Executive Summary
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The Single Euro Payments Area (SEPA) affects all companies doing business with European partners and sending or collecting payments in euros.
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SEPA introduces two new pan-European payment instruments, replaces local payment formats, and requires the utilization of new master data for payments.
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Companies can simply try to comply with the new SEPA framework or pursue a strategic approach involving the redesign of their business processes.
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The German Würth Group implemented a strategic change program that included corporate connectivity with SWIFT and further cash management centralization.
A Brief History of SEPA
SEPA is one of the largest projects in the history of pan-European monetary transactions. It is another major step toward a common financial market following the introduction of the euro in 1999. SEPA, which became effective in January 2008, affects all companies doing business with European partners and sending or collecting payments in euros. SEPA not only erases the boundaries between payment service systems in the European Union (EU), but also forces corporations to comply with new payment standards, change master data, and reconsider their business processes in financial accounting, cash, and corporate treasury management.
SEPA is the result of actions taken by the banking industry in 2002, when the industry created the European Payments Council (EPC) to define the standards, frameworks, and rules for euro payments. SEPA enables individuals, companies, and other stakeholders to make and receive payments in euros within Europe, whether across or within national boundaries, under the same basic conditions, rights, and obligations, regardless of their location. The political driver behind SEPA is the European Commission along with the European Central Bank.
Background
SEPA applies to all national and cross-border euro payments within and between the 27 member states of the European Union, the three European Economic Area ountries, and Switzerland. All of these 31 countries must gradually harmonize their payment systems and procedures. This means establishing European standards for processing payments, reducing barriers to market entry, increasing efficiency, and lowering transfer costs. Setting such standards will lead to payment format and master data changes—not only for companies in Europe, but also in the United States and other countries that have subsidiaries in Europe. So-called one-leg-out payments—where either the payment service provider of the payer or the beneficiary is not located within the SEPA—are not subject to SEPA payment regulations.
The official SEPA roadmap allows for a transitional period in which both the old and the new payment formats coexist. This is similar to the roadmap for the euro. After a critical mass of payment transactions using the new SEPA payment formats has been reached, the old formats will be abolished by the European banking industry. Although there is currently no fixed end date defined for this event (the initial plan envisioned 2010, which is rather unrealistic), such a date will undoubtedly be set and all enterprises doing business in Europe will have to become SEPA-compliant eventually.
New Payments Instruments
SEPA introduces two new payment instruments to be provided by banks for their customers: SEPA credit transfers (launched in 2008) and SEPA direct debits (scheduled to be introduced by November 2009). These new payment instruments are identical across SEPA. They provide significant payment efficiencies for the daily business of corporations.
The two new payment instruments are fundamentally different from each other. While SEPA credit transfers are used by debtors to initiate payments, SEPA direct debits are initiated by creditors to collect outstanding receivables. The processing of SEPA credit transfers is relatively straightforward, but SEPA direct debits are more complex because they require a mandate that has to be sent by the creditor to the debtor and signed by the debtor. From a legal perspective, a mandate encompasses two different functions. First, it is an authorization by the debtor to debit his or her account, and second, it is a payment order to the debtor’s bank to initiate a payment to the creditor. Although SEPA direct debits and credit transfers can both be used for business-to-business as well as business-to-consumer transactions, it is very likely that SEPA direct debits will become more common for smaller, potentially recurring business-to-consumer transactions such as utility or telecommunications bills. A huge benefit of the two new payment instruments is their universal usage across the SEPA area; this differentiates them from domestic payment solutions that don’t work across borders and are today much more expensive.
The two payment instruments provide a number of additional advantages. For example, exporters no longer require expensive, difficult to manage, incoming payment accounts at foreign correspondents’ banks. Companies can set up payment factories and shared service centers for financial operations, enabling them to centralize their financial accounting, cash, and corporate treasury management functions. SEPA affects card payments as well. Holders of Euro Cheque (EC) cards and credit cards can use them within SEPA to make payments at their usual national rates.
Both SEPA credit transfer and SEPA direct debit payments are based on International Organization for Standardization (ISO) 20022 payment processing standards and are defined as XML (eXtensible Markup Language) formats. Both the SEPA credit transfer and the SEPA direct debit are defined by ISO as PAIN (Payment Initiation) messages. There are also CAMT (Cash Management) messages, which define XML-based account statements for corporate-to-bank communication.
