Moves towards economic harmonisation have been slow in coming but the new regulations mean corporates and banks will now have no option but to change. By Eric Sepkes.

When the EU member countries got together in 2000 to sign the Lisbon Agenda, the intrinsic goal was to put the ‘E’ back into Economic and Monetary Union (EMU).

The Lisbon Agreement, to create “a modern and information-based economy” by 2010 – with the tools in place by 2008, was simply a way of formalising the political will to achieve this objective. Integrating the payment infrastructures of Europe and harmonising standards are not goals in themselves but steps towards creating an economic zone in which business can be done cheaply and efficiently.

Nursing a dream

Little changed after EMU was established in 1999. This is borne out in the payments industry by the fact that there are still 15 national automated clearing houses and the banks continue to run their payments businesses along legacy infrastructures (and why not, as just 2% of payments traffic in Europe today is cross border?). The need to create an environment where money moved seamlessly across historic borders was still a political dream and not a reality.

The European Payments Council (EPC) was formed by the banking community as a direct consequence of Regulation 2560/2001, which ruled that banks could not charge more for a cross-border payment than a domestic transaction.

The EPC is the single voice of the banking payments community to communicate with regulators. It was tasked with providing a coordinated banking response to regulators and that response was the blueprint for creating a Single Euro Payments Area (Sepa), which articulated how the banking industry would evolve from multiple structures and products to a simplified set of payment products.

While the banks agreed to do this in eight years’ time, by 2004 little action had been taken. This prompted the European Central Bank to demand that the banking tools for EMU be made available from 2008. In 2010, migration will have to be at such a level that going back to the old domestic systems would be impossible so that the critical mass of payments has migrated fully and this migration is irrevocable.

Legal changes expected

Legal harmonisation, especially needed for direct debits, to provide a new legal framework for EMU to operate has been provided within the Payments Services Directive, which is expected to be ratified by the European Parliament this year.

The process of harmonisation and standardisation may be arduous but the end game is one that will enable an individual or corporate entity to operate in Europe with a single bank account for all payments. Here is an opportunity to have one consistent format across the continent, and the European Commission has estimated that 2% gross domestic product growth can be gained as the result of a more efficient infrastructurein Europe.

Reasons to change

In order to encourage companies to change, they must be offered something better than what they have already. What will be the catalyst for companies to change? For those companies that have already begun to centralise their payments in shared service centres, this will take them one step closer to a single euro account. For those that have not, they now have an opportunity to streamline and centralise as Sepa removes many of the barriers, and levels of complexity, they would have previously faced.

There is also a great opportunity for corporates to create a centralised payment factory or an electronic ‘virtual’ payment factory through Sepa, which would not need staff and resources but only the amalgamated data as much of the complexity and fragmentation of Europe will disappear. Salary payments could be centralised and this could be started immediately by starting to populate the Bank Identifier Code and International Bank Account Number fields.

Reconciliation will become 100% accurate with a common reconciliation reference between countries enabling corporates to move to a more efficient world, with much of the work done for them and allowing them to use technology to gain the benefits of centralisation without losing local control. Message protocols such as ISO20022 and those being hammered out by Swift and Twist will bring supply chain standardisation for all companies. A domestic sweep is always going to be easier than cross border.

Central to making Sepa migration a success is the move to cross-border direct debits within the EU. But while the tools are available, it is up to corporates to make the move and provide the incentives for their customers and suppliers to switch.

Everyone should evaluate and understand the opportunities that Sepa offers. Corporates should see it as an opportunity to automate the supply chain and get rid of manual processes, and banks need to understand and accept the new model as it inevitably will happen.

The change must be embraced in order to gain from it. Sepa will create a world in which only the efficient will survive – and ignoring it is not an option.

Eric Sepkes is director, cash management strategy at Citigroup Global Transaction Services.

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