TCM Guide 2007 : Sepa: Reaching Beyond European Borders


Naveed Sultan is Managing Director, Head of Global Transaction Services in Europe, Middle East and Africa (EMEA)

The birth of a new currency used by more than 300 million consumers is a remarkable event. Since 1999, corporates around the world have embraced the single currency and gained from a degree of standardization. Less easy to grasp perhaps is the creation of an infrastructure that enables the euro zone to truly operate as a single market. While using one currency, European countries operate today as a patchwork of domestic payments markets. However, the opportunities for businesses to access new markets and streamline business processes—following the planned introduction of the Single Euro Payments Area (SEPA) in 2008—will have an even greater impact than the arrival of the euro. Whether you already have businesses operating in multiple European markets or are looking to expand trading partnerships in Europe, SEPA could support your business growth significantly.

For those not directly involved in SEPA’s creation, there are two common misconceptions. Misconception 1: “Because SEPA concerns only euro payments, it is just a matter for Europeans”. Misconception 2: “Because it is merely a change to formats passed between banks, only bankers need to know about it”. Wrong in both cases: all firms that trade in and with Europe could be affected.

SEPA stems from the same vision of a single European marketplace that gave birth to the euro. The introduction of the euro left Europe’s payment instruments and clearing infrastructures largely untouched; cross-border payments remained costly to process and acted as an ongoing barrier to a true single market in which businesses could trade as easily across Europe as within their own national boundaries. SEPA is the banking industry’s response to the determination of Europe’s politicians to facilitate the free flow of capital, labor, goods and services within Europe. Under SEPA, the introduction of new pan-European payment instruments will standardize the core payment products and services used across the region, remove the long-standing requirements to maintain local accounts in each country and eliminate the need to understand the myriad of differences that exist between national payment instruments today. It holds out the prospect of a single, streamlined payment and collection process to support relationships with customers and suppliers across the continent. SEPA makes Europe an easier place to do business in, as well as making it an easier place to do business with.
To understand the impact of SEPA in more detail, let’s take two types of business; the large multinational already doing business across Europe and the fast-growing company that’s increasingly looking at trading abroad.

Many multinationals with extensive operations in Europe are already centralizing and standardizing their payments, collections and liquidity management processes. But firms that have sought efficiencies through adoption of a single global ERP system—or centralized structures such as payment factories, in-house banks or shared service centers—have been compromised by the persistence of local payment practices. Payment factories still have to consolidate payment files from multiple local offices and shared service centers still need to maintain expertise in local payment practices. The question all multinationals should ask is: how much more efficient could our payment processes be under SEPA? As the single market takes shape and new sources of competition emerge, low operating costs will be increasingly critical. Cross-border trade is central to the SEPA vision; a uniform payment and collection process across Europe can remove the constraints that previously accompanied management of supply chain relationships, thereby enabling firms to source from the best suppliers regardless of where in Europe they are located.

For firms that conduct increasing volumes of business with Europe, SEPA offers a different kind of opportunity. When establishing operations in say, France, Germany and Spain, it has typically been necessary to establish banking relationships, open bank accounts and define best practice for payment and collections processes in all three countries—adding considerable cost and effort to the decision to expand into new markets. If businesses can operate out of a single account with one bank in any Member State, the costs of serving the European market are reduced considerably. While technology drove efficiencies in the physical supply chain to make it easier to reach remote markets, the development of common payment standards is now having the same impact on the financial supply chain. Automation and standardization lie at the heart of SEPA, enabling integration and interoperability with companies’ existing systems, for example by taking advantage of XML-based ISO 20022 message standards.

Although SEPA is key to doing business in Europe more easily, many questions remain. For example, SEPA payment

SEPA will replace today’s disparate local payment products with a new set of services based on common standards.
SEPA will force changes to the ways corporates make and receive non-urgent euro transactions, greatly simplifying payments and collections processes for end users.
SEPA Credit Transfers will be launched on 28th January 2008.
SEPA Direct Debits are scheduled for launch during 2009.
Today’s local euro payment products will be phased out over the coming years although no firm timetables are in place yet.
Corporates should evaluate the impact of SEPA and plan for migration during 2008/9
Corporates can exploit the standardization that SEPA will offer to make payment/collection activities more efficient and less complex.

instruments include a common field for remittance data, but corporates need to agree on standard approaches to structuring this information to leverage it effectively. The timing of migration to SEPA instruments also needs careful consideration. SEPA credit transfers will be available from January 2008, but direct debits will be introduced later and existing instruments will be withdrawn according to different national migration plans. The opportunities are there; but corporates must plot their own course.

As a global bank with a pan-European cash management network that offers clients a combination of both domestic and regional capabilities, Citi has been taking a leading role in the creation of SEPA. Our active engagement in the design and implementation of the new standards puts us in an ideal position to guide our clients through the many changes that SEPA will bring. We talk to customers every day about how their European business could be more efficient and streamlined. For example, making all euro payments out of a single account sounds like a great opportunity for cost savings, but this may not be the most effective alternative for many firms. Customer preferences, industry practices, plus legal and tax considerations, must all be analyzed before restructuring your payment and banking arrangements. Citi can help you identify and pursue the real opportunities in Europe and across the world, helping us all to reap the benefits of the new payments market.

Naveed Sultan is Head of Global Transactions Services (GTS)
for Europe, Middle East and Africa (EMEA) responsible
for cash management, trade finance and services and
securities and fund services across the region.

Naveed Sultan