SEPA's Tech Basics

Four primary SEPA requirements are driving the software changes that companies need to undertake in order to process euro-denominated debits and credits starting next February. First, SEPA compliance requires a company to supply an International Bank Account Number (IBAN) for every SEPA credit transfer and SEPA direct debit. Until 2016, companies will also have to supply a SWIFT Bank Identifier Code (BIC) for every cross-border SCT and SDD.

Second, all euro-denominated payments that are not urgent will have to be submitted using the ISO 20022 XML message format.

Third, companies will need to hold a valid mandate for all consumers and organizations that will be paying in euros using direct debit. A mandate is a form completed by the customer that authorizes the creditor to collect payments via direct debit and authorizes the debtor bank to make those payments. To achieve SEPA compliance, a business will need to store this information in a structured electronic format. That's because companies will need to include some of the mandate information in their ISO 20022 collection messages in order to receive payments. Holding the data electronically expedites this process and reduces the risk of error. But it also requires a mandate-management system that stores customer mandate information.

Finally, SEPA dictates rules and technical standards that companies need to follow when submitting collection messages for direct debits to their banks. The schemes vary depending on the type of receivable—e.g., whether it's the first in a series of direct debits, a one-off payment, etc.—and their rules vary depending on the scheme type (consumer vs. business-to-business). Companies that collect euro-denominated direct debits have to make sure their A/R processes comply with the appropriate SEPA schemes.

Mastering the Master Data

The SEPA credit transfer process is fairly straightforward. Nevertheless, SEPA may cause some complications for companies that make euro-denominated credit transfer payments. One issue is SEPA's use of BICs and IBANs. Companies preparing for SEPA need to locate their master data, the bank data for all the vendors and suppliers they need to pay. Then they need to determine whether the system holding this data (typically the ERP system) has the ability to store both BICs and IBANs. Most ERP systems that are not up to date cannot store BICs and IBANs; they are able to store only domestic bank data. However, newer ERP systems should have been amended to support BIC and IBAN data. Custom-built applications that initiate payments will probably require custom work. Businesses with a complex back-office infrastructure may discover that their master data is stored in several locations, which can cause difficulties because several systems might need to be changed to support BIC and IBAN numbers.

Companies should also determine whether the system that holds their payments master data is capable of exporting BIC/IBAN data with other payment information to construct a valid SEPA credit transfer. Systems that currently initiate payments using domestic formats may not be able to use BIC and IBAN information. It's one thing to change the system to be able to store this information, but another to ensure that it can export the data when doing a payment run. Obviously, one potential solution is to amend the ERP system to export SEPA-compliant ISO pain.001 credit transfer messages directly.

If a company determines that its A/P systems can accommodate banks' BIC and IBAN identifiers, it then needs to confirm that the systems already hold this data for its current beneficiaries. Companies that do not already have SEPA-compliant data may want to hire a service provider in a one-off engagement to enrich their master data with BICs and IBANs. There are also options for checking bank identifier data for new vendors/suppliers on an ongoing basis using software that is either installed locally or available in the cloud.

Finding the Right Format

Some companies have already transitioned to ISO 20022 format for credit transfer messaging in cross-border payments because the format usually allows for large savings on bank fees. However, because domestic payments have not typically offered the same savings incentives, many businesses have held off on reformatting their domestic payments messaging. Companies that have not yet made this transition have three main options for moving to the pain.001 format.

First, they can make changes to all their affected back-office software systems so that each system produces payments in the ISO 20022 XML format, complete with SEPA-compliant bank data. This is likely to be the most expensive option for companies with a heterogeneous back-office environment.

Second, the companies can allow the disparate back-office systems running in each of their divisions to continue to output the domestic payment formats they're used to producing, then they can run every payment through a corporate payment factory or transaction banking solution before submitting it to the appropriate bank. In this type of environment, a software solution converts the instructions produced by a legacy application into ISO 20022 XML and enriches the payments with additional data where necessary for SEPA compliance. This approach offers an efficient path to SEPA adoption because it focuses the changes in one location. In essence, a payment factory can help insulate the company's different back offices from some of the changes that SEPA requires.

Finally, companies may want to try asking their cash-management banks to convert their domestic payments from their legacy formats to ISO 20022 XML. This approach essentially outsources the problem to the banks. Although it might be a viable short-term option, banks are allowed to provide this type of service only for a limited time. Provisions in the EU's SEPA legislation require these services to be decommissioned by 2016. Not only that, but some banks are not currently planning to provide ISO 20022 conversion services. Unless all of a company's banks will provide such a solution, this route may be complex to manage. Obviously, organizations considering turning ISO 20022 conversion over to their banks should ask how much this service will cost before they make a decision.

