Biggest companies poised for maximum SEPA benefits

Those Irish businesses fretting over their preparedness or otherwise for the arrival of SEPA were given a welcome breather with the announcement from the European Commission that a further six months “transition period” would be granted for compliance.

While the formal deadline for SEPA migration has not changed from 1 February last, during this extra period payments that differ from the SEPA format will still be accepted “so as to minimise any possible risk of disruption to payments for consumers and businesses.”

“As of today, migration rates for credit transfers and direct debits are not high enough to ensure a smooth transition to SEPA despite the important work already carried out by all involved,” said Internal Market and Services Commissioner, Michele Barnier. “I regret having to do this but it is a measure of prudence to counter the possible risk of disruption to payments and potential consequences for individual consumers and SMEs in particular.”

The Commission and the Eurosystem, having monitored progress of all stakeholders, including banks, payment institutions, national and local administrations, corporates (including small and medium-sized businesses), and consumers, were unhappy with takeup. “Although migration rates have been growing over the last few months to reach 64.1% for SCT (SEPA Credit Transfers) and 26% for SDD (SEPA Direct Debits) in November, it is now highly unlikely that the target of 100% for SCT and SDD can be reached by 1 February 2014,” the Commission said.

Were no action were to be taken by the Commission and the co-legislators, banks and payment services providers would be required to stop processing payments that differ from the SEPA format as of 1 February 2014. “This could result in serious difficulties for market participants that are not yet ready, particularly SMEs, who could have their payments (incoming or outgoing) blocked.”

So who is to blame for the delay to implement fully a process that has been flagged for years?  ISME, the Irish Small and Medium Enterprise Association, has no doubt. ISME chief executive, Mark Fielding said: “Once more, as ISME had warned, the Irish banks have let us down by dragging their collective heels in the implementation of SEPA. It is regretful but proper that the EU has intervened to prevent a disaster because of bank negligence and mismanagement.” At the same time the Association welcomed the decision, which will allow a smoother migration to the new system for many SMEs, “on the assumption that the banks will now do their job properly.”

The benefits of SEPA to consumers have been well documented. They will be able to reach all accounts SEPA-wide from one home country account. Greater use of payments cards will displace cash with improved security around customer funds. In promoting non-cash alternatives, the Commission is pushing hard to reduce card processing fees.

But the benefits to business are less well articulated – and not all business will reap those benefits equally. According to the European Commission, in addition to the ability to use a single home account for all euro-denominated SEPA-area payments, smaller businesses can look forward to faster settlement and more simplified processing, that will improve cash flow and reduce costs.

That may well be the case, but it appears that larger enterprises are poised to gain most, according to the Commission’s own findings as published in a specially-commissioned survey by PricewaterhouseCoopers (PWC).

PWC stratifies the SEPA-area corporate landscape into three categories – types A, B and C.

Type A are large multinational companies of which there are 4,490: these are the blue-chips operating on a global basis. Type B are small-cap companies, operating more on a regional basis, of which there are 328,028. Type C is local business and public companies, everything from shopkeepers to hospitals – and the number of enterprises in this category is in excess of 16 million.

The major benefit of SEPA to the corporate sector – all types – essentially relates to cash management. In this respect it is the large, multinational operators who stand to benefit the most.
Source: European Payments Council

Small, local business (type C) typically has one, or possibly two, local banks with few foreign bank accounts if any. Only the larger organisations in this group may have a cash management function.

Type B companies may have a few banking relationships, perhaps one per Eurozone country, for the purpose of conducting local business. They may have basic cash pooling (the sweeping of excess funds overnight from multiple bank accounts into a single account for investment purposes) but their Treasury function will be basic.

Type A operations, on the other hand, operating globally and with perhaps several operating entities in many Eurozone countries will have many bank relationships with multiple bank accounts. Consequently, they will have sophisticated cash concentration and pooling practices in place with a mature Treasury function.

It is these organizations that stand to gain most from the SEPA environment. Indeed, according to PWC the process is already under way.

“During the past few years, we have already noted price convergence within pan-European cash management tenders as a result of the evaluation of cash management infrastructures in Europe,” says PWC, who predicts that after the February 2014 milestone, price convergence will be even more in evidence for the following reasons:
•    Transparency in transaction fees across countries;
•    Rationalisation of account structures and the resulting migration of transaction volumes; and
•    Migration of transaction volumes towards the more efficient transaction banks.

Not surprisingly, PWC finds that “Large and international operating companies of type A are best positioned to benefit directly from SEPA.”

According to PWC, the main drivers for this category of companies include “the consolidation of transaction volumes and simplification of the management of the corporate bank accounts as a result of closing out stand-alone, in-country bank accounts at domestic banks, and concentrating euro cash-pooling within one bank branch. These companies have the leverage and knowledge to divert transaction volumes and negotiate with their cash management banks’ standardised fees across the Eurozone. Furthermore, by closing out stand-alone accounts and simplifying cash-pooling structures, companies reduce account fees and unlock idle cash balances across the Eurozone.” They will also be able to streamline bank account relationships.

While the benefits to smaller companies are not as dramatic, they are not insubstantial: faster payments, to and from any SEPA-participating country; the end of bank “value-dating” of payments so access to cash is immediate; an end to multiple bank accounts – all of this very much to be desired.

All told, PWC expects the monetary benefits of SEPA to the corporate sector to total €13.2 billion resulting from:
• Reduced banking fees
• Price convergence
• Simplification of bank account structures

It expects €179.5 billion idle cash to be unlocked and a reduction of 9 million bank accounts with up to €115 billion in efficiency gains related to process efficiency and the opportunity-loss related to cash balances currently trapped in payment processing.

While most of this will fall to the big players, in time it can be expected that other benefits facilitated by SEPA, such as e-invoicing with straight-through processing from order to payment, will flow down the organizational scale. One of the consequences of this will be improved credit management through “auto-matching” because non-payment can be detected sooner, as ‘open-item’ lists will become shorter or less ‘polluted’ by unmatched items. Furthermore, administrative staff will have more time to focus on credit management, as they will need less time to do reconciliations.

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