beyond sepa - treasury management€¦ · beyond sepa 10 a new tool box with many treasuries...

Beyond SEPAGoing Deeper and Wider

Deutsche BankGlobal Transaction Banking

Deutsche BankBeyond SEPA

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Introduction

The commencement of the Single Euro Payments Area (SEPA) marks a pivotal moment – merging different retail payment systems throughout Europe into one market. Previous payment schemes were not only restricted within national boundaries but were highly mature, providing little opportunity for innovation or adaptation.

SEPA changes this picture dramatically; creating opportunities for rationalisation, centralisation and payment system innovation for corporates and banks alike. It is no exaggeration to say that SEPA marks the dawn of a new age for payments and treasury management.

SEPA’s introductory phase has seen the creation of a set of payment service products, namely SEPA Credit Transfer and SEPA Direct Debit. Developed as the result of a negotiation process between payment experts and other stakeholders, these products were designed to achieve standardisation while incorporating the core concepts and most critical features of legacy systems across Europe.

Over time, a second wave of refinement will ensure that the momentum gained around the adoption of best practices will be maintained and transported across all markets. For example, it may become possible to plug-in Additional Optional Services (AOS) on a market-wide basis; widening the use of well-regarded features that are currently restricted to local markets. France’s CAI (Customer Account Information) and Italy’s SEDA (SEPA-compliant Electronic Database Alignment) provide a case in point; instruments that have not found their way into the first wave of SEPA products but are likely to be leveraged in future for best-practice sourcing across the zone.

Certainly, the introduction of SEPA throws open the door to further opportunities, beyond the more immediate benefits of regional harmonisation. As with any regulatory initiative, corporate treasurers should look to use compliance-related projects as a launch pad for the planning, execution and realisation of further internal improvements; implementing changes intelligently and effectively in order to enhance operational efficiency, strengthen risk control and uncover financial benefits. Such an approach is all the more relevant to SEPA, thanks to the payment scheme’s opportunity for significant rationalisation and innovation. If corporates, through their treasurers, embrace SEPA and adopt long-term thinking, it is possible to convert what is initially a regulatory project into a major strategic advancement.

It is no exaggeration to say that SEPA marks the dawn of a new age for payments and treasury management.


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SEPA requires corporates to implement three major process changes:

1. Migration to SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) standards; a task now completed by most corporates,

2. Handling of returns; dealing with transactions (R-Transactions) that have not been properly processed. This element may pose a concern for corporates as they adjust to a new framework and way of thinking, and will require strong bank support to ensure the work is performed properly,

3. Reconciliation; another area which may prove challenging for corporates.

In addition to these factors, corporates will need to assess the end-to-end efficiency of their SEPA processes; ensuring they reach (if not surpass) the high levels of efficiency enjoyed in legacy processes. While it is inevitable that innovation will have taken a backseat during the SEPA migration phase (as corporates strived to achieve full compliance before the imposed deadlines), the August 2014 end to the six-month grace period means treasurers can, and should, consider the possibilities created by re-engineered processes and systems.

SEPA completion


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By taking a constructive approach to the implementation of SEPA, corporates have the opportunity to proactively examine their bank account structures across their enterprises and different European markets. The strategic aim of such an exercise should be to rationalise and improve these structures in order to centralise payment flows through re-engineered bank models and fully-automated end-to-end processes. Such a process should be viewed and undertaken as a means to creating practical and economic improvements as well as enhanced efficiency.

A series of steps can take corporates from a disparate treasury and payments environment to one with a higher degree of control and organisation. Rationalisation of bank models further allows liquidity management solutions to be fundamentally revised and rationalised in order to realise cost and efficiency benefits.

