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What you need to know about the Single European Payments Area. by Adrian Stafford-Jones

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23rd May 2007
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A revolution is coming in the way Europe handles electronic transactions. Albany Software's managing director sets the scene and describes the steps that are needed to make the transition.

Introduction
The three-day delay for clearing electronic payments via BACS is a pain, and has been recognised by the European Commission as a barrier to cross-European trade. Fast-moving commerce and service-based organisations such as employement agencies would greatly benefit from faster clearance processes. These are currently available via the CHAPS electronic transfer system, but typically cost £10-25 per transaction.

It should be as easy to make a payment or raise a direct debit between partners in France and Germany as it is in your home market - and it should not cost any extra.

To help realise Europe's potential as a unified market, the commission has issued a directive to create a Single European Payments Area that is supposed to go live in 2008.

In theory, SEPA will create the opportunity for anyone to make payments across the continent within two hours at a reasonable cost. As we see it at Albany, you will get an extra menu on your existing BACS system to cope with the faster payments scheme. But there are several legislative and practical hurdles to overcome before this utopia arrives.

SEPA will based around a set of protocols and standards that will govern how organisations link to banking systems in their base locations. A common standard is needed so that every company in Europe can connect to a bank to accept a SEPA transaction. No real standard exists yet and that remains a very big gap in the overall project.

SEPA will also pose an extra set of challenges for accountants. Faster payment will demand faster remittance process - what's use of paying quickly if you can't see who you've paid? The same goes for statement reconciliation and invoicing, which will require changes in the way accounting systems work to make sure these processes are more seamless. They too will need a long period of time to adjust their business processes and systems.

This briefing outlines the SEPA timetable and will mean for companies trading across Europe, and identifies some of the topics that will need to be addressed to support SEPA's implementation.

National and cross-border electronic payments
Within the UK, the most cost effective way to make and collect sterling business payments is through BACS, the UK's automated clearing house (ACH). Transaction charges at between 10p and 20p per payment are less expensive than cash, cheques or cards. Similar ACHs handle domestic payments in most European countries.

However, cross-border electronic payments are generally made via SWIFT, the global payment organisation, and can incur significantly higher costs at around £10 to £25 per transaction. Following the adoption of the euro, the majority of European transactions are now made in a single currency, yet the high cross-border costs have persisted.

The Single Euro Payments Area (SEPA) is a European Commission (EC) initiative to remove these barriers to cross-border transactions. The vision is that SEPA should replace existing schemes and transactions and ensure that euro payments across the region will be subject to a uniform set of standards, rules and conditions. This will result in payment transactions circulating as easily, quickly, securely and efficiently as they do within the national markets today.

For UK companies trading or operating across Europe in euros, SEPA has a number of attractions, particularly for those that are multi-banked and/or multi-national. They will see a reduction in bank transaction charges, and enjoy the simplicity of dealing in euros in standard formats, with greater speeds and certainty for payments across Europe. Additionally, because most large organisations trading across Europe are likely to have separate bank accounts in every country in which they are conducting business, the new scheme offers these companies the opportunity to rationalise their banking arrangements and potentially deal with just one bank in Europe.

New legal framework
The original timetable was to have SEPA credit transfers and SEPA direct debits available by January 2008, with total migration across Europe by January 2011. Agreeing the necessary standards and putting them in place requires changes in the laws for each of the countries involved, and also standardised scheme rules for these products. The EC issued the Payment Services Directive (PSD) which was originally to be made law during 2006. However, continued debate and a lack of consensus is likely to lead to drive the PSD back to the European Parliament for a second reading. This delay, and the 18 months allowed for member states to adopt European directives into national law, could mean that the legal structure would not be in place until May 2009.

SEPA credit transfers
With the rules for SEPA credit transfers now agreed by the European Payments Council, and with less legal impact from the PSD legislation, banks are beginning to design work to change their systems, looking at which clearing and settlement mechanisms to use, and testing their SEPA credit transfers ready for product roll-out in January 2008. The challenge will be to ensure the adoption of the scheme by most European banks so their customers can both send and receive SEPA Credit Transfers.

