At the top end of the banking and corporate pile, SEPA-readiness is almost a given, and for some has been for a while. Further down among the medium-sized corporates, however, things are less clear.
To try to gain some clarity on the situation, payment systems consultant Peter Miller recently carried out a survey, asking some basic questions, (with the collaboration of Neil Burton, director of product strategy at Earthport.)
The main conclusion was stark: corporates are being provided with little basis upon which to judge whether SEPA provides them with an opportunity to improve their cash management or whether it simply represents another compliance matter.
Miller says that this is important for a number of reasons: it determines the method and the urgency with which they address the issue and initiate the necessary projects and budgets. “Education of the private sector on the effects of imposing new law, apparently aimed at banks, is required, whether this is offered by trade bodies, the UK Payments Council or by government itself,” he said.
The survey was intended to be “a quick and informal study of opinion surrounding the implementation of SEPA for UK customers … it is a narrow national view, intended to discover the extent to which the UK industry as a whole is aware of the issues”.
The study was conducted over a two week period in Jan 2013, during which 40 experienced practitioners, bankers, suppliers, consultants and industry commentators were asked to respond, by email, to a survey.
The questions were not aimed at singling out technical fact, but were aimed at bringing out the high –level issues. If the quantity of responses received was mildly disappointing, their quality and depth were not.
The questions were set against the certainty that the end date regulation for SEPA is now set.
- Countries in the Eurozone will have to cut over all existing direct credits and direct debits in euro to new instruments which comply with the end-date regulation and the Payment Services Directive – February 2014. This means that all “heritage” instruments will be replaced by the SEPA Direct Credit and the SEPA Direct Debit managed by the European Payments Council, as there is today no alternative which complies with the PSD and the SEPA end-date regulation.
- Other non-euro EU countries making payments in euro will have longer to comply with the same requirement – by the end of October 2016.
Ad hoc discussion suggested that there is uncertainty as to the commercial, rather than functional, impact of SEPA on UK firms; and that the scale of the impact might be considerable. In the face of this we asked five questions, which are questions for the UK payment industry, but which might equally be posed in other euro-out countries.
The responses elicited comments beyond straight answers (see panel), providing a useful snapshot.
The most significant practical obstacle to be overcome is for corporates with multiple transactions/high volumes. Typically, these will be sent from the corporate in files. The design of SEPA (its “four corners”) assume that it is the sender’s responsibility to ensure the quality of data within the files, that they will be sent in XML format (ISO 20022) and that banks are prevented from converting instructions from non-XML to XML (this is part of the SEPA regulations).
The banks’ responsibility is to clear and settle – not to reformat. Thus, corporates with volumes to send/receive have to have a capability to operate accurate and complete transmission of data using a technical method which they are unlikely to have today and which requires a significant effort to implement.
Are some UK corporates in danger of putting themselves at a significant commercial disadvantage if they postpone adoption of SEPA for euro transactions until 2016?
The majority answered with a clear yes, with some qualifying their answer with the suggestion that while it would be advantageous for UK corporates with European payments to use SEPA early, this might not be their biggest problem and that the cost/effort of enabling SEPA might be a constraint. 2 answered no.
Which segments of the corporate market are most disadvantaged – large corporates, mid-sized or SMEs?The majority answer was
1. No-one is disadvantaged yet.
2. All those engaged in cross-border business would be the most affected (although this was assumed by the question.)
3. Small SMEs will mostly be managing single credit transfers which aren’t impacted by SEPA (which for corporates applies only to bulk transfers). Their online banking products and or FX payments will continue to manage their requirements adequately. They are unlikely to have a significant problem.
4. Opinion was split between large and medium corporates with a majority assuming that the mid-sized corporates with less banking clout had the greater problem in sending SCTs and that large multinationals which may see the benefit of using SDDs have a significant issue.
Is it presumed that this is almost entirely about direct credits rather than direct debits, for which the changes required are significantly more complex, but for which the cross-border volumes today are not significant?
Almost all replied yes. But most respondents added the rider that since the direct debit business was growing, primarily because it offered corporates the ability to collect funds more efficiently and cheaply, it would become more important.
A typical reply was: “There is ample evidence that the costs and risks of collection inhibit businesses, especially small businesses, from engaging in export. SEPA DDs are intended to reduce this barrier, for firms which bill in euro to clients in the eurozone. While perhaps relatively few UK firms do that today, the availability of such a service might be seen as an enabler by some.”
Is the UK economy as a whole in danger of putting itself at a significant commercial disadvantage if it regards the end date of 2016 as the only critical date?
The majority answer (60/40) was yes and included multi-national companies with European headquarters in the UK.
Is someone responsible for informing the markets, corporates or consumers, about SEPA. Who is this? And are they doing what is necessary?
Here the answers were both most complete and varied.
Most respondents acknowledged that it was the banks’ responsibility to inform their customers about the change. (Miller himself trades as an SME with international payments flows, and says he has yet to receive any SEPA education or advice from his bank. Other SMEs have a similar experience.)
Those customers that are aware of SEPA are not aware of the 2016 date or believe their bank will sort it out for them. A distinct lack of leadership and education was cited. A typical answer was:
“No. I think there is a distinct lack of leadership here. By closing the euro schemes, it feels as if the industry thinks it has cunningly side-stepped the issue. I would have thought that a forum of bodies, including the Payments Council, Treasury and corporates should be doing a risk assessment at the very least. By not doing anything, in effect they’ve chosen 2016 by default.”
But most respondents also suggested, as criticisms, that:
1. There was no information campaign to corporates and specifically that:
2. The Payments Council was too worried about its own future and burdened enough with sterling issues and clearings;
3. The Government was regarding this as a “minority interest.”
The use of a standard XML approach also enables the corporate to change their banking supplier easily – from a technical perspective. This enables the advantage to choose the country / bank with the best conditions (charges) and enables the corporate to change account from one bank to another to gain cheaper pricing / lower cost on transactions.