While the concept is straightforward enough, there is no single right approach to increasing operational efficiency, as what this entails will closely depend on each corporate’s company structure. For this reason, corporates have been exploring various operating models as they seek the optimal structure for their respective business, risk appetite and geographic spread, as well as any individual characteristics. All structures, however, should include an active contingent on an intra-regional basis to allow for a smooth switch-over should any risk issues or problems arise. In the wake of the global financial crisis, treasurers have understandably kept this consideration in mind when determining preferred banking set-ups and regional-centric approaches.

Ultimately, with the August 2014 deadline passed and the migration phase now practically completed for most corporates, the “must dos” have been achieved.

For corporates of all sizes, it is clear that SEPA migration has incurred a cost and proven a complex practical challenge; from building up a team of dedicated experts with specialist knowledge, to implementing the new “rules”. But are there now benefits to be gained? The answer to that question should be a clear “yes”, provided that corporate treasurers now shift their focus beyond the “must dos”, to the “could dos”.

Operational efficiency

With the August 2014 deadline passed, the “must dos” have been achieved. Are there now benefits to be gained? The answer should be a clear “yes”.


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Without a doubt, treasurers should view SEPA as a major opportunity to examine their treasury and banking technology – including reviewing group-wide treasury and banking software – in order to consider upgrading systems and processes. In particular, treasurers should analyse infrastructure processes relating to banking and account relationships. Such an analysis could range from examining the number of banks in each SEPA country where the enterprise operates, and potentially concentrating cash flows through fewer accounts, to reducing corporate-to-bank tools, communication links and systems.

Treasurers examining their group corporate structures, in a bid to reduce and rationalise the number of accounts, may initially hope to use a single account to serve all subsidiaries across the SEPA zone; the ultimate rationalisation model that would bring clear workflow benefits and cost-reduction potential.

However, while it should certainly be possible to reduce the number of euro accounts for each country in which a company operates, holding just one zone-wide account may not be practical while the region’s markets remain in flux. Indeed, in some jurisdictions it may be necessary to retain a local account for particular transactions such as tax or salary payments. In both Ireland and Portugal, for example, tax agencies often demand a local account because of BBAN/sort-code functionality and irrevocable direct debits, and companies must provide a local account number if they are to receive tax refund payments. Local accounts may also be necessary in order to make use of certain Additional Optional Services (AOS). Italy is a case in point; a country where AOS such as the BI-COMP “dispatching service”, SEDA (the SEPA-compliant Electronic Database Alignment), SDD financing and SCT routing1 all require a local account.

So rather than immediately looking to use just one account across the whole SEPA zone, treasurers should instead develop a strategy that strikes the optimal balance: achieving the maximum level of rationalisation possible (with the greatest cost and efficiency gains) while simultaneously ensuring all transactional needs are addressed.

Over time, cost savings and performance improvements can undoubtedly be achieved through the closure of locally-based payment and collection functions in the SEPA area, alongside the centralisation of such work. In particular, savings can be achieved (and material advantages gained) through the use of a Payment and/or Collection Factory, in order to institute Payment on Behalf of (POBO) and/or Collection on Behalf (COBO) structures.

Over the last few years, more corporates have been looking at bank-agnostic solutions. And the move to non-proprietary based models will not only continue, but in fact accelerate.

Upgrading systems and structures

1More information on all these services can be found in Deutsche Bank’s Beyond SEPA: SEPA Post Migration Landscape.


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Of course, cost savings and efficiencies are only part of the treasury agenda. Risk mitigation is equally important and, as dependencies of any kind are potentially a cause for concern, in recent years a growing number of corporates have sought to employ bank-agnostic solutions in order to decrease reliance on individual bank-hosted solutions. Indeed, we need look no further than the popularity of SWIFT as an example; a bank-agnostic proposition that allows organisations to send and receive information regarding financial transactions in a secure, standardised and reliable environment.

With the trend for non-proprietary based models set to continue, and perhaps even accelerate, a key consideration for corporates will be seamless integration with the rest of the company, most notably through the Enterprise Resource Planning (ERP) system.

