The SEPA end date is less than a year away. Banks and corporations have until 1 February 2014 to be fully SEPA compliant – but, asks FM-MM’s Rebecca Brace, will they make it in time?
According to a survey published by EuroFinance in December, 52% of companies in the SEPA zone have not yet started migrating to SEPA and 31% do not know exactly what is needed in order to be SEPA compliant.
These findings are reflected in the SEPA migration statistics published by the ECB. A mere 2.07% of direct debits in the Eurozone were SEPA compliant in November 2012. While the SEPA Credit Transfer figure is much higher at 30.58%, it has not grown significantly in the last six months.
In light of these indicators, is there still time for the industry to meet the February 2014 deadline? “It’s very unlikely,” says Andrew Owens, SVP enterprise payments at SunGard. “I don’t see any way that SEPA Direct Debits are going to get from 2% to 100% in a year. And even the SEPA Credit Transfer migration statistics seem to have slowed down.”
It is not only companies which may struggle to become SEPA compliant in time – many smaller banks are not yet fully ready. “My gut feeling is that there will be people that don’t make it,” says Barry Kislingbury, Global Solutions Manager, Misys. “Smaller banks are only just coming to the realisation that they won’t be able to rely on services they thought they could – for example, the end date regulation makes it clear that they will have to submit and receive payment messages in ISO 20022 XML format.”
At this stage, degrees of migration vary significantly from country to country. “In European countries where the government is pro-SEPA, you’re seeing more awareness among corporates because the government entities are making it happen,” comments Steve Everett, Global Head of Cash Management at RBS.
Tino Kam, SEPA Product Executive at RBS points out that Finland and Belgium are fairly advanced in their SEPA migration, whereas companies in the Netherlands and Germany have further to go. “There’s a country difference in terms of migration. Country-specific migration plans are another differ – entiator – but the regulations say that those plans need to be cleared by February 2013, which is quite late in the game for some countries.”
How final is the end date?
Given current adoption rates, it seems unlikely at this stage that the SEPA zone will be 100% migrated by the end date – but few believe that the end date will be postponed. Nor will it be possible for all legacy clearing systems to be turned off on 1 February 2014, as many of these also support niche payment schemes which have until 2016 to migrate. So what will be the consequences for any banks or companies which are not ready for SEPA by February 2014? “
It is absolutely unclear at this stage as to whether every country will suddenly switch off their local clearing for legacy credit transfers and direct debits in the Eurozone on the 1st of February 2014,” says Ruth Wandhöfer, global head of regulatory and market strategy, at Citi transaction services. “There could be certain market practices in some countries, however. For example, there has been some speculation that some banks may start rejecting legacy instructions for non-SEPA credit transfers and direct debits. If the bank starts behaving this way, it’s almost like the legacy system has been switched off – even though the clearing system may still be open in order to process niche payment instruments.”
Even if companies are still able to use legacy payment instruments after February 2014, they may incur penalties for doing so. “The regulation leaves it to each country to decide how they are going to oversee that particular period and what they will do if a company should be late,” observes Ray Fattell, Global Head of Product, Payments and Cash Management at HSBC. “By February 2013, each country was required to go to the Commission and say, ‘this is the body that will oversee SEPA migration and this is what will happen if we do not migrate on time and decide on any penalties for being late.”
Without a clear understanding of the consequences of non-compliance after the end date, few companies are prepared to run the risk of incurring unspecified penalties – or, indeed, of being unable to make essential payments. As such, most treasurers now have SEPA in their sights – but have they left it too late?
Outlook for 2013
With so many companies yet to make headway with their SEPA migration, significant SEPA activity is likely this year. “We expect to see increased demand for SEPA services throughout 2013 with a spike around March/April,” says Lesley White, Head of Treasury Products, EMEA at BofA Merrill Lynch. “Most clients, we believe, have included SEPA planning in their 2013 budgets, and we anticipate that the majority of migration projects will have begun in early January, starting with an internal analysis of what is required as part of this process. By the end of Q1, corporates will be ready to select their banking partner who will support their SEPA migration.”
Not all companies have waited until the last minute to begin migration. Swiss healthcare company Roche began preparations for SEPA in 2007 – before the SEPA Credit Transfer even became available. While creating a ‘virtual SEPA’, the company reduced its banking partners to two and began obtaining BIC and IBAN data from customers and suppliers.
“This strategy enabled us to reap all the benefits from SEPA with minimum disruption,” explains Martin Schlageter, Roche’s Head of Treasury Operations. “And when SEPA Direct Debit became available, it was not too much of a challenge either to make the move because we only had to implement it with one of the banking partners.”
But while some companies are on track to achieve SEPA compliance by the deadline, many others are not – and for these companies, the coming 12 months are likely to be challenging. In order to migrate in time, many companies are focusing on fulfilling the compliance requirements rather than on gaining wider benefits from SEPA. “Companies which have left it a bit late might choose to get something tactical in place, even if they plan to do a more complete SEPA migration later on, perhaps as part of a payments optimisation project,” says Owens.
