The deadline for SEPA compliance has sailed by, but corporates are just beginning to explore the possibilities left in its wake, explains Andrew Reid, Managing Director and Head of Corporate Cash Management, EMEA, Deutsche Bank
It was one of the largest financial integration projects the world has seen, requiring considerable time and money to update existing systems for both businesses and banks – in some cases equating to a major overhaul. But the (extended) SEPA deadline passed us by in August of last year. As the last-minute compliance rush dies down to the ripples of reconciling and remaining snags, treasurers are looking forwards to find ways in which to turn the cost of compliance to their advantage.
The SEPA mindset brought with it a renewed focus on treasury functions and a timely push towards a new generation of treasury that is digitised, streamlined and flexible. The Single Euro Payments Area has done just what it says on the tin – standardising, harmonising and integrating the region in terms of rules, standards, formats and pricing. Carrying on these improvements, treasurers are looking at the next steps in centralisation and rationalisation, integration and in-house banking. Banks have been building solutions and products over the last few years to enable corporates to make best use of SEPA’s features; now the time has come to take those opportunities from theory to practice.
For many treasurers, SEPA’s unification of the region has freed them up to consolidate European bank accounts, even potentially to a single central account (practicality, local regulations and taxes permitting). From this main account all transactions could be received and made on behalf of any eurozone subsidiaries, eventually removing the need for cash pooling. Alongside bank account rationalisation is a move towards centralising treasury departments themselves – creating cost savings, improving speed, efficiency and visibility of processes and lowering the risk of error by transforming a fragmented and disparate treasury structure into a single treasury department that centrally controls group operations.
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Hand-in-hand with such advancements comes an increased interest in in-house banks and an associated rise in the popularity of Shared Service Centres (SSCs) and Payment and Collection factories. Payment-on-Behalf-of (POBO) and Collection-on-Behalf-of structures are older than SEPA, but their effectiveness pre-deadline was relatively limited due to the numerous local bank accounts and varying formats necessitated by the lack of standardisation. When using SEPA’s (compulsory) ISO 20022 XML standard, in contrast, no format modification is necessary and the subsidiary making the payment can be specified, unlike before.
Post-SEPA the landscape continues to change. Other regulations, including those around liquidity, are still shifting, and the ongoing implementation of Basel III and the upcoming PSD2 will further mould the terrain. Regulated pricing and standardised formats have also evened the playing field for new entrants and non-bank competitors, and regulation over these players – from fintechs to shadow banking providers – has yet to be worked out and set in stone. Meanwhile, the burden of compliance has caused some banking providers to retrench in certain geographical or financial areas, putting the spotlight on those instead making a clear commitment to the market and to innovation.
Given all these changes, the rise of in-house banking, SSCs and POBO/COBO also piggyback on a growing SEPA-supported trend for bank agnosticism, as mitigating the risk of dependencies of any kind is a key objective. The liberating standardisation of the XML format supports this by making it easier not only to seamlessly integrate non-proprietary models, but also to move from bank to bank – which, along with the greater visibility and control brought about by these developments, lowers risk. Such standardisation means that other points of differentiation – expertise and consultancy, value-added services or pricing – can be used to distinguish between providers. Another boon of standardisation is the potential for integrating more than simple payments into data flows; integrating supply chain financing on the confirmed payables or direct debit side of transactions, say, or a foreign exchange component into cross-border data flows.
Full steam ahead
However, if the possibilities seem overwhelming it is worth noting that such enhancements do not need to be implemented all at once. Migration can be gradually phased in, and priority should be given to solutions that will add the greatest value to a corporate’s unique circumstances and infrastructure and are most in-keeping with their long-term objectives. For example, while POBO structures are enjoying increasingly widespread take-up, COBO is often perceived as a secondary step, and can always be implemented later on.
The standardised SEPA landscape has also provided a more fertile environment for bank innovation. Not only has interest in more sophisticated solutions risen, but they are of course more widely applicable and suitable to be rolled out to a pan-European market without local modification. In addition, SEPA’s “best-practice” momentum will likely see a second wave of technological development, leading to Additional Optional Services currently restricted to local markets being re-engineered to plug in across the region, as well as further developments in cross-border Automated Clearing House-type solutions.
Treasurers must open their eyes and look around at a new land of payments, with numerous possibilities created by the re-engineered processes and systems of SEPA and by the standardisation and harmonisation of the zone. The long-term goals of real-time transactions and visibility, end-to-end automation, complete control and absolute fluidity of cash movements are closer than ever, thanks to SEPA, and the sooner corporates’ next moves are decided, the sooner they can enjoy the benefits.