By requiring corporates to use an XML-based format, SEPA supports this preference for bank-agnostic features and seamless integration. The standardisation of formats enables corporates to move from bank to bank more easily, reducing dependency on any one provider. And as the communication and formats spaces become more standardised (thereby reducing bank competition), corporates can use other considerations to differentiate between providers – such as service quality, value-added services and pricing. In this regard, SEPA can be viewed as a step towards empowering the corporate treasurer.

Risk control: lowering the dependency


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A new tool box

With many treasuries assessing best practice and how to achieve it, one route to move beyond SEPA is to examine emerging treasury solutions and consider these as potential new “tools”. Specifically, treasurers should analyse whether these tools could be productively deployed within their organisation.

Some of the tools or “new solutions” being introduced by corporates include:

– Payment on Behalf of and Collection on Behalf of (POBO/COBO) structures,

– Enhanced reconciliation programmes (for Payments on Behalf of/Collections on Behalf of),

– Virtual account-based models, and

– Financial supply chain management (FSCM).

With SEPA’s rationalisation and centralisation benefits likely to catalyse the further development of in-house banks, we have seen tools such as virtual accounts gain growing interest and popularity as corporates review Shared Service Centre (SSC) structures and Payment Factory set-ups. Indeed, the establishment of POBO – and to a lesser extent COBO – solutions is becoming increasingly common business practice, creating the potential for corporates to access account rationalisation and liquidity optimisation opportunities.

One of the reasons such operating structures or “tools” are emerging as practical and implementable options is that the infrastructural change that supported the transition to SEPA brought with it a significant enhancement in the delivery of transaction-related data flow through the end-to-end clearing cycle. This standardisation and harmonisation of information transfer has been a significant enabler for the development of these more advanced models, and has allowed corporates to undertake processing change safe in the knowledge that reconciliation processes can be effectively managed and will not be compromised.

Indeed, under SEPA, corporates can be certain that data regarding the underlying counterparty – on behalf of whom payments are being made or received – is fully transferred without truncation; providing the necessary transparency. For example, the ability to immediately identify a transaction’s underlying counterparty means intra-group reconciliation can be undertaken from a single physical bank account across a group of sub-accounts held as virtual accounts. This, in turn, enables corporates (through an SSC) to operate an in-house bank; passing internal entries between subsidiaries, and debiting and crediting accordingly. Under such a structure, the SSC would perform much of the work previously undertaken by the payment bank.

A door is opening to make life easier for all kinds of business with a lot of room for innovation.


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For corporates looking to introduce POBO and COBO, it should be noted that it is not necessary to integrate both payments and collection structures simultaneously. Indeed, many corporates choose to implement POBO first, as part of a rationalisation strategy, and then COBO at a later date. However deployed, these tools necessitate a significant shift in mindset – requiring backward integration, with bank accounts and liquidity structures replaced by internal accounts and bookings through one IT infrastructure or platform. But the rolling-out of such tools is undoubtedly easier under SEPA, as the rationalisation of accounts (and reduction in technological interfaces) simplifies the process.

SEPA’s harmonisation and standardisation of formats can also improve access to other solutions, such as the integration of financing on the confirmed payables and potentially the direct debit side of transactions. Where there is demand for financing – and corporates are taking a greater interest in financial supply chain management to both inject stability and improve working capital – such solutions can be implemented seamlessly thanks to the now-common use of XML, which removes the need to modify the format of the payment in order to incorporate the financing component. Previously, corporates would need to conduct legacy payments with one format and confirmed payments with another, but now, under SEPA, these can be combined into one payment format. In fact, a corporate can put pure SEPA payments, confirmed payments and non-euro payments (directed to Asia, for example) into the same payment “package” – simplifying the integration of financing by a significant degree.

For corporates that were already leveraging financing options in the legacy environment, SEPA’s harmonisation of formats will inject greater efficiency and flexibility. And for those organisations new to financing solutions, the increased efficiency and flexibility will serve as added incentive to utilise such programmes.