One of the fundamental requirements of SEPA is to provide the international bank account number (IBAN) instead of domestic legacy account numbers. Rather than contacting counterparties individually to obtain the new details, companies with large numbers of counterparties use conversion services which automatically convert the domestic account number into the IBAN.
Companies can also use conversion services to change their legacy file formats into SEPA compliant XML, rather than adopting XML themselves. Such services may be useful as a short term measure, even if the company plans to adopt XML at a later date.
Garry Young, director of corporate services at CGI argues that the quality of data in company’s systems represents another obstacle. “It’s clear that good data hygiene is critical if companies are to migrate successfully. The companies we’re speaking to are aware of the danger of payments failing when domestic systems are switched off – but many aren’t aware of the risk of poor data quality leading to additional cost on their business post SEPA because today the banks are repairing incorrect payments free of charge. With SEPA, the expectation is that banks will start to charge for repairing these ‘dirty’ transactions.”
Further challenges arise for companies using direct debits extensively. “I feel that the heaviest challenge in migration is for the SEPA Direct Debit,” says Alain Grugé, global head of payments & cash management at SocGen. “Companies have to change not only the way in which they exchange information with their bank, but also their internal processes.”
The greatest challenge arises for companies using the Business to Business SDD scheme, as they cannot use legacy mandates for the new scheme. Even for companies using the Core scheme, challenges may arise as the company is responsible for managing mandates – in contrast to many domestic direct debit schemes, some of which specify that this is the responsibility of the bank. Again, some banks offer mandate management services in order to help companies with these challenges.
In order to complete migration by the deadline, many companies will be looking to use relevant tools and services – but the clock is ticking and companies should still move sooner rather than later to complete all the necessary processes.
“For companies that are still exchanging local formats with perhaps 15 banks in Europe, and that are now just starting the transition, I would be concerned about their ability to migrate to SEPA by the February 2014 deadline,” concludes Schlageter. “For those treasurers who have not yet alerted their organisation that these formats will cease to exist, that IBAN and BIC are coming and that have not yet considered how to adapt, for example, their non-ERP HR systems for payroll and travel expenses, they may find that they are in trouble.”
Interview with Daniela Russo, Director General of Payments Market Infrastructure of the European Central Bank
Do you think the industry-wide migration to SEPA will be complete by 1st February 2014?
The question should probably not be whether, but how the industry will migrate to SEPA credit transfer and direct debit. Member States can still have an additional transition period of 2 years. Banks have no other option but to firmly comply with the “SEPA end date regulation”, and according to our information they are determined to be ready on time. Companies appear to be more diverse. Bigger companies seem to be progressing well. There’s more work ahead with small and medium sized enterprises (SMEs), many of whom are not aware yet of the implications SEPA will have on their day-to-day business. The ECB, together with the national central banks of the Eurosystem, is closely monitoring the SEPA migration process. On the ECB website, euro area and national migration indicators can be found as well as country specific fact sheets, which give information on conversion services, waivers and niche products (see also www.sepa.eu).
What consequences will banks and/or companies face if they are not SEPA-ready by the deadline?
The SEPA end date regulation stipulates that every Member State shall appoint a public authority that will ensure compliance with the regulation and be able to apply penalties. However, it is better to emphasise that it is in the best interest of banks and companies to be ready on time. Not meeting the deadline may hamper their ability to initiate or receive payments. The bigger companies would also miss the opportunity to profit from efficiency gains in terms of in-house rationalisation and automation as well as better payment service offers.
When will the niche schemes be announced and how will this affect companies’ migration plans?
As the name suggests, niche schemes serve rather specific purposes and have limited scale. They still exist because in some countries there was no easy match between legacy and SEPA schemes and the phasing out process required additional time. However, supporting niche products until 1 February 2016 may lead to additional costs, as the related legacy infrastructure and applications need to be maintained.
What are the main challenges companies face as they migrate to SEPA?
The success stories of already migrated companies show that all challenges are manageable if carefully planned. In general, migration to SEPA direct debit will be more challenging, in particular in countries that previously relied on different practices. In this respect, with migration to SDD, new administrative processes have to be established in communities which previously relied on the so-called “debtormandate- flow” model. In addition, because of the continuation of their legal validity, the “old” national direct debit mandates – or the information these legacy mandates contain – should now become available to creditors, which in many countries are not used to handle this kind of information. The mandatory use of ISO 20022 XML messages between company and bank will be challenging for some companies too, at least in the short term. Nonetheless, in the longer run the costs related to these hurdles will be offset by savings associated with higher automation rates and lower IT maintenance costs.
What would be the impact on SEPA if one or more European countries dropped out of the euro in the coming 12 months?
I don’t consider this likely to happen and I do not want to comment on such a scenario. For SEPA, being in or out the Eurozone makes no difference. SEPA is about harmonisation of payment standards for transactions in euro, irrespective of whether the country’s national currency is the euro or not. SEPA covers the 27 EU Member States and some other European countries. And is getting even bigger. Most probably Croatia will join the EU in summer and will consequently enter the SEPA. We also see interest from countries outside Europe, to learn about our integration experience.