One of the key benefits of ISO 20022 messages—which are sometimes also referred to as UNIFI (Universal Financial Industry Message Scheme)—is the standardization and simplification of today’s heterogeneous and flat-file-based payment messages. In the medium term, it is also foreseen that the UNIFI standard will replace the common message types which are used today in the SWIFT (Society for Worldwide Interbank Financial Telecommunication) environment such as SWIFT MT 94O.
The SEPA credit transfer does not differ significantly from the existing standard credit transfer within the EU, but it eliminates the current 50,000 euro value limit. The SEPA direct debit is a more complex payment instrument, requiring the creditor to receive a mandate from the creditor’s debtors. The mandate is the authorization and expression of consent given by the debtor to the creditor, allowing the collection of outstanding receivables from a specified debtor account. Creditors must store mandate information in their systems as proof of legitimate collections, as well as to transfer mandate-related data to their financial institutions.
Both the SEPA credit transfer and the SEPA direct debit payment instruments require the use of an international bank account number (IBAN) and bank identifier code (BIC). The IBAN is a standard which was jointly developed by ISO and the European Committee for Banking Standards (ECBS).
Because only 45 countries have defined IBAN structures so far, this standard is not sufficient for routing payments, which means the BIC is needed as well. BIC (often also called SWIFT) codes are assigned by SWIFT. Companies have to update their IT systems to support both IBAN and BIC.
SEPA credit transfers are already in use and SEPA direct debits will be gradually introduced to the market by the banking industry. In the medium term, both payment instruments will replace the current domestic payment formats such as DTAUS (Datentraegeraustauschverfahren) in Germany and BACS (Bankers’ Automated Clearing Services) in the United Kingdom.
One of the prerequisites for the introduction of SEPA direct debits is the Payment Services Directive, which establishes important intervals and other rules for payments. The European Parliament and the European Council (which consists of all the ministers of finance and economic affairs within the EU) approved this directive in 2007 and requested the member states to implement it before November 2009 in national law.
Case Study
The German Würth Group decided to seize the opportunity of the advent of SEPA and implement a strategic approach. Würth’s core business is worldwide trade in fixing and assembly materials, including screws, screw accessories, dowels and plugs, chemical products, furniture and construction fittings, tools, and stock keeping and picking systems. The group’s 420 companies are located in 86 countries (half of them in Europe), with almost 63,000 employees. Würth’s 2007 turnover totaled almost 8.8 billion euros.
The main business issue for the group was its nontransparent financial supply chain, since the group’s many companies maintained their own banking interfaces for their payment transactions. Additional obstacles were high processing costs as a result of manual business processes, use of numerous access channels, and a lack of straight-through-processing (STP). The group was already managing 18 banks in a shared-service center and processing up to 2.5 million incoming payment transactions annually. Not only was the existing electronic banking component non-SEPA compatible, it had reached its capacity limits both from internationalization and compliance perspectives. In addition, Würth wanted to increase the current level of automation to achieve greater process savings.
Würth decided to implement a vendor’s commercial bank communication solution and use the SWIFTNet infrastructure to route its SEPA payments to the group’s banking partners. Würth is modifying all of its payment transactions, replacing domestic payment formats, and setting up a new payment approval process. The group also plans to bring additional banks and affiliates into the new SWIFT infrastructure. A key objective is to improve the processing of account statements further and increase the automatic reconciliation quota of open items within its enterprise resource planning (ERP) system.
Making It Happen
Strategic Options for SEPA
Enterprises can respond to the SEPA challenge with two basic strategies:
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They can invest only the bare minimum to become SEPA-compliant. This would imply the adoption of IBAN and BIC master data, as well as the implementation of the new payment instruments and formats. From an IT perspective, this strategy would require companies to evaluate the SEPA compatibility of their existing human resources, financial accounting, payment, and cash management system—including relevant master data.
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They can view the changes as a strategic opportunity to benefit from lower market barriers and adapt their business processes. On the business side, this could include the centralization of cash management activities, the implementation of payment factories, and the use of international payment service providers such as SWIFT. From the IT side, this could include consolidation of various IT systems in shared-service centers that would cover different European markets. Such operations should lead to improved economies of scale, better capacity utilization, and reduced total cost of ownership (TCO).
The right strategy depends on various factors, such as the geographical extent of a company’s sourcing and sales, the savings potential in SEPA compliance, the number of customers in various markets, the level of competition in these markets, and the potential for consolidation of IT systems.
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