The Single Euro Payments Area (SEPA) is much more than a European operational compliance challenge, and should be seen as a strategic opportunity for corporations to restructure their European cash and liquidity management functions so that they can be run far more efficiently, and significantly reduce costs and risks.
The fundamental change that SEPA brings from an operational perspective is the standardization of all euro Automated Clearing House (ACH) payments in the SEPA zone. All businesses that make euro payments within Europe can do so using a single euro account to submit a SEPA compliant payment, which becomes mandatory with effect from 1 February 2014.
SEPA Migration - A Strategic Opportunity for Asia Pacific Corporations
At a basic level, some global treasurers headquartered in Asia Pacific and with operations in Europe may simply see SEPA migration as a European issue with limited relevance to them, leaving it up to the European operations to deal with the migration burden.
From a more strategic perspective, however, SEPA offers a unique and very real opportunity for treasurers to achieve far greater benefits by rationalizing payments practices, enhancing processes and reducing the cost of payments and banking fees. One major reason corporations are able to achieve these benefits is that SEPA will enable them to make all their euro payments out of one account, significantly reducing the number of bank accounts and simplifying the liquidity structures. Companies can even use a “Payment On Behalf Of” model to make payments for their entire group from one single euro account.
With SEPA, all euro ACH payments and collections in the SEPA zone are subject to one common set of conditions from a legal, formatting, processing and pricing point of view. Since one single account per legal entity will thus be sufficient, corporations will have the ability to rationalize account structures and operations, which means they can reduce their risk and further lower the cost of payments.
Corporations that have multiple bank accounts across the Eurozone will gain tremendous strategic benefits from rationalizing their accounts and streamlining their payments so that they use one account (per legal entity) to make and receive payments in the same manner. Using just one account will also immediately concentrate funding and liquidity, thereby reducing the need for physical and or notional forms of cash pooling, which simplifies the process of managing liquidity and enables better operational risk management.
Corporations can achieve further gains by analyzing the cost of payments across the SEPA zone, and re-evaluating where it will be most cost-effective and efficient to make their euro payments. A corporation that has a large number of payments in a country where payment processing is expensive, for example, could shift payments to a lower cost location and take full advantage of what will truly become a single market.
Along with replacing their current set of complex structures for payments with fewer accounts, treasurers also have an opportunity to consider rationalizing the number of banks they deal with and potentially working with a single banking partner. Whilst it is not absolutely necessary to change banking relationships, all banks operating in the SEPA zone will essentially have the same reach under SEPA from a banking point of view and corporations can take advantage of SEPA to work with a smaller number of banks.
Rather than just leaving SEPA migration to European counterparts as an operational issue, treasurers in Asia Pacific with operations of any size in Europe can benefit from focusing strategically on how best to rationalize their entire payments and collections process and practices during SEPA migration.
Beyond simply looking at how to change processes in the Eurozone for SEPA, treasurers can also examine innovations within the SEPA markets and leverage them to gain further benefits from leading-edge practices. The shift from fragmented markets to increasing harmonization in a single market over the past decade, as well as the additional congruence that SEPA migration provides, has resulted in increasingly sophisticated innovations in cash or liquidity management in Europe, and treasurers can leverage these developments to enhance their own global payments, collections and liquidity practices further.
As soon as a corporation has decided on the strategy for SEPA migration that will bring the greatest benefit, it will need to start on the implementation process. Corporations will need to perform a technical analysis of their Enterprise Resource Planning (ERP) and treasury systems to determine their ability to send SEPA compliant euro payments, as well as evaluate process improvements to streamline payments. They can then develop an implementation plan for any changes that are needed to rationalize bank accounts and banking relationships.
Since SEPA migration affects ACH payments and direct debit payments in 33 markets in Europe, 17 of which have the euro as their main currency and others such as the United Kingdom which support the euro next to their local currency, corporations will need to ensure that their plans include all payments in all markets that need to be SEPA compliant. Any company in Asia Pacific that initiates payments for the euro in SEPA markets from a Shared Service Center or other processing unit in Asia will also face similar operational requirements due to SEPA migration.
Whilst the time required to become compliant will vary depending on the corporation’s size and their level of sophistication in making payments or using direct debits, it could typically take up to six to nine months to become compliant.
The cost of implementation and technology also varies depending on the level of sophistication and the size of the corporation. The cost savings, however, will usually far outweigh the cost of implementation.
Corporations can benefit from working with their global banking partner at a strategic level to use SEPA as a key driver to assess their current structure of euro accounts in multiple countries, determine how best to rationalize their euro payments operations, and rationalize banking relationships as well as liquidity management. The banking partner can also provide consultative advice at a tactical and operational level on switching package strategies, legacy account conversion or other practices to meet SEPA requirements.
The Risks of Non-Compliance
Following the SEPA migration deadline of February 2014, legacy systems that corporations use for euro accounts payable, accounts receivable, taxes, payroll transactions and other payments may no longer be usable. From an operational perspective, the risks of not meeting the deadline for SEPA compliance could range from simply not being in compliance with the rules, to potentially not being able to make payments for suppliers, staff salaries or even taxes.
Whilst there has been some speculation that the date for compliance will be extended, the 1 February 2014 date is fixed and companies that miss the deadline will face the difficulties of non-compliance.
More importantly, corporations should ensure that the changes to platforms and processes do not stop them from reaping the strategic benefits of SEPA immediately.
Although Asia Pacific treasurers often regard SEPA migration as a European operational exercise, the benefits go far beyond simple compliance. Corporations can benefit greatly from taking advantage of SEPA migration to rationalize account structures and enhance payment processing efficiency to reduce costs, complexity and risks.
J.P. Morgan Treasury Services