Features : The Benefits of Being Single

Banks and regulators are working together to cut the costs of cross-border payments in Europe.
Since its inception, the European single currency has been fraught with economic and political problems, with some countries threatening to pull out of the euro and others blaming it for their economic woes. The single currency has also raised the expectations of consumers and policy makers alike. Increasingly, European Commission (EC) policy makers and major multinationals that do business across Europe are asking, how can you have a single currency without a single harmonized market in terms of taxation, legal requirements and payment systems and instruments, why are intra-EU payments still so expensive, and why does the cost of a domestic payment vary markedly from one EU country to the next?

Historically, cross-border payments within the EU have been both expensive and slow. A 1999 study found that the cost of cross-border credit transfers varied markedly from 3.5 to 26 for smaller amounts and from 31 to 400 for larger sums. It also found that banks in some countries charged additional fees for extras such as balance-of-payments reporting, currency conversion and communication charges. The average time taken to complete a cross-border credit transfer was 4.8 working days, although the EC found this varied between countries, with more than 15% of transactions taking longer than a week.

This is the kind of ammunition that prompts bureaucrats in Brussels to act, and act they did: In 2001 the European Parliament issued its regulation on cross-border payments in euro, which called for cross-border payments to be priced the same as domestic payments. As of 2003 the regulation applied to cross-border credit transfers and electronic payments up to 12,500 (the limit has since risen to 50,000). It was a controversial piece of legislation given that cross-border euro transfers comprised only 2% of total payment volumes within Europe. The point that legislators were trying to make, however, is that in a single market there should be no differentiation between domestic and cross-border payments.

Following publication of the regulation on cross-border payments, a group of 42 banks formed the European Payments Council (EPC). In 2002, in conjunction with the European Credit Sector Associations and the European Banking Association, the EPC released a white paper outlining a vision for a single euro payments area, or SEPA, by 2010, a payments market in which cross-border payments could be made as easily and inexpensively as domestic payments.

The banks have already achieved some cost savings through the introduction of Bank Identifier Codes (BICs) and International Bank Account Numbers (IBAN), which enabled increased automation of cross-border payments. According to the EC, this made it easier and cheaper for customers to perform many types of payments, as well as kick-starting other initiatives for the creation of SEPA. In March this year, the EPC also finalized rulebooks for three new SEPA payment instruments: pan-European credit transfers, pan-European direct debits and a pan-European cards framework for the development of a general purpose card scheme for payments and withdrawals in euros that can be used throughout the SEPA area. Banks will offer these instruments from 2008 starting with the 12 eurozone countries.

Harmonizing what has until now been a disparate set of payment instruments based on different national standards and legal and tax frameworks is no mean feat. As the deadline for SEPA draws closer, some important philosophical differences have emerged between the various parties involved in realizing the SEPA vision. Up until recently SEPA has largely been what Chris Skinner, member of the executive board of TWIST, a user-driven treasury standards organization led by multinationals such as Royal Dutch Shell, describes as a bank run program.

The European Associations of Corporate Treasurers (EACT) has voiced its disapproval at the lack of corporate involvement in the design of the rulebooks published by the EPC. We were disappointed by the consultation process carried out by the EPC through the national banking associations, EACT stated. In some countries it failed to happen, and in all cases the time allowed was inadequate. Franois Masquelier, honorary chairman and secretary of EACT and head of corporate finance and treasury at RTL Group in Luxembourg, acknowledges that corporates came quite late to the SEPA project. We dont have the resources of the banks, and therefore we are not as well-equipped. Yet if the corporates are not involved, it is a nonsense, he says.

The EC has expressed its concerns that the new pan-European payment instruments based on the EPCs schemes as currently developed may not appeal to all end users and therefore may not be adopted. It says that SEPA payment services should be as good as or, preferably, better than what currently exists. Yet according to the EC, the new payment schemes as defined in the EPCs first draft only provide core and basic payment service levels. EACT also weighs in, saying, Companies will not have an incentive to abandon their current payment systems, which in most cases provide richer functionalities, more certainty of collection and more STP [straight-through processing].

EACT recommends increasing the involvement of stakeholders other than the banks and moving beyond core and basic payment products to ones that facilitate end-to-end straight-through processing of the whole payment and reconciliation processes, which includes not only the use of standards such as the IBAN but also a unique standard for automated payment initiation and reconciliation and messages for client-to-bank reporting and electronic account statements. The most important example of the new payment messages and services [corporates demand] will be the URI [Universal Remittance Identifier] and standard remittance advice, which will allow for automated reconciliation of accounts receivable, states Gianfranco Tabasso, chairman of EACTs payment harmonization committee. He points to the example of Telecom Italia, which he says employs 253 people full-time to manually reconcile business-to-business AR.