It may take until 2011 to reach critical mass, particularly as the present domestic and cross-border products will run in parallel at least until that time. Additionally, most corporates will also have to evaluate and change their existing computer systems, and transaction and accountancy packages that currently operate according to specific national standards. However, SEPA-compliant packages cannot be made available until the new bank product designs are known, and the implementation guides have been fully completed.

SEPA direct debits
Standard rules for SEPA direct debits have still not been satisfactorily agreed and diverse direct debit rules and regulations in each country mean that pilot SEPA direct debits systems will be thin on the ground even by 2010. The critical mass stage may well be nearer 2015. As a resul, a number of companies looking to collect direct debit-type transactions across the whole of Europe (for example fund managers, finance houses, insurance companies, subscription organisations and mobile phone companies) are also looking at collecting funds by regular transactions on credit cards through SEPA-compliant VISA and MasterCard services.

Clearing settlement mechanisms
Banks are seeing other challenges: the potential loss of income from lower bank charges; the cost of investing in new product systems; plus the costs of running their old products in parallel for at least three years. The original bank vision was to reduce costs substantially by seeing the 20-plus ACHs in Europe merge into one. But presently no individual national ACH can provide the same functionality across Europe.

However, a number of national ACHs are intent on becoming SEPA-compliant, which could encourage consolidation into three or four Clearing Settlement Mechanisms (CSMs - basically SEPA-compliant ACHs where SEPA participating banks can clear the SEPA payments made between themselves).

Be prepared
Most corporates, particularly in the UK, are not prepared; but how can they be whilst they are still unsure about what is required and what the time frames will be? Recent research showed that few chief executives knew much about SEPA and assumed that there is no need to worry about it until the corporate treasurer or finance director tells them to.

Unfortunately, many corporate treasurers don’t know enough either because there is a lot of misinformation in the marketplace confusing the true status of the SEPA project. Treasurers may know that their banks have a framework and are aware of the benefits, but don’t know what the end product will be or what software they will need in order to generate SEPA payments, and more importantly do not know when the SEPA service will be implemented.

Watch this Space
Presently, the general feeling is that SEPA will happen but not in line with the timetable that has been set. Good advice for corporate finance managers would be to watch this space. Talk of “SEPA-compliant systems” is simply talk. There is still a lot of speculation and a lot of work to do. The legal framework has to be finalised, the standards fully approved, the bank products and processes designed, the implementation plans initiated, the payment channels such as CSMs and ACHs decided upon, the communication networks tested, the timetable updated, national migration plans agreed, and sufficient banks in Europe have to sign up to be a SEPA bank. Until then a “SEPA-compliant system” is a pipe dream.

Planning
As a starting point, however, most companies should already have a system in place which can verify BIC and IBAN codes, as this is now mandatory for European transactions.

Corporates should not ignore SEPA and wait until the last minute, but should start planning. It is difficult to know where to start, the answer is to set up a project to monitor and research what is needed and begin asking the right questions of the banks and accountancy system suppliers. Businesses should be asking their banks what they are doing by way of preparation and what timetable they are working to – doing this will move the debate forward and improve the lines of communication between everyone affected.

About the author
Adrian Stafford-Jones is managing director of Albany Software, a specialist developer of payments solutions. Its portfolio of Albacs products is used by more than 12,000 organisations to automate their payment processes.

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By hughk
24th May 2007 14:55

Intra European Transfers WORK NOW
All of this is big news to us outside the UK. We were all convinced that it was happening already amongst most European institutions for next day credit payments and costs no more than a standard transfer within a country. Yes, two hours would be even better for who need to move cash quickly such as financial markets participants, but overnight suits most people fine. International debits aren't yet rolled out widely but this will be there soon.

It costs me about a Euro to transfer from my German business account to another EPA country, if that to make transfers throughout Europe up to 12.5K Euros as long as I have the destination BIC and IBAN. More than that and I may be charged for AML paperwork but not always and that goes for up to around 40K Euros. Once a payment gets to the UK, I will get hit for spread if the account is in pounds but otherwise the transfer remains cheap/fast and is easily initiated via Electronic banking. The transfers go out of the banks via the TARGET intra-European payment system (based on SWIFT but operated under the ECB) and typically, much cheaper.

The funny thing is that from the UK, there is no direct access for international payments for most companies and the minimum charge for a relay payment remains at £10.

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