Indeed, SEPA’s XML-based formats, and the ease this brings to the implementation and use of financing, will undoubtedly encourage greater adoption among corporates that have identified the need for financing but which have yet to make the leap. While this is most likely to begin in markets (such as Spain, Italy and Portugal) where similar legacy products have already proved popular, the greater ease-of-use coupled with the growing awareness among corporates as to the benefits of such programmes compared to alternative working capital facilities (such as credit lines or short-term facilities) will lead to more widespread adoption of payment financing in other economies, to become a more pan-European product.

The key goal for corporates working on SEPA should be to standardise, harmonise, rationalise and automate.


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A whole treasury approach – going deeper and wider with SEPA

In addition to going “deeper” with regards to improving and advancing treasury processes, SEPA also allows treasury to go “wider” in terms of standardising practice on a global basis, beyond the SEPA zone. Certainly, SEPA should be viewed as more than a Europe-only initiative. Global and multi-national corporations with European operations should understand the opportunities that SEPA brings not only to the European subsidiaries but to the rest of the business. In this respect, SEPA’s impact is wider than just payment processing and cash management.

By using SEPA formats and standards, rationalisation and centralisation opportunities can be used to drive efficiencies on a broader corporate basis. Indeed, a standardised, global operating model can be used to generate strategic advantages in areas such as working capital management, supply chain management and (most importantly) full automation of end-to-end processes, enabling improved risk management.

For example, global acceptance of the XML format means it can be extended to SEPA-like initiatives all over the world, using the basic technical infrastructure already in place. For instance, the format could be used for data flows – seamlessly integrating the foreign exchange (FX) element in cross-border transactions beyond SEPA’s borders. Such uses will not only provide corporates globally with greater portability, but will also enable harmonised (and enriched) data, leading to enhanced transparency, operational efficiency, ease of compliance and – crucially – risk control.

With regard to financial supply chain management, corporates that, again, look beyond the SEPA zone and use the XML format globally – across the full reach of their operations – will be in a better position to extend solutions such as integrating financing into payments or collections throughout their organisations.

Finally, as SEPA’s harmonised environment sparks the development of more sophisticated treasury practices in the SEPA zone (such as the building of SSCs and Payment Factories) corporates will be more likely – and better positioned – to create similar structures in other regions, in turn setting themselves up for the use of more diverse and wider supply chain finance (SCF) schemes. These would be indirect impacts of SEPA, but the regulatory initiative has undoubtedly started the ball rolling and as momentum increases in the SEPA zone it will steadily and inexorably spread to other geographies, to the benefit of all.

By using SEPA formats and standards, rationalisation and centralisation opportunities can be used to drive efficiencies on a broader corporate basis.


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Of course, for any “deeper” or “wider” changes, a significant amount of initial research is required. To illustrate: in looking to reduce the number of bank accounts and invest in Payment and Collections Factories (POBO/COBO), corporate treasurers must not only investigate the needs and individual characteristics of their respective businesses but also undertake research into a number of external elements, including:

– The legal/regulatory environment: What are the legal implications of an SSC offering services, and conversely, what are the legal implications for the subsidiary purchasing those services from SSCs rather than buying them from a bank (a factor all the more important if the SSC is domiciled elsewhere)? Also, is any form of banking licence required?

– Tax: Obtaining clarification over payments to the SSC for services performed, withholding taxes and tax treaties, and VAT.

– Markets: Will market practices prove to be a hurdle or facilitator to successful centralisation?

These considerations are equally relevant to corporates with only a partial rather than fully-fledged SSC, and all such research should include advice sought from financial industry partners. Corporates should be clear on the legal implications of SSCs offering these services, and the implications for a subsidiary purchasing such services from SSCs (as opposed to banks). Furthermore, the tax implications and position for the SSC and participating group entities should also be clarified. For example, in some European countries, payments need to be made from one of the legal entity’s dedicated accounts.

