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Over the past several years, corporate treasury managers have observed and participated in a number of fundamental changes. Among the most significant was the euro's adoption as the common currency of 12 of the 25 nations that currently comprise the European Union.
For this 12-nation Eurozone and several other nations that are part of the European Economic Area, there is another vital change rapidly approaching. That change revolves around the next critical step in the development of a truly harmonized pan-European financial market: a Single Euro Payments Area (or SEPA).
SEPA envisions a single currency within a unified European marketplace linked by an efficient, straight-through processing based infrastructure. Realizing that vision will require overcoming a complex, fragmented payments environment where clearing cycles, transaction pricing and value-dating practices vary from country to country.
The EU Commission took an important first step toward harmonization with its regulation on cross-border payments in euro. The regulation ensures that when a payment is made in euros between euro accounts that charges aren't affected should the payment cross a border. According to the regulation, if a cross-border transfer uses an International Bank Account Number (IBAN) and a Bank Identifier Code (BIC), then it should be treated in the same way as a domestic payment transfer.
SEPA Goes Live in 2008
As planned by the European Payments Council, the EU Commission and the European Central Bank, SEPA will go live in January 2008, initially with two major instruments that are designed to smooth pan-European cash management: a SEPA credit transfer and a SEPA direct debit.
Both figure to be key steps forward in the process of making European national borders invisible in euro payments. This is particularly true in the case of the direct debit, which does not exist today in any standardized cross-border form within the entire EU, or even within the Eurozone, and which will do much to facilitate the receivables collection process for corporates active at a pan-European level.
Overcoming Labyrinth of Obstacles
Adoption of the euro has proven both expensive and complex, impacting Europe's central banks, its financial institutions and their clients, both corporate and consumer.
But although the 12 nations within the Eurozone now share a common currency, they still function as 12 separate payments markets, with separate sets of legal standards, financial regulations, payment instruments and preferred and habitual banking practices. These are the elements in the labyrinth of established “national” and “local” financial environments that SEPA is designed to address and, ultimately, to replace.
Today, there are a handful of mechanisms that are effectively providing pan-European euro-clearing functions, and everyone has the basic capability to move their euros throughout Europe. But because there is no common set of instruments and rules throughout the EU, and each country still has its own established payment practices, a fundamental transformation is needed in order to reach SEPA's objective: to create a true pan-European domestic market for euro mass payments that eventually will replace national payments schemes.
Achieving the Goal of SEPA
A major step toward this objective has been taken by the European Payments Council—the decision-making and coordination body of the European banking industry—by proposing rules and guidelines for two pan-European payment instruments, the SEPA credit transfer and the SEPA direct debit. These instruments will form the basis for a pan-European mass payments market and will ultimately replace the corresponding national payment schemes. The idea is to make euro payments within the European Union as efficient and comfortable for corporate and private users as local payments are today, without the need to maintain separate bank accounts in each country.
By no means will it be mandatory for corporate cash managers to immediately adopt the SEPA instruments and standards in 2008. Parallel national systems and instruments will remain fully functioning until a future date (no earlier than 2010) that will eventually be designated for all euro transactions within the affected countries to conform to SEPA standards.
But SEPA in 2008 will represent an option and may provide opportunities for corporates active in several European markets to streamline and rationalize their cash management set-up at an early stage. Participation in SEPA will mandate several basic elements of standardization and harmonization, including adoption of IBANs and BIC standards and the introduction of a dedicated Reference Number Field to facilitate the receivables reconciliation process for corporates.
In parallel to the work undertaken by the European Payments Council to establish the new payment schemes, the EU Commission is now laying essential groundwork in the form of a New Legal Framework (NLF), which aims to provide a harmonized legal environment for SEPA. NLF is a prerequisite for allowing the SEPA initiative to become a reality on schedule in 2008.
Many Treasury Advantages
Although corporate cash managers will not be required to immediately switch over to SEPA standards in 2008, the benefits of doing so could be worth it. If, for example, a US company maintains offices in more than one country within the Eurozone, adopting SEPA standards might make it possible to save considerable overhead by combining all of those cash management operations in just one country. For the corporate treasury department, the advantages to be derived from SEPA figure to include greater efficiency, enhanced transparency and, ultimately, significant cost savings.
When SEPA is fully implemented, it will be no different for a company to make a euro payment from Germany to France than it will be for the same company to make a payment from Point A to Point B within Germany. Cross-border mass payments will be routinely handled by banks—just as if they were national payments—via one of several Pan-European Automated Clearing Houses (commonly referred to as “PE-ACHs”).
A Leader in the SEPA Effort
Among financial institutions active in SEPA planning and implementation, Deutsche Bank is one of the foremost thought leaders. As the largest bank in the euro-clearing industry, we prominently participate in the work of the European Payments Council and its various working groups, and by doing so take an active role in shaping the future of the European payments industry.
As SEPA develops, Deutsche Bank will be alerting our corporate clients to new avenues of opportunity through value-added services, particularly in such key areas as account information and account reconciliation. We pledge to conscientiously consult, advise and support our corporate treasury clients in adapting their critical IT and other functions to operate effectively and efficiently in a new SEPA environment.
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