Article regarding SEPA-migration March 2012

1. SEPA is Just Around the Corner, But it is on 'SEPA+' That Corporates
Should Focus
Dirk Braun, Commerzbank - 06 Mar 2012
With the European Parliament (EP) and European Council (EC) having confirmed a deadline of
1 February 2014 for migration to both single euro payments area (SEPA) Credit Transfers (SCTs)
and Direct Debits (SDDs), any questions over the inevitability of SEPA's implementation have
vanished. Given the advantages that payments standardisation offers to corporates, the question is
no longer whether to 'SEPA' or 'not to SEPA', but rather whether to 'SEPA+'.
Most European corporates have been hesitant to migrate to single euro payments area (SEPA)
instruments, and the reluctance to take action has been exacerbated by the long wait for a strict
migration deadline from legacy payment instruments. However, with the deadline now confirmed as 1
February 2014, businesses across Europe face a limited timeframe to implement their respective
SEPA projects, as highlighted in the box.
SEPA Regulation at a Glance Payments standardisation is widely regarded as one of
the key steps on the journey towards creating a truly
• Deadline of 1 February 2014 for both credit transfers efficient global treasury function - an aspiration for
and direct debits (niche products and direct debits
based on read-outs of payment cards at the point-of- many corporates post-financial crisis, where the
sale (POS) has a deadline of 1 February 2016 - for emphasis has increasingly turned towards compliance
non-euro countries this is extended to 31 October by heightened risk management, increased visibility
2016).
• Card transactions, mobile payments (m-payments)
and cash flow management. Certainly, a centralised
and other payment instruments are not in the scope structure for payments can help provide the liquidity
of the regulation. controls and visibility into funding needs that will help
• By 1 February 2014, there will no longer be the need
for payment initiators to deliver bank identifier codes
treasurers with their investment decisions and ensure
(BICs) to address the counterparty bank within the optimisation of their working capital.
domestic payment orders (although EU Member
States are allowed to push back this deadline by two
years).
Yet one cannot discuss payments standardisation
• ISO 20022 XML format will be used in the interbank without considering the impact of SEPA. While there is
(as well as in the corporate-to-bank) space for a clear business case for payments standardisation
transfers which are not transmitted individually (e.g. regardless of SEPA regulation, it would be wrong to
orders with specific instructions).
• Existing mandates for legacy local direct debit suggest that the initiative is not driving corporates to
schemes can be used for SEPA Core Direct Debits consider the issue more seriously. Corporates should
(SDDs Core). refrain from focusing all their energy and resources on
• Using direct debits, consumers are allowed to block
specified payees and to restrict the amounts and meeting these SEPA regulatory deadlines and instead
frequency of debits. approach it from a strategic perspective. Not only a
• Multilateral interchange fees for direct debits will be ‘SEPA’ but a ‘SEPA+’ strategy is now needed.
prohibited, but rejection/refusal transaction (R-
transaction) fees will be allowed.
Essentially this means that corporates should
• The principle of equal charges for cross border and
recognise the opportunity to move towards payments
domestic payment transactions (EU price regulation)
will be extended to all payment transactions,
regardless of the respective amount.
centralisation, standardisation of accounts payable
(A/P) and accounts receivable (A/R) processes, as well
• The government process of SEPA development will
as a single technical interface in terms of payment
be reviewed to take greater account of all involved
parties.
instruction formatting, not only for SEPA payments but
for all kind of payment transactions (such as euro and
foreign currency, legacy and remaining payment instruments, urgent and third party payments).

2. Undoubtedly, SEPA should make it easier to centralise treasury, cash management and payment
functions for a wide range of incoming and outgoing cash flows of businesses in Europe. Of course,
the road towards standardised payments is not without its hurdles, and it is accepted that the
envisioned SEPA landscape may not necessarily translate into strategic advantages for all
corporates in the short term. Certainly, a limited number of companies, particularly those that conduct
the majority of their business within national borders, will derive benefits from being able to conduct
all their payments under one SEPA banner. Yet the most progressive banks are adamant that
migration should not adversely affect their business, and are thus working to provide pragmatic
solutions to ensure a smooth transitional phase for all.
Advantages to Corporates of Payments Standardisation
Admittedly, there are immediate inconveniences of migrating to SEPA payments. For example, the
need to change account administration to include international bank account numbers (IBAN), as well
as BICs in some cases, and the necessary reorganisation of counterparty risk profiles due to new
regulations regarding direct debit revision.
What is often over-looked, however, is the potential for initial cost savings, which can be garnered
through adopting SEPA payments. For example, corporates can reduce outgoings by using low-cost
markets for European payment transactions and can further substitute cross-border payments for
SEPA transactions that are priced as domestic transfers only (the European regulation that a
payment transfer within SEPA must not cost more than a national transfer will be extended to all
payment transactions regardless of the respective amount).
Furthermore, via its adoption of the XML ISO 20022 standard - essentially a single financial
messaging language between banks that is designed to replace local standards across countries -
the initiative will save corporates having to deal with the technical inflexibility and complexities of
handling numerous file formats. The reduction in expenses relating to format maintenance and
system administration, particularly for those corporates conducting trade on an international scale,
can be huge.
Uniform settlement periods and exception processes (e.g. returns) for all European countries will
contribute to these savings by replacing cumbersome legacy processes. The transition to IBAN as
the only permissible account identifier for SEPA transactions will also result in improved security,
ensuring that corporates both transfer money to the right account and receive payments when due.
What is more, these codes allow corporates to protect their accounts from theft and fraud.
Beyond the short-term cost, efficiency and security advantages, however, SEPA opens up a host of
opportunities for corporates to expand their business, for example by increasing the feasibility of new
trade routes powered by new payment instruments (such as SDD) and thus encouraging small and
medium-sized enterprises (SMEs) to do more cross-border business within the eurozone.
For those corporates that already conduct trade on a European or global scale, SEPA will allow them
to consolidate their bank accounts, enabling optimised liquidity management and perhaps the
establishment of payment and collection factories. Ultimately, by standardising payments and
providing a wider set of message information to be carried from payment initiation to reporting (via
XML ISO 20022 and IBAN and BIC codes), SEPA can facilitate end-to-end automation and
reconciliation, leading to higher straight-through processing (STP) rates and hence lower processing
costs.

