SEPA-review-Race to the finish

The creation of a single market in euro-denominated payments is expected to facilitate trade for eurozone companies. But questions remain over whether they will meet the SEPA migration deadline. Liz Salecka reports.


The full introduction of the single euro payments area (SEPA) next year is expected to improve the speed and efficiency of cross-border euro-denominated payments and bring major operational benefits to corporates with trading relationships in the euro area.

All corporates and public sector bodies in the eurozone are required by EU regulation to have fully migrated from existing national payment schemes to the new SEPA payment instruments – SEPA credit transfer (SCT) and SEPA direct debit (SDD) – by February 1, 2014. Organisations based outside the euro area have until November 1, 2016 to do so for euro-denominated payments to suppliers in the region.

The end result will be a single market in euro payments in which all credit transfers and direct debit collections are made using a standardised format, and in which euro payments are cleared within the same timescales and for exactly the same fees. This scenario is expected to facilitate cross-border trade by taking away the complexities of dealing with multiple national payment systems.

“At a high level, any type of standardisation always simplifies commerce by taking away barriers, and allowing it to flourish more vigorously. There is no doubt that SEPA will promote trade within Europe by standardising and accelerating the payments process,” says Moti Porath, executive vice-president, global pre-sales at IT solutions provider Fundtech.

“SEPA is an important enabler, which will allow mass payers to make payments to suppliers in an efficient and standardised way across the SEPA zone,” adds Eran Karoly, chief operating officer at payments software platform provider Tipalti.
Already, many large non-European corporates that trade in the euro area have taken SEPA onboard, and are making SEPA-compliant payments to their suppliers.

“Most of the large US and Asian companies with trading relationships in euroland have set up regional treasury centres, and are very much up to speed with SEPA,” confirms Daniel Schmand, head of trade finance and cash management corporates, Emea at Deutsche Bank.

“They welcome the creation of a single euro payments market – and most of them are already in a strong position to take full advantage of using a single, SEPA-compliant format when executing Automated Clearing House (ACH) payments.”
He adds that one of SEPA’s biggest benefits relates to direct debits because it enables companies to collect these mass payments across jurisdictions from any one location using the same format.

SDD will simplify the collections process for insurance companies, utilities and other service providers operating across the region. SEPA also represents a positive step forward for banks outside the euro area that have to process large volumes of euro payments.

Olivier Denis, product manager for SEPA compliance at solutions provider EastNets points out that many financial institutions (FIs) are struggling to optimise these payment flows and they see SEPA as a way of rationalising them. It is particularly pertinent for banks and FIs in the Mena region.

“If the management of these payments is optimised, this could impact on prospects for trade. SEPA will improve the speed and predictability of euro payments into, and out of, Europe and represents a major step forward for these FIs and hence also corporates that are developing European trade connections.”

Boost for SMEs

SEPA is also expected to improve business prospects for smaller companies based in the euro area, and potentially coax them into regional, and even international, trade.

“For smaller companies, making and receiving payments under SEPA will become easier, cheaper and more transparent. This could provide them with a new – and beneficial – competitive edge,” says Schmand.

“SEPA should boost trade prospects for all European SMEs, many of which have focused more attention on building customer relationships in their own national markets,” confirms Denis. “The difficulties they face in ensuring an effective cross-border payments service has often meant that they have refrained from extending their business across borders. With SEPA this will become much easier. If they want to expand their business and trade in a new EU country, the payments infrastructure they deal with will be identical in 70 to 80% of EU countries.”

He adds that although it is still early days, SEPA may also make it easier for companies to arrange trade finance.
“Once SDD is fully operational for cross-border payments, the payment collection system will be much more predictable. This will not only affect cash collections but will also lead to more accurate cash forecasting and planning, putting corporates in a much better position when negotiating financing terms with their banks,” he says.

The final lap

Although the EU SEPA regulation laid down February 1as the deadline by which corporates in the eurozone must migrate to SEPA, and ruled that existing national payments systems be switched off on this date, there are growing concerns that some organisations will not be fully compliant on time.

In August 2013, with just months to go, SCT payments accounted for 52.8% of all credit transfers in the euro area, but SDDs accounted for only 7.2% of all direct debits, according to European Central Bank (ECB) statistics.

“Across Europe, corporates are already experiencing the operational and liquidity benefits of SEPA in areas such as payment collections, liquidity planning and forecasting and efficiency in trade payment collection, especially in relation to credit transfers – more than 50% of which are already being processed using SEPA,” says EastNets’ Denis. “However, in the case of SDD, there are still questions over whether companies will achieve migration before the February 2014 deadline.”

This has given rises to suggestions that the EU may need to allow some companies additional migration time, and let them continue using existing national payments systems for a short period post-February 2014 until full SEPA-readiness is achieved.

“To date, the main regulatory authority has said there will be no exceptions to the migration deadline. However, some national authorities – due to the complexity of migration from their domestic schemes to SDD – might potentially ask for a waiver for a period of time,” continues Denis. “But this is only a detail compared to the wider adoption of SEPA market infrastructure.”

“We are likely to see the dual operation of SEPA and legacy payment systems, and the emergence of other mechanisms that will help SMEs with SEPA compliance,” adds Moti at Fundtech, who points out that the costs of SEPA compliance have hindered migration by the SME sector in particular.

Moti believes that third-party technology companies and service providers will start offering support services to SMEs that do not have the funds required to invest in SEPA directly. These third parties are likely to work in partnership with banks, which have a vested interest in onboarding companies to SEPA.

“If there is significant demand for support from the SME sector as the SEPA deadline approaches, there may be some external solution providers that can step in to offer eleventh-hour advice and technical support for those yet to migrate,” adds Deutsche Bank’s Schmand. “As a bank, we cannot place an obligation on smaller companies to implement SEPA, or ensure they do so within deadline. We can, however, support them through the migration process.”

At Tipalti, Karoly points out that his company’s mass payments software platform is already SEPA-compliant, meaning that companies that use it can already make SEPA payments without having to do the required SEPA preparation work themselves.

“We have already introduced SEPA to our payments platform, and are asking our customers to encourage their suppliers to modify their requested payment methods so that SEPA is supported,” he says.

“By doing this work early, we have benefitted from seeing any issues that arise early – and have had enough time in which to correct them. As we deal with mass payers in Europe too, it was important that we take a stringent approach and be ready for the earliest of the deadlines.”