From 1st February 2014 in Eurozone countries and 31st October 2016 in non-Eurozone countries, banks and corporates will be required to use the Single Euro Payment Area (SEPA) for euro payments and direct debits (DDs).

Any organisation making or receiving payments is likely to be affected by this new regulation – yet a large number of organisations of all sizes have not yet begun their SEPA migration. Indeed, many appear not to realise that SEPA has any relevance at all.

In fact, the shift to SEPA offers significant benefits to businesses – from lower bank fees on euro payments and DDs to opportunities to streamline processes. Marcus Hughes, Business Development Director, Bottomline Technologies, outlines the requirements for SEPA compliance and provides essential migration guidance.

Introducing SEPA

Designed to create a stronger, more competitive EU marketplace, SEPA will streamline euro payments and DDs, as well as card transactions, making it cheaper and faster to make and receive payments. Covering the 27 EU member states as well as the European Free Trade Area and European Economic Area Territories, SEPA is set to affect 500 million citizens and 71.5 billion electronic payments per year.

So what difference will SEPA make in practice to UK business? One of the immediate benefits will be a reduction in bank charges for euro payments: under SEPA, banks must apply domestic tariffs to compliant SEPA credit transfers and DDs, rather than the higher cross-border payment tariff. In addition, the initiative presents a great opportunity for organisations to standardise euro payment and DD processes, which will in turn result in further cost cutting opportunities.

For example using a single payment and DD instrument across the EU for euro transactions provides an opportunity to consolidate payments on fewer banks whilst retaining bank independence of platforms and processes. Combining fewer bank accounts with standardised and centralised processes should provide organisations with improved visibility and control over payments, offering the chance to enhance working capital management and improve cash flow forecasting. However, organisations failing to comply are likely to face penalty fees for manual repairs by the bank.

SEPA Migration

What changes are required to make SEPA payments? The new SEPA Credit Transfer and DD schemes require the use of the International Bank Account Number (IBAN) and Bank Identifier Code (BIC); as well as the XML ISO 20022 standardised file format to exchange bulk payment and DD files between banks and corporates. SEPA also introduces new execution timelines and processing cycles for euro payments and DDs and new procedures for managing DD mandates, in some cases requiring the signing of new mandates.

Given the significance of SEPA to the business, it is vital to ensure that senior management are aware of and understands the implications of SEPA; it is also necessary to raise awareness throughout the business and underline the importance and implications of SEPA, especially in those units directly affected. This will require good communication of both the changes required to achieve SEPA compliance and the attendant benefits: demonstrating cost savings and opportunities to streamline processes will be key to attaining cross-business commitment to the transition.

It is also essential to determine the scope of the SEPA migration challenge. What are the current and predicted payment volumes, values and types of euro payments versus receipts; Credit Transfers versus DDs, domestic versus cross-border, business-to-business versus business-to-consumer transactions, as well as which bank accounts and banking relationships are affected by SEPA.

Making the Transition

Armed with this insight, it is important to understand the strategies and SEPA readiness of key payment partners – from banks to technology providers. What processes will the bank require and when is the planned switch from legacy schemes to SEPA schemes – will both schemes be handled in parallel? If so, for how long?

Can the payment software hold and process IBANs and BICs or support ISO 20022? IBANs are longer than domestic bank account numbers and sort codes, so some system field lengths are too short to hold enough characters to comply with SEPA. This may require a system upgrade, a new bolt-on solution or even a replacement system. An ERP upgrade could require more than 12 months to implement, possibly ruling out this option. If an organisation needs to modify several payment systems in different locations, it may be more cost effective to implement a single web-based payment hub which can be used by all affected units.

It is also important to check whether the system can validate IBANs and BICs – and to consider the best way of collecting these numbers from customers and suppliers. One fast track approach is to deploy software to convert Basic Bank Account Numbers (BBANs) into IBANs and match these up with the appropriate BIC, which is essential for proper routing of payments. However collected, these numbers must be validated using IBAN and BIC validation software tools to minimise errors that would incur penalty repair fees, instead of qualifying for lower bank SEPA fees. Putting in place the right technology solution will be critical in streamlining the SEPA transition, minimising disruption or payment failure and providing a strong platform for further streamlining of processes.

Some UK organisations may well be thinking that the SEPA mandatory migration date of 31 October 2016 for non Eurozone countries seems a long way off. But they should consider carefully whether the more immediate migration date of 1 February 2014 is in fact the applicable date for them. This will be the case if they have subsidiaries, branches or even bank accounts in Eurozone countries. These will all need to be SEPA compliant in less than 12 months. Furthermore, if they collect euro DDs in any Eurozone countries they will also need to ensure they are compliant by 1 February 2014. On the positive side, the sooner an organisation makes the migration the sooner they will capture the benefits of domestic payment fees from their banks, as well as lower processing costs and visibility from standardisation.

Conclusion

The European Commission has estimated that SEPA will generate euro 123 billion of savings over six years as a result of faster transfers and reduced bank charges. Add in improved visibility and enhanced working capital management and the potential benefits are compelling. However, these benefits can only be attained if organisations understand the implications of SEPA and embark upon the migration process well in advance of the end dates.

If an organisation waits too long, it may prove increasingly difficult to access the necessary IT resources as the deadline approaches. With a large number of organisations needing to meet the deadlines, demand for skilled resources at banks and technology partners will increase rapidly. By starting in good time, there is not only more opportunity to plan and implement a successful migration project but, critically, explore and capture the benefits of centralisation and standardisation across the organisation.