On solid foundations: building on SEPA’s groundwork

Andrew Reid is managing director and head of corporate cash management, EMEA, Deutsche Bank,

As the SEPA deadline has come and gone, what will be built upon its advances towards digitisation and standardisation? Andrew Reid explores the possibilities

This August marked the first birthday of the SEPA-zone. While there are still a few deadlines to come (for example, for niche products and for non-euro corporates collecting euro-denominated Direct Debits), any last wrinkles are being ironed out for corporates within the region and they are now turning to look at what lies ahead.

Of course, the deadline for SEPA migration did not mark the end of change or compliance for affected corporates; the landscape will remain in flux due to ongoing and future regulatory initiatives as well as shifts in market players. Some banks have retrenched away from particular corners of the market due to squeezed margins and the necessary prioritisation of the burden of compliance, and remaining providers must prove their dedication by being at the front of technological developments. At the same time, banks are facing competition from new market entrants and non-bank providers, and regulation has yet to catch up with these new roles or technologies.

That being said, the post-SEPA landscape is a new start in many ways, replete with opportunities to take advantage of the advances in standardisation, harmonisation and automation. As the complexity of payment transactions and cash flows has been significantly reduced, many corporates are extending the SEPA effort beyond the “must-dos” to the “can-dos”, including rationalising and centralising both treasury and banking structures. Although local requirements must be consulted and some locally-restricted products may prove a hindrance, many corporates will be able to shut subsidiary bank accounts and treasury departments all over Europe to run operations from one central hub – allowing greater control, visibility, liquidity and risk mitigation, as well as significant cost savings.

But SEPA’s technological achievements can be leveraged further. For example, the data-rich nature of the ISO 20022 XML standard and the fact that it is now the sole format used across the region has made many existing tools more accessible, and made the development and application of others possible. In support of the movement towards centralisation, interest in in-house banks, Payment and Collection factories and Shared Service Centres has risen, and these solutions in turn can be more sophisticated as banks can focus on creating one tool that can now be rolled out to a wider pan-European market without further modifications. Payment-on-Behalf-of (POBO) options are more often implemented first, with the option of introducing a Collection-on-Behalf-of (COBO) structure at a later date – but regardless of how they are deployed, such tools do necessitate a fresh approach, with traditional bank accounts and liquidity structures replaced by internal accounts and bookings through one IT infrastructure or platform.

And it is that consolidating force which builds on the trend – for simplifying and streamlining treasury – which runs throughout these developments. Whether in terms of one core bank account serving an entire group’s subsidiaries, or integrating different aspects of treasury processes in bank-to-customer interfaces, convergence is the name of the game. The impact that SEPA has brought to bear on the eurozone – unifying a disparate and fragmented landscape under one standard format and set of rules – is now being replicated within banks and corporates themselves.

For instance, the XML format also allows supply chain financing components to be seamlessly integrated with a payment, again without any convoluted need to alter the information. The ease that this creates in the implementation and employment of such financing will lead to greater adoption; most likely beginning in markets (such as Spain, Italy and Portugal) where similar legacy products were popular, but continuing to spread, driven by SEPA’s “best-practice” momentum.

And the global acceptance of the XML format means that corporates can utilise it across the corporate body, beyond the SEPA-zone, to replicate the same efficiency savings and simplified but enriched data transfers between subsidiaries. It could be used for further integration such as combining a foreign exchange element in cross-border transactions. Whether used within or without the SEPA-zone, its worldwide application also means greater independence for corporates who, concerned by the risks entailed by bank dependency, are striving for a higher degree of bank agnosticism. The standardised format makes it easier to move from bank to bank when necessary, and to compare providers based on other differentiators such as the quality of their expertise, advice and value-added products.

In this sense, SEPA can be seen as a step towards more worldwide connectivity improvements. While Europe now has an Automated Clearing House (ACH) that serves the whole area, strides will continue to be made in launching cross-border ACH-type solutions. SEPA’s push towards higher levels of digitisation will mean efficiency and cost savings in the long-run, as well as making real-time visibility and transactions viable possibilities, but it is the standardised format that will free banks and corporates alike to invest in the next step of technological developments while remaining flexible and globally compatible. The SEPA-zone’s first birthday is certainly one to celebrate.