Corporates should start factoring the Single Euro Payments Area into their plans now so that any changes to internal financial processes do not need to be re-engineered when Europe’s new harmonised payments infrastructure finally takes shape.

In his book on globalisation, The World is Flat, US business writer Thomas Friedman reminds us that computers had only a gradual impact on business in the 1980s. Firms invested millions of dollars in IT systems but the returns were slow to materialise. Only when companies began to adapt their workflows did the IT revolution really take off. The impact of the euro on the cash and treasury processes of corporates in Europe was similar. Companies began to adapt their cash flow processes to the single currency at their own pace, typically implementing euro cash pools and rationalising account structures only when this coincided with other change requirements.

Those that took a cautious approach to computerisation or indeed the euro did not go the way of the dinosaurs, but many did lose precious ground to competitors by failing to adapt their processes to major shifts in the business environment. The Single Euro Payments Area (Sepa) also provides corporates with an opportunity to review and upgrade their financial processes. In fact, Sepa can be a catalyst for a new level of integration of the financial supply chain. While only banks need to worry about ‘Sepa compliance’ for now, corporates that adopt a wait-and-see stance for the introduction of a single payments infrastructure across Europe may miss a significant opportunity to cut costs, review sub-optimal processes and further centralise their European cash and treasury operations.

Completing the picture

Sepa is perhaps best understood as an admission by Europe’s politicians that the euro did not fully deliver the single market vision of free-flowing goods, services, capital and labour across Europe’s borders. That vision of economic union is still a work in progress, much like many corporations’ current attempts to create a single infrastructure for managing their European cash flows. In reality, the euro’s introduction left much of Europe’s existing national payments infrastructures untouched.

Corporates reacted appropriately by adopting overlay structures that left national operations largely intact while taking an important first step towards pan-European treasury centralisation. But the inefficiencies of multiple local products and processes remained. Just as Sepa and the Payment Services Directive (PSD) bring the politicians’ dream of a single European market a step closer, so too can it help corporates further optimise their European cash management operations.

To look more closely at how Sepa may do this, let us take the example of a corporate that has consolidated European disbursement processing across Europe in a shared service centre on a single enterprise resource planning (ERP) system. Certainly this corporate has achieved significant cost savings by lifting processes out of the local environment, but inefficiencies remain. The firm still needs to operate country processes separately because of the lack of standardisation between payment instruments across Europe. With the introduction of pan-European instruments under Sepa, the corporate has the prospect of reducing dozens of payment types to a single set. As well as enabling further internal process rationalisation, the standardised, electronic payment formats will improve the efficiency of cash flows between cross-border counterparties, thus helping the firm’s financial and physical supply chains to operate in parallel.

Sepa will also pave the way for future optimisation. It may renew the business case for pan-European process improvement projects such as auto reconciliation or e-billing services that were not cost effective while Europe’s patchwork payments infrastructure perpetuated instruments that provided such varying levels of information quality. Corporates have continually demonstrated their appetite for improving efficiency in the financial supply chain. Programmes such as TWIST and RosettaNet have established common rules that enable corporates to process invoices, purchase orders and related payment flows more efficiently, and which are now integrated with Swift’s XML-based message suite.

These initiatives have already brought significant financial supply chain benefits to many corporates, but Sepa offers further opportunities, both for corporates that wish to migrate to the Sepa instruments in parallel with use of TWIST standards, for example, and for first-movers that now wish to make their bank communication processes as streamlined as their corporate-to-corporate message flows.

Factor Sepa into your plans

Perhaps the most important change a corporate can make ahead of the introduction of Sepa is a change of mindset. Corporates should start to factor Sepa into their plans now so that any scheduled changes to internal financial processes do not need to be re-engineered when Europe’s new harmonised payments infrastructure finally takes shape.

In the next 12-18 months, a company may need to review account structures, payment types, banking relationships, corporate-bank connectivity, payment terms or ERP platforms. The introduction of Sepa could have an impact on any of these and as such its impact should be considered sooner rather than later. It is clear that the existing local payment products must eventually be decommissioned, so early movers away from these products can ensure competitive advantage. For example, a firm should consider which payments might benefit quickly from Sepa Credit Transfers, and use these as the business case for developing the capability.

Other volumes can follow on a phased basis. Similarly, a company that plans to expand into new markets should discuss the most appropriate account structure with its existing banking partner, as it may no longer be necessary to establish local accounts for its overseas operations once customers in those markets start to use standardised payment instruments. There are many applications of Sepa and each organisation will need to respond differently.

Companies should build the business case today by committing IT and other resources to facilitate the switch to new payment instruments as soon as they become available. Given the pressure on discretionary investment, the challenge is often securing a green light for a much-needed but sometimes hard to justify project, despite the long-term benefits that it might generate.

Naturally, the impact of Sepa will be different on every organisation, depending on its industry sector, management culture, degree of automation and geographic spread. Some firms will be able to reduce their use of local bank accounts significantly; for others, local accounts will remain critical. Treasurers will have to work within the complexities of business reality.

Customer needs

Banks should be committed to supporting their customers’ requirements however they decide to tackle Sepa. Most will look to supply Sepa solutions via their existing branches and channels to ensure clients can quickly integrate the new instruments into their current banking infrastructure, and simplify their in-house processes.

Corporates need to prepare now to make the maximum use of the opportunity provided by the migration of Europe’s payments to a single infrastructure. Priorities might include:

 But whatever the priorities, for any treasurer looking to drive efficiency and optimisation, Sepa is not something happening in January, 2008, it is already here.

Naveed Sultan is managing director, head of cash management, Europe, Middle East and Africa, at Citi. 

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