3. Easing the Transition
In general, the migration to SEPA is a strategic opportunity for optimisation of processes and
structures in the cash and treasury management of business groups. However, for a limited number
of corporates - usually those only settling domestic payments, with no foreign debtors or creditors -
there will be no direct strategic advantages derived from migrating to SEPA payments. In these cases,
the onus therefore lies with their bank to ensure that the transition is as smooth as possible.
Certainly, purely domestic-focused corporates have become used to the efficiency of national
payments, which rely heavily on domestic bank identifiers, account numbers, clearing and settlement
systems. Now, SEPA payments have to achieve the same level of efficiency, while adopting
international identifiers for banks and accounts, as well as new clearing and settlement systems.
Given this, the transference of domestic payment codes to SEPA codes is a key task, yet it is a
daunting one for corporates to execute on, particularly when they have little to gain from doing so.
Tasks such as identifying errors in their transaction administration can be especially time-consuming.
Indeed, many corporates may find that their actual data error rate is in fact higher than the
percentage of rejected transactions they experience, as it is common practice for banks to fix these
problems when settling payments unbeknown to corporates. And once they have identified errors in
their existing data, they will then have to convert and validate IBAN information.
This need not be such an arduous process. Commerzbank, for instance, is planning to launch an ‘on
the fly’ migration service, allowing corporates to conduct SEPA payments without sending the
information in a SEPA-compliant format, thus taking the workload for conducting IBAN (and BIC)
conversions off of the shoulders of its clients. Essentially, corporates can therefore change their
payments schemes without having to worry about changing their payment formats.
The Need for Action
While corporates with global aspirations should be moving towards payments standardisation
regardless of SEPA - or risk falling behind to more progressive competitors - the ruling by European
lawmakers on the SEPA end date regulation has undoubtedly introduced an element of urgency into
the situation. Indeed, a race has started to catch the best resources in the industry to support SEPA
projects of corporates (and banks). Specialists in consultancies, vendor companies for electronic
banking, enterprise resource planning (ERP) and treasury management systems (TMS), as well as
experts in banks, will all be in high demand over the next few months. Time is running out; indeed,
corporates have only 24 months to become SEPA-ready. There will be no extended warm-up, just a
short, sharp cut-off.
With 2014 looming, corporates need to put in place a strategic plan for SEPA migration now. And one
of the key elements of this should be the choice of a banking partner with the expertise to advise on
wider SEPA strategy and adoption, as well as enabling the migration itself. Certainly, the right
banking partner will be equipped to help corporates assess their existing operations against the new
regulatory requirements and create the scope of their SEPA planning.
The speed of migration is also crucial. Having taken the first step on the road to being SEPA-ready,
corporates should complete the remainder of the journey as quickly as possible in order to avoid
maintaining two separate sets of data in parallel. The most proactive European banks are already
helping their corporate customers by familiarising them with the upcoming changes and supporting

4. them throughout the migration process, in order to minimise correction and rejection charges of failed
payments. Yet given that there are a limited amount of banking resources in the market to help
corporates migrate, it is clear that the time has come for corporates to act.
Dirk Braun - Director for Sales Strategy, Cash Management and International Business
– Commerzbank
Dirk Braun is the director for sales strategy, cash management and international
business at Commerzbank. In his senior specialist role, Braun is responsible for the
strategic development and co-ordination in the area of international cash management
between sales teams in Germany (small and medium-sized enterprises (SMEs), as well
as large corporations and multinationals), product management, further stakeholders in
Commerzbank and external partners, as well as international branches of the bank in western, middle
and eastern Europe, Asia and the US. Braun has been specialising in cash and treasury
management (payments, receivables, office banking and financial supply chain management) in the
banking industry for almost 15 years now and has worked for several banks in various roles with
direct and strategic sales responsibility.
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