The end is finally in sight for legacy payment systems in Europe – but, asks FX-MM columnist Rebecca Brace, has the recent legislation finally kick-started corporate migration to SEPA?
Known somewhat misleadingly as the SEPA end date, 1st February 2014 has now been confirmed as the date on which legacy systems in Europe will be turned off, thereby completing the migration to SEPA. This date was finally published in the Official Journal of the European Union on 30th March as Regulation (EU) No 260/2012. Despite indications at the end of 2010 that the SEPA Credit Transfer and SEPA Direct Debit schemes would have two separate end dates, ultimately the same end date has been set for both schemes. Niche direct debit and credit transfer schemes representing volumes of 10% or less in a particular country have a little longer: migration for these schemes is required by 1st February 2016.
The countdown to full SEPA migration has officially begun, but while the banking industry is largely prepared for SEPA, the same cannot be said for the corporate community. SEPA has featured at industry conferences for so many years that it feels like part of the furniture – and yet the reality is that so far only a minority of companies have made the leap, particularly in the case of direct debit. While the 2011 European Business Test Panel SEPA survey reported that 42% of corporate respondents had made payments using SEPA Direct Debits, in volume terms the percentage of European direct debits being made using the new instrument has yet to exceed 1%.
There is a long way to go yet before the industry completes the migration to SEPA, but with the door set to close on legacy schemes there are signs that the tide is finally turning. “In some ways I’d say we’re now having the real SEPA conversation, ten years after the term was coined,” says Simon Newstead, Head of FI Market & Business Strategy at RBS. “And to an extent there’s SEPA fatigue. But the rules of the game have just changed: with this regulation there’s now a much needed degree of certainty. It’s bringing the conversations alive again and there’s a renewed hunger for information from corporates and financial institutions. They realise that this time it’s SEPA for real.”
End in sight
While the industry has welcomed the certainty offered by the end dates, the question remains: how likely is it that the transition will be completed within the specified timescale? At present, a full migration to SEPA still looks a long way off. As of February 2012, SEPA Credit Transfer volumes represented 24.8% of total credit transfers in Europe, according to figures from the ECB. While this is a significant improvement on the 15.7% share a year earlier, it is nowhere near the 100% adoption levels required by 2014.
Where SEPA Direct Debits are concerned, full migration is even further away. In February 2012 SDDs represented a mere 0.41% of total direct debits in Europe. In its defence, the payment instrument has had some catching up to do. SEPA Direct Debit was launched in November 2009, almost two years later than the introduction of the SEPA Credit Transfer.
Aside from the headline adoption figures, there is a significant amount of geographical variation in SEPA migration, says Majid Moujane, payments specialist at Callatay & Wouters. “As usual, the figures are an average for all of Europe. The differences between countries are still there. In Belgium, in November last year, a big electricity company started using the SEPA Direct Debit, so there is at least one big creditor which is using SEPA Direct Debit with all the banks.”
Moujane says that adoption in Belgium is more advanced than in many other countries. “In Belgium, more than 55-60% of credit transfers are now processed via SEPA, and SEPA Direct Debit migration has started. I think that in two years we will have full migration without any problems. But in countries such as the Netherlands, volumes are very low. The Netherlands has now set up a working group to create a migration plan to ensure they will be ready on time – but they are really at the beginning of the process for both SEPA Credit Transfer and SEPA Direct Debit, so they will have to do in two years what others have taken four or five years to complete.”
While for some countries full SEPA migration may already be in sight, is there any chance that the industry as a whole will have completed its migration by 2014? Moujane points out that at the current trajectory, it would take another ten years to complete the migration of both SCT and SDD transactions to SEPA. “I am convinced that things need to accelerate if we are to reach 100% of transactions by February 2014,” he says.
Will the end date legislation be enough to kick-start that acceleration? “If you did a straight line projection, there’s no way you would get to full migration within two years – but I wouldn’t take the trends to date as an indication of what will happen over the next couple of years,” says Newstead. “In a sense, corporate clients and to some extent the banking industry have been collectively holding their breath for the last couple of years – there’s a lot of pent up activity that’s been held back and suspended pending this clarity.”
Treasurers have held off initiating SEPA migration for years, preferring to adopt a ‘wait and see’ strategy. Now that the end date has finally been confirmed, there is little reason to hold back – but while many point to a pick-up in SEPA activity since the end date was confirmed, so far the increase activity is more of a trickle than a wave.
“Since the end date was announced we’ve seen an uptick, not a deluge,” says Malcolm Taylor, Director of Accuity, part of BankersAccuity. “Some companies will leave it until the last minute, maybe because they haven’t included a SEPA project in their budget for this year and don’t have the available funds. We might see a significant rush for the post at the last moment.”
Even for those companies now looking to begin migration, internal constraints may have to be overcome before the project can begin. “It’s really about being prepared to make the necessary investments – so the first thing is making sure they have available funds, and the second thing is making sure they have available resources from an IT point of view and a project management point of view,” continues Taylor. “A SEPA project will be jockeying for space with other projects that institutions are working on, so it’s not a simple case of flicking a switch and making the money available.”