There was no mention of the difficulty of nominating beneficiary accounts as IBANs.
The most important effects of late or non-compliance are:
- Slower euro payment flows, higher charges and increased repair fees. In a friction-free payment infrastructure (which is what SEPA is designed to enable), payment service providers in Europe will penalise wrongly completed, and incomplete and non-compliant instructions.
- And if SEPA is implemented across Europe by European banks and their corporate customers by end 2014, then UK banks and their customers are exposed to competition with more efficient, and cheaper payment services, which are more easily connected into the corporates’ payables and receivables systems – until they themselves are compliant, which may be a period which lasts up to two and a half years.
- Thus, UK trade with the Eurozone – held to be the UK’s most important trading partner(s) – is disadvantaged against its European competition. The unanswered question is by how much?
The UK payment community has not moved much from its long-held scepticism of the SEPA initiative. a common view, expressed by most respondents is illustrated by one quote: “UK banks and corporates have been lagging behind SEPA developments anyway, even before the 2016 deadline for the UK was announced, because they thought SEPA would never come and were in denial-mode.“
The introduction of SEPA disadvantages those smaller banks that compete for the business of corporates which trade in Europe. SEPA compliance will be managed by the large UK banks and the international banks operating in the UK and European markets.
Interpretation of legislation (the PSD was the cited example) tends to end up with each bank interpreting the rules – and differently. The UK Payments Council was most frequently named as the body which could both focus the issues and publicise them.
The importance of education was highlighted by most respondents, as the following responses indicate:
“It does matter because businesses are not informed sufficiently to make decisions on the commercial impact, negative or positive. What we witness is bland statistically led reports on bank adherence to scheme, reachability etc. As one chief executive said three or four years ago, ‘Please, no more roundtable debates on SEPA – let’s workshop a business case’. This should really matter to Treasury but they delude themselves and are poorly informed of the situation. Even Vince Cable doesn’t … talk about it.”
“Today companies look at all ways of centralising/managing their payments and collections and if SEPA contributes to this it matters. As far I as I see it the only assessment of the opportunities is with businesses and they are at varying degrees of knowledge, awareness or interest in SEPA.”
“The real issue is ensuring UK companies have the best means of managing their business and if this is aided by SEPA they need to be informed. They continue to be under-whelmed by their banks in this regard. This is well documented feedback. As one financial director said, ‘If the banks are unclear on what SEPA means to them they are not in a position to guide my company’.”
Miller says that the responses “were driven from two entirely opposite points of view”.
- From those who regard SEPA as an “over there” issue, relating to a project which about which they are sceptical anyway. They regard SEPA as a c ompliance matter, to be addressed by a date sufficiently far in the future to be unthreatening, with little or no medium or long-term relevance to UK clearing, which is heading in its own directions. We drive on the left hand side, they drive on the right.
- From those that regard SEPA as a means of making the European payments infrastructure more efficient, cheaper and more open to the implementation of e-commerce applications. These people regard SEPA as a competitive advantage matter from which both corporates and their banks can benefit. These recognise that UK corporates could be disadvantaged against their European competition and that UK-based banks’ hold on their customers’ euro business is fundamentally threatened. For these, this is a competitive advantage issue, in which the end-date for the UK of 2016 is irrelevant. In their view, compliance is required at all possible speed, particularly as European banks will turn their attention to competitive markets once their own customer bases have been converted to the SEPA techniques.
Miller – who readily admits that he has always been a sceptic – says it worth remembering what SEPA is about “and why our view of it will change as it becomes a reality”.
The SEPA programme is expensive – it will have cost an estimated €9 billion to implement. This sum is applied to electronic payments in euro (direct credits and debits) adding up to over 38 billion transactions a year in 2010 within Eurozone and accession countries and growing at an annual rate of 4%. “This means a capital cost per transaction of about 5 eurocents written off over a five year period, causing reduced processing, clearing and settlement costs, and offering greater usability across the entire Single Market,” says Miller. “Less attractive business cases have been approved.”
While it is a huge programme, with all of the inherent risks that apply to grand plans, Miller says that from the UK perspective “it looks quite different now it is happening” and will look more attractive once it has happened. “Initial cynicism will have to be replaced by the recognition that it exists and that the UK banking community and its corporate customers will have to comply for their euro business – the laws applying and the infrastructure are in place within the UK alongside the sterling infrastructure,” he says.
From a 35,000 foot vantage point, he says, you might conclude that it was in the national interest to:
- Encourage corporates not simply to comply by a distant end-date, but to seize the opportunity to comply in their own commercial interests within their EU trading plans and as soon as possible. Perhaps by pointing out that postponing the end-date is to the benefit of the UK by postponing the date on which mandatory penalties come into force; however were it to be interpreted to mean delay or lack of urgency, the advantage of the space created by the regulators will be swamped by the commercial disadvantage of mass late adoption.
- Regard this European programme as a viable experiment to judge the viability of the theories surrounding SEPA and its techniques. Any view as to whether ISO 20022/XML represented a future path for Sterling clearing could then be made on an informed basis and with the knowledge that the UK banking community was already practicing it successfully.
“The message for regulators is that there is considerable uncertainty in the UK payments community, in contrast to euro-based countries such as Ireland which has an active education programme,” says Miller. “The message to banks is that they are responsible for educating all their customers. And they will form the group which is likely to suffer from any backlash that may result from late adoption.”
Banking Technology would like to thank Peter Miller for his input to this article. He can be contacted on firstname.lastname@example.org