Businesses Want More Functionality

Skinner says businesses want to see SEPAs scope broadened to include other payment instruments such as e-payments and the enablement of electronic invoicing to ensure full end-to-end automation. Currently, not only payments but also e-invoicing programs in Europe are based on different national standards, which is costly for corporates to comply with. Corporates think that e-invoicing should be facilitated, which means not only interbank standardization but also corporate-to-bank standardization covered in the new legal framework [for payments]. The banks are saying they have only devised instruments for interbank treatment of credit transfers, direct debits and cards, he explains.

Yet given some of the complexities around incorporating detailed supply-chain information within payments messages, Edward Glassman, managing director of product delivery channels at ABN AMRO, concedes that SEPA may not provide what many corporates dream of in terms of true end-to-end STP. In the area of referencing information and invoice data, there is still a lot to harmonize, he says.

The EC, corporates and banks also appear to differ on what is actually meant by SEPA. Skinner says the EC and corporates want SEPA for all 25 member states, but the EPCs concept of SEPA is initially focused on 12 eurozone countries. SEPA for us should be Europe-wide, says Masquelier of RTL Group. We are a pan-European company with a lot of activity in the Scandinavian countries, Eastern Europe and the UK.

Opportunities Abound

Corporates have a lot to gain from SEPA, not only in terms of reducing the cost of cross-border transfers but also in terms of the opportunity it presents for overhauling the whole payments infrastructure within Europe by dispensing with different national and proprietary banking formats and regulations. Corporates have consolidated their payments and treasury operations on a single global platform technology-wise, Skinner explains, so now they also want to concentrate their banking services or at least harmonize them.

Masquelier views SEPA as an opportunity for companies to reduce the number of cross-border transfers they need to make by reducing the number of local concentration accounts they maintain throughout Europe. The more accounts, the more costs you have, he explains. When you have many banks around Europe, you end up with many bank payment solutions as opposed to one system for repatriating bank statements and entering payment details in a single format. Phillip Lindow, head of global treasury and investment management at ABN AMRO, says SEPA will mean a significant reduction in man-hours spent on the daily administration of multiple accounts with local banking partners.

There are also qualitative gains to be made, says Masquelier, in terms of standardizing security around payments, enhanced risk management, better harmonization of payments and improved controls. The more different types of payment formats you have, the more systems you have to interface with, and the more complicated it becomes, he says. SEPA will make a payment safer. Daniel Cotti, head of Europe and global transaction products, ABN AMRO, says that SEPA rules on credit-transfers will offer greater security than the current system. In terms of direct debits, he says, SEPA means companies will not have to adapt to different local regulations or payment types.

In the area of liquidity management, a number of companies have implemented solutions for pooling or sweeping of end-of-day balances to a central account. Yet, Lindow says, companies have still have to maintain individual accounts in each country. SEPA, he says, will eliminate some of the challenges around different payment cut-off times, fees and value dating, which is why companies still have needed to maintain individual accounts. This, in theory, should allow corporates to centralize cash management to one bank account for payables and receivables in the eurozone, he says. The biggest winners from SEPA, he adds, will be those companies with robust ERP systems that have centralized payments and receivables as well as payroll and travel expense administration in shared service centers and payment factories.

In effect, SEPA will allow corporates to shop around for banking services, rather than being restricted to working with local banks in each country they are doing business in. Post-SEPA, the locating of bank accounts should not be an issue, says Masquelier. It should be normal for a Luxembourg company to open an account in Italy and receive the same service as if they had opened an account somewhere else. SEPA will create more competition between countries and banks. It is not something the banks like because it means greater choice.

While companies potentially have a lot to gain from SEPA, banks have a lot to lose as harmonization and standardization of payments within the EU erodes some of the revenues they earned from managing those inefficiencies. EACT maintains that the banks will be more than compensated for those losses by a reduction in costs through increased automation of payments and by increased revenues from corporates willing to pay for broader service levels.

Skinner believes that under the design pushed by the banks, the organizations that gain the most from SEPA will be multinationals and pan-European banks that have the volumes to compensate for a reduction in revenues from electronic banking. However, if electronic invoicing and the corporate-to-bank interfacing is included, small and medium-size firms will benefit, as well as those banks that can deliver value-added services like e-invoicing. He says that SEPA will cause the banks to introduce new charging schemes, but it is unclear what impact SEPA will have on the cost of domestic banking, which is currently free in most countries. Skinner asks, Once domestic and cross-border transactions are priced the same under SEPA, will the pricing of cross-border transactions be subsidized by increasing the price of domestic banking?

Anita Hawser