Taylor points out that the increase in activity since the end date announcement is confined to the SEPA Credit Transfer – at least at present. For the SEPA Direct Debit, the picture looks different again. “The argument for the SEPA Direct Debit isn’t quite as compelling as it is for the SCT because direct debits are predominantly national payments, made using national systems which work well,” says Taylor. “So there isn’t the same volume of cross-border activity, which is where the real cost savings are. SEPA Direct Debit probably won’t gain much momentum until next year – there’s nothing to suggest that momentum is increasing at this time.”
Regulatory update
Ruth Wandhöfer, Head of Regulatory & Market Strategy, Citi Transaction Services, points out that the SEPA regulation published on the 30th March was binding as of the following day, bypassing the usual 20 day adjustment period. “That means that a number of articles had to be applied on the 31st March, and it’s highly unclear whether that’s actually happening,” says Wandhöfer. “One of these articles relates to the pricing parity introduced under the old Regulation 924/2009 for corresponding payment services in euro, whereby you are not allowed to charge customers more for either sending or receiving a euro payment if it’s cross-border compared to the ‘corresponding’ domestic payment – unless the value of the payment is above €50,000. This limit has now been removed, which should hopefully result in lower charges for customers across the board, or at least more commercial negotiation on fees being charged – but I’m quite doubtful as to whether all banks in Europe have actually realised that this is now a requirement.
“There are two other articles that apply,” Wandhöfer continues. “The first is reachability for credit transfers, i.e. any bank that is offering euro credit transfers and hasn’t signed up to SEPA schemes is already late. And it’s quite unclear how you would supervise or monitor this, because we just don’t know how many banks are offering domestic euro credit transfers to their clients today.
“The other is the payment accessibility article, which was supposed to help on the corporate side in terms of making and receiving payments from one account in Europe. There the reality is a bit different – the article says that customers should be free to receive and make payments from any account in SEPA (subject to the PSP being reachable). We know that in a number of countries today we have a different process for tax payment – sometimes only special banks appointed by the state are actually offering tax payment services, or you do it directly at the state website. And for both tax and salary payments you often have to hold accounts in country.”
Wandhöfer points out that while in theory SEPA is intended to allow a corporate to operate from a single account, including making tax and salary payments from that account, in practice the tax laws of individual countries may conflict with this goal. “In reality, a number of countries have tax processes that either fall outside of the SEPA law because they are executed via high value payment systems, which are outside of the scope, or because they have special requirements – for example, in France, you have to put a special tax code into the message.
“There is however an expectation at the level of the European Commission that Member States will come forward with national implementing laws to enable compliance with this and other articles in the Regulation. However, if as a result countries are going to start adapting SEPA schemes to their own requirements (rather than changing local processes and laws), this would mean that we would end up with many local SEPA solutions and a continued distinction between a domestic and cross-border transaction – which is exactly what SEPA is intended to get rid of.”
The road to SEPA still throws up the odd surprise. After years of advising corporate clients to collect International Bank Account Number (IBAN) and Bank Identifier Code (BIC) data from their counterparties, banks will no longer be able to require their clients to supply BICs from 1st February 2016 under a late addition to the SEPA regulation. While this may help to make SEPA more straightforward for consumers, it is unlikely to provide any benefits for corporations, which are generally accustomed to the concept of the BIC – and it poses certain challenges for the banking industry, as the BIC cannot always be derived from the equivalent IBAN.
Opinions vary as to the significance of this development. “It’s definitely very significant,” comments Newstead. “It’s something that came as quite a surprise at a very late stage of the negotiation process and it marks a major sea change from what’s happened in the past. It’s fair to say that there’s still quite a bit of thinking to do in the market to understand quite how that issue is to be solved in an efficient way. It’s a challenge particularly for cross-border transactions – a number of individual countries have a country database with lookup capability, but this doesn’t exist on a cross-border basis.”
Beginning of the end
While the recent legislation has focused attention on 1st February 2014 and whether migration can be achieved in that timescale, Taylor believes that the solidification of the end date has already had the desired effect. “You do feel a certain inevitability now that we will reach that end date and SEPA will be the standard across the Eurozone,” he says. “It’s something that corporates will come round to – some have adopted it and are already reaping the benefits. But others are still very sceptical and will not necessarily be prepared to make the move until the absolute last moment.”
It is worth bearing in mind that SEPA was not originally intended to be sealed with an end date at all. As such, to a certain extent the 2014 deadline is arbitrary – as long as the industry is moving in the right direction. “If the date is not met it’s not going to stop everything,” concludes Moujane. “Even if we don’t have 90% adoption by February 2014, it doesn’t matter – what is most important is that countries are moving. If we don’t meet the date, it’s not going to stop SEPA because in some countries they might have moved 100% of their SCTs – we’re not going to stop the project and come back to national formats.”