April 2007

national and cross-border electronic payments

Within the UK, the most cost effective way to make and collect sterling business payments is through Bacs, the UK automated clearing house. Transaction charges at between 10p and 20p per payment are less expensive than cash, cheques or cards. There are similar automated clearing houses (ACHs) operating domestic payments in the same way in most countries in the rest of Europe. However, cross border electronic payments which are generally made via SWIFT (the global payment organisation) can incur significantly higher costs at around £10 to £25 per transaction. Though the majority of these European transactions are now made in a single currency, following the widespread adoption of the Euro, the high cross border costs have persisted. The Single Euro Payments Area (SEPA) is a European Commission (EC) initiative that has been established to remove the barriers of cross border transactions. This will be an important revolution. The vision is that SEPA should replace existing schemes and transactions and thereby ensure that euro payments across the region will be subject to a uniform set of standards, rules and conditions. This will result in payment transactions circulating as easily, quickly, securely and efficiently as they do within the national markets today.

benefits for corporates

For UK companies trading or operating across Europe in Euros, SEPA has a number of attractions, particularly for those who are multi-banked and/or multi-national. They will see a reduction in bank transaction charges, and enjoy the simplicity of dealing in Euros in standard formats, with greater speeds and certainty for payments across Europe. Additionally, because most large organisations trading across Europe are likely to have separate bank accounts in every country in which they are conducting business, the new scheme offers these Corporates the opportunity to rationalise their banking arrangements and potentially deal with just one bank in Europe.

new legal framework

The original timetable was to have SEPA Credit Transfers and SEPA Direct Debits available in the market by January 2008, with total migration across Europe being achieved by January 2011. Agreeing the necessary standards and putting them in place requires changes in the laws for each of the countries involved, and also standardised scheme rules for these products. The EC issued the Payment Services Directive (PSD) which was originally to be made law during 2006. However, continued debate and a lack of consensus is likely to lead to the need for the PSD having to go back to the European Parliament for a second reading and this, taken with the fact that each country is allowed up to 18 months to adopt a European directive into national law, could mean that the legal structure would not be in place until May 2009.

SEPA credit transfers

With the Scheme Rules for the SEPA Credit Transfers now agreed by the European Payments Council, and with less legal impact from the PSD legislation, matters are now progressing for the Banks to start designing, investing in system changes, agreeing which clearing and settlement mechanisms to use, and testing their SEPA Credit Transfers ready for controlled product roll-out in January 2008. The challenge will be to ensure the adoption of the scheme by most banks in Europe so that their customers can both send and receive SEPA Credit Transfers. This could well mean that critical mass usage could be later than the beginning of 2011, particularly as the present domestic and cross-border products will be available in parallel at least until that time. Additionally, most Corporates will also have to evaluate and make changes to their own incumbent computer systems, and transaction and accountancy packages that currently operate according to specific national standards. However, SEPA compliant packages cannot be made available until the new Bank product designs are known, and the implementation guides have been fully completed.

SEPA Direct Debits

The Scheme Rules for SEPA Direct Debits have still not been satisfactorily agreed in terms of having one overall standard. This coupled with the diverse rules and regulations for Direct Debits in each country making the PSD legislation imperative, then the general feeling in the market is that pilot euro-wide versions of SEPA Direct Debits will be very few even by 2010. If one then thinks about reachability to, and adaptability by consumers, then critical mass could well be nearer 2015. Because of this, a number of Corporates who wish to collect Direct Debit-type transactions across the whole of Europe (e.g. fund managers, finance houses, insurance companies, subscription organisations, mobile phone companies), are also looking at collecting funds by regular transactions on credit cards through SEPA compliant VISA and MasterCard services.

clearing settlement mechanisms

The Banks are seeing other challenges resulting from the potential loss of income from lower bank charges, plus the cost of investing in new product systems, plus the costs of running their old products in parallel for at least 3 years. The original Bank vision was to reduce costs substantially by seeing the 20 plus ACHs in Europe merging into one. But presently no individual national ACH can provide the same functionality across Europe. However, a number of national ACHs are intent on becoming SEPA compliant which could lead to consolidation into three or four Clearing Settlement Mechanisms (CSMs - basically SEPA compliant ACHs where SEPA participating banks can clear the SEPA payments made between themselves).

preparation by businesses and organisations

Most Corporates, particularly in the UK, are not prepared; but how can they be whilst they are still unsure about what is required and what the time frames will be. Recent research showed that few Chief Executives knew much about SEPA and assumed that there is no need to worry about it until the corporate treasurer or finance director tells them to. Unfortunately, many corporate treasurers don't know enough either because there is a lot of mis-information in the market-place confusing the true status of the SEPA project. Treasurers may know that their banks have a framework and are aware of the benefits but don't know what the end product will be or what software they will need in order to generate SEPA payments, and more importantly do not know when the SEPA service will be implemented.

watch this space

Presently, the general feeling is that SEPA will happen but not in accordance with the timetable which has been set. Good advice for Corporates would be to watch this space. Talk of "SEPA compliant systems" is simply talk. There is still a lot of speculation. Until the legal framework has been finalised, the standards fully approved, the bank products and processes designed, the implementation plans initiated, the payment channels such as CSMs and ACHs decided upon, the communication networks tested, the timetable updated, national migration plans agreed, and sufficient Banks in Europe having signed up to be a SEPA bank, until then a "SEPA compliant system" is an impossibility.

planning

To start preparing, however, companies should already have a system in place which can verify BIC and IBAN codes, as this is now mandatory for European transactions. Corporates should not ignore SEPA and wait until the last minute, but should start planning. It is difficult to know where to start, the answer is to set up a project to monitor and research what is needed and begin asking the right questions of the banks and accountancy system suppliers. Businesses should be asking their banks what they are doing by way of preparation and what timetable they are working to - doing this will move the debate forward and improve the lines of communication between everyone affected.

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