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SEPA: Pooling business efforts

SEPA could enable firms to organize themselves efficiently and consequently bypass the traditional providers of payment services. Before elaborating on this hypothetical evolution (however far from being unrealistic), we take off with a small reminder of the direct consequences the SEPA Direct Debit (SDD) & the SEPA Credit Transfer (SCT) will have on treasurers.


We can pose ourselves the question what the concrete value creation of SEPA is in the operational management of daily cash flows and the internal organization of cash management activities. In general, SEPA is perceived as a welcome gift by many companies if it goes about transfers, since quite often tariffs, processes and safeguards can be very different between domestic and European transactions. For example, it is not uncommon for midsize companies to have a package in place covering an entire set of current banking services. Domestic services are generally included in the basic service of this pack where orders can be transmitted via an online banking cash management platform. However, cross-border transfers follow often a specific operational procedure, passing through other channels such as mail, fax with signature or highly secured dedicated interfaces (digital certificates, encrypted USB keys, etc). Once a company has several bank accounts within different institutions, the management of these operations becomes rather complex, especially in a phase of account reconciliation or return calculation, particularly in the case of rejects (R-transactions). Moreover, these operations are regularly extra charged by a flat amount and/or per operation, contrary to the Regulation 2560/2001 on cross-border payments that dictates a uniform tariff for domestic and European transfers under € 50.000..

The interest of a Payment Factory

The expectations on SDD, the most innovative payment mean of the SEPA directive, have always been the highest. As a matter of fact until now, direct debits could only be carried out within the national boundaries of a respective country. Direct debits designated to clients of European subsidiaries were to be sent to a local bank, prone to very different legal requirements, operational processes and discount formats (including the acknowledgement process, confirmation of orders and rejects). Consequentially, processes and ad-hoc systems had to be spread out in each country, representing a significant cost in terms of deployment and maintenance. Thanks to SEPA, companies could pool their transaction platforms now into one single European payment factory, in charge of collecting and sending all the payment orders of all the entities within the Group. Off course could this be a significant advantage for insurance experts or for consumer credit, which are strongly represented in Europe and responsible for a significant part of the direct debit transaction flows.

From the moment SEPA has discovered a favorable outcome for cards, this mechanism could also be deployed for collecting and processing credit card transactions, particularly in supermarkets. More generally, these payment engines possess the capability to centralize the entire package of payment orders of a company that is operating on the European market.

In addition, a company will now have the freedom to choose a service provider located anywhere in the SEPA zone to process its payment operations on national as well as on cross-border level, for example in Belgium or Sweden. In other words, it can select the European provider that is offering the best services at the best price. Therefore many opportunities are arising, meaning that a company can acquire a unique bank account in Europe, accessible for any subsidiary, in case the organizational structure allows it. In any case, a company will be able to consolidate all of its accounts in one single banking site, allowing canceling certain international cash pooling services and hereby saving on operational costs. In addition, it offers also advantages vis-à-vis the valuation of excess cash by liberating many intra-day movements to balance the accounts of each entity (in the case of real time cash pooling). By extension, it opens also the opportunity for international companies to negotiate more favorable pricing terms by concentrating larger volumes within the same bank.

The management of mandates: a challenge to overcome

Unfortunately, there exists also a downside: beyond the technical compliance aspects, many investments are expected to migrate to SEPA. These are clearly out of scope for treasury management and have a significant impact on the daily business operations.

More specifically, it is the establishment of the European direct debit framework that is representing the biggest organizational and financial challenge for companies. This covers mainly the management of mandates which are replacing the direct debit authorizations. From now on, it is the issuer of the debit order that not only has to ensure the collection but also the archiving and dematerialization process (including the stock of existing authorizations). As a matter of fact, the SEPA standards stipulate that all data of the mandate have to be integrated electronically into the payment order sent to the bank. This information should also be made available to the sales and marketing department to ensure management and monitoring, which means changing the interfaces of customer relationship management tools and corresponding training sessions for employees.

Moreover, transferring the burden of managing the mandate to the creditor, combined with the extensive right to contest upon 13 months, poses a legal and financial risk to the company. Beyond the operational challenges of processing these contestations, the company is now responsible for the rehabilitation of the client's account in the event of an accident. This could pose an import impact, moreover difficult to implement, knowing that this could mean the cancellation of bank charges, mandated by the customer's bank.

Companies liberating banks?

In this context, outsourcing can be considered. Administrative management of mandates or litigation management could not be considered as a key business that is offered by public utilities. So it is not an unrealistic assumption that specialist providers will arise and invest in this niche. We have already seen that SEPA also sharpened the appetite in terms of new offerings, for example in the domain of mergers and acquisitions as well as in the processing business of credit card transactions, where several new entrants have arisen in the form of payment institutions.

However it should be noted that companies may not be ready to divert this function to the newly created start-ups, which can be a strategic choice from an operational perspective. Therefore it is also very plausible to assume that innovative pooling initiatives will emerge. Some businesses could pool their energies for example in an "Economic Interest Group" (EIG), as we can see by analogy for EMV.

This type of model is particularly justified taken into account the problem of the mandate management as well as the simultaneity of interest linked to deadlines, which are common to all actors. Few companies are likely to invest solely in systems of dematerialization, archiving and mandate management. So this opens the opportunity to pool this burden into an ad-hoc structure with the option to sell the obtained expertise afterwards to other companies. In other words, on the one hand there will be companies that outsource the mandate management and thus pay for this service and on the other hand there will be companies that will invest in this sector by converting their expertise into a profitable business.

In any case, the SEPA directive for businesses will largely exceed the "simple" upgrade of technical infrastructures. On the contrary, SEPA assumes and suggests large transformation projects, embracing all business, organizational, legal and IS aspects. In a context marked by a reduced spending pattern in the aftermath of the crisis as well as due to the multitude of unanswered questions regarding the harmonization of SDD standards, it certainly has witnessed a difficult kick-off. However in the longer-term, SEPA remains an engine of innovation and renewal, not only for cash management on business level but also as a whole for the relationship between companies and banks.

The means of payment: Product appeal?

The opening of national markets for payments is not perceived by banks as something neutral. By allowing institutions in other member states to address end-to-end payment orders from domestic companies, SEPA will without doubt boost the trade between banks and companies and create new opportunities. It will jut out the area of payment means and will open opportunities to offer other products with higher added value (treasury loans, investments, insurance products ...). By this, it is not impossible to see payment means, traditionally drivers of high and recurrent margins, arise as marketing products to offer a comprehensive banking package and provoke new forms of competition across Europe. These actions could also aim to develop the activities of national bank branches abroad, taking full advantage of the national exchange and settlement mechanisms that offer more favorable conditions.

Note however that these mechanisms will be conditioned by the decision whether or not multilateral interchange fees will be removed. As reminder, this type of fee consists of an irreducible amount billed to the customer for each payment order and collected by the payer bank. If this barrier would be lifted, business models and banking strategies related to payment means will have to evolve as a whole ...


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