The Next Step

Treasurers may be able to add value to the overall franchise by showing how new structures and harmonised payment methods could be implemented.


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While corporates could be forgiven for initially viewing SEPA as a compliance-related challenge (with all the costs and practical hurdles that involves), the scheme is a catalyst for attaining greater oversight of the treasury function. SEPA allows corporates to re-engineer treasury and financial processes: centralising, automating, improving and enhancing operational and commercial tasks. Over the medium term, this gives treasurers the potential to achieve year-on-year savings through operational improvements and efficiencies gained in areas such as finance, risk, technology and control. Whether treasury is a cost or profit centre, SEPA provides multiple opportunities for improvement projects, and creates the opportunity to strengthen the treasury link throughout the wider corporate organisation.

Indeed, amid continued market challenges – from broader regulatory change to ongoing risk concerns and market uncertainty – SEPA is a positive development. By offering corporates – through their treasury departments – a way of optimising treasury structures, bank accounts and bank relationships, thereby helping to create and facilitate the flow of international trade, SEPA can provide tremendous value.

Furthermore, SEPA also underlines the important role of treasury as a value-creator. In a number of organisations, the treasury function continues to evolve from a cost centre into just that. This means more than simply obtaining the cheapest rate for the loan or the highest rate for the deposit, important though they are. Rather, real value-creation involves thinking tactically around a whole series of treasury issues regarding processes and structures, including how banks can be leveraged as strategic partners.

Dealing effectively with SEPA entails more than simply ensuring successful compliance. The real differentiator between good and excellent treasury over the next few years will be found in those who materially move beyond SEPA; using the scheme as a launch pad for the realisation of far greater payments and treasury opportunities.

The role of the treasurer: from cost centre to value-creator

The real differentiator between good and excellent treasury will be found in those who materially move beyond SEPA.


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Finally, as we will no doubt learn to take SEPA’s benefits for granted, it is worth placing it in its broader context – as a project that is a direct result of the introduction of the euro. While corporates, banks and regulators have all undertaken an enormous amount of work over the past decade to make SEPA a reality, the payment scheme could not exist if it had not been for earlier harmonisation efforts and the political will and clear legislative framework set out by the European Commission and the European Parliament. This was an idea born in Brussels; a political mission to make Europe the most competitive payments area in the world. At Deutsche Bank, we feel they can make a strong claim to have succeeded.

Before the introduction of the euro, different currencies caused significant logistical and cost challenges for cross-border trading and working. The euro, despite the financial crisis, has greatly reduced this complexity. While other regions, such as South East Asia, struggle with similar pre-euro situations (i.e. multiple currencies operating across a region with low economic integration), the SEPA zone’s seamless and harmonised payments structure is producing notable benefits across an entire continent. Indeed, Europe stands on the brink of a new and exciting age of innovation in payments. Deutsche Bank intends to remain at the helm.

End-note: SEPA’s promise realised

SEPA is the catalyst for re-engineering all sorts of operational processes, from both a treasury and a wider financial perspective.

Copyright © November 2014 Deutsche Bank AG. All rights reserved.

These documents may not be reproduced, distributed or otherwise used without previous authorisation.

This presentation is for information purposes only and provides a general overview of the range of services offered by Global Transaction Banking of Deutsche Bank AG. The general information provided in this presentation is based on Global Transaction Banking Services as they may be offered to clients on the date this presentation was published in November 2014. This information is subject to change. This presentation and the general information on the services offered by Global Transaction Banking merely serve as an illustration; no contractual or non-contractual obligations on the part of Deutsche Bank AG or its subsidiaries, or liability claims against Deutsche Bank AG or its subsidiaries, can be derived from them.

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beyond sepa - treasury management€¦ · beyond sepa 10 a new tool box with many treasuries...

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