says Reid.

The next deadline

With Sepa migration for payment users across the euro area now effectively complete, more attention is likely to be focused on the next Sepa migration deadline of October 31, 2016, which applies to companies in non-euro countries involved in euro-denominated trade.

Hennah believes that joining Sepa presents clear benefits for banks and corporates outside the euro area that are processing significant volumes of euro-denominated payments. “These include the rationalisation of euro account structures and enhanced payment processing efficiency as well as reduced risk, complexity and cost,” he says.

Meanwhile, companies in non-euro countries are already doing Sepa cross-border transfers.

“I do not see achieving Sepa compliance as a hindrance to these companies. Sepa is in existence already for the euro area and the way that companies make payments within their own non-euro countries will not be affected,” says Allighan.

“Many corporates have already actively used the Sepa capabilities of their bank, for example, to achieve cost-savings,” adds Knetsch. “Even banks have already actively switched these types of payments into Sepa because of the associated cost efficiency.”

As more companies outside the euro step up their adoption of the new Sepa payment instruments, this is expected to boost their opportunities for trade in the euro area too.

“Use of the Sepa instruments will open up a much wider market to them,” says Allighan. He believes it will encourage companies outside the euro area to trade with more countries in the region. “There is greater potential for cross-European trade because of the ease and efficiency of payment and collection methods across all countries.”

Using Sepa to create new financing solutions

While Sepa brings clear new opportunities for corporates trading across the euro area, banks managing payments across borders also stand to benefit.

“There is a clear connection between a standardised, harmonised payments landscape and the opportunities open to corporate clients,” says Deutsche Bank’s Andrew Reid. “From a bank perspective, it will also allow for a rationalisation of systems and a reduction in complexity, ultimately helping drive down the cost of processing payments.”

Reid believes that banks will now be able to offer new solutions to their corporate clients as they capitalise on defined payment terms and a single Automated Clearing House (ACH) clearing system which provides greater certainty of payment and settlement.

“Banks can leverage Sepa to develop new solutions in areas such as supply chain finance,” he says. “When introduced into financial supply chain programmes, Sepa can significantly enhance banks’ abilities to offer effective early financing solutions.”

Deutsche Bank is currently working on the creation and presentation of new solutions that leverage Sepa formats and practices. About a year ago it set up a Working Capital Advisory Unit, which is looking at the convergence of product and solution sets, where there may be opportunities for the promotion of certain trade finance-related solutions.