What to Do About the Mandates

SEPA direct debits are more complex than SEPA credit transfers. In addition to the BIC/IBAN and XML-format issues, which affect both credit transfers and direct debits, SDD rules include further requirements that impact a company's procedures from front office to back office. Thus, SEPA direct debits present business process issues as well as data management challenges. Companies that approach SEPA compliance with this in mind will likely do a better job of examining their processes for collecting payments via direct debits and identifying the touch points within the organization. This improves their chances of setting up an optimal process and avoiding problems in the future.

For many companies, the biggest challenge created by SDDs is the requirement that the business begin storing a mandate for each customer from whom it wishes to collect money. Each Eurozone country has a slightly different approach to collecting the mandate information. For example, Belgium has established a national mandate database containing all existing mandates, and has made the database available for use by creditors.

The first step in achieving compliance is to determine whether the company already maintains SEPA-compliant mandates for its customers. If it does store some mandates, it needs to evaluate whether they are currently in paper or electronic format, and whether it has mandates for all customers or only for a subset. If a company doesn't currently store customer mandates, it should examine the processes and software solutions it has in place, in order to establish whether they can support mandates. It also needs to determine whether its systems are capable of automatically adding this mandate information to collection messages. If the answer to any of these questions is no, the company needs to build a business case, budget, and plan a project to incorporate SEPA mandates into its processes.

Companies that currently store paper mandates but have systems capable of storing them in electronic format can scan the paper version, then use an optical character recognition (OCR) solution or service to translate it into the appropriate electronic format. However, the information on a paper mandate may not include the BIC or IBAN data for the customer's bank, which would then need to be added. Some software solutions enable a company's customers to fill out and validate their mandate information online. Other solutions enable companies to import this data directly from customers' banks; availability of this type of service varies by country. If a company receives customer-mandate information through this type of service, it will need to import the data into a mandate database.

Once a company has made it past the initial deadline for SEPA compliance, it will need a solution for the ongoing addition of new mandates as it acquires new customers. It can implement a software solution for storing new mandates electronically, but it may instead pursue a traditional, paper-based approach, from which it can either enter mandate data manually into the database or use scanning and OCR services on an ongoing basis.

Payment Schemes and R Messages

The last major change to direct debits introduced by SEPA is the deployment of new rules for payment schemes, particularly rules around handling "R messages," which cover the exception processes for direct debit messages across rejections and refunds. Companies operating in the Eurozone have two main options for supporting the new payment scheme rules. One option is to utilize a software solution focused on SEPA direct debit mandates and transaction processing. Such an application can handle all the R messages related to the company's SDD transactions, integrating with the back office to provide required general ledger updates related to payment rejections, refund requests, etc. A company could implement this type of software centrally, routing all its direct debit collections through the centralized solution. It could also enable its various divisions to separately use a cloud-based solution.

The other option is to make changes to every affected back-office system so that all the company's systems can support R messages and the associated scheme rules. This may be the more expensive option, but for companies which drive large volumes of collection messages from billing systems that are integral to their business (e.g., telecommunications companies), it may be the more desirable solution.

This is not a process companies can outsource to their banks. However, large cash management banks are providing solutions to help their corporate customers streamline management of direct debit mandates and transaction processing. These are primarily single-bank solutions, so while this option may be suitable for smaller organizations that can concentrate all their euro-denominated collections with one bank, it may not meet the requirements of large corporations that need to use multiple banks in the Eurozone.

Consider a Wider Perspective on Payments Re-engineering

At its most basic level, meeting SEPA requirements forces an organization to examine its internal processes and procedures for receiving payments via direct debits and making payments via credit transfers. Smart businesses are using this examination as a catalyst that spurs a broad-scale reconsideration of how they manage receivables and payments.

Some companies are choosing to centralize euro-denominated credit transfers or direct debits, or both, as part of their SEPA initiative. Doing so can provide several benefits beyond SEPA compliance. It can help the organization rationalize its banking relationships and reduce the number of strategic transaction-processing partners it uses for euro payments and/or debits. Not only might this simplify cash management, but it also has the potential to reduce spending on bank fees, as economies of scale apply in the negotiation process with banking partners.

Centralization of payments and receivables also streamlines management of euro currency balances, enabling a multinational corporation to move money more easily and cheaply to wherever the company can put it to use most efficiently. Along the same lines, generating all of a company's euro-denominated payments through a centralized group simplifies the adoption of a "payments on behalf of" (POBO) structure, through which the company makes all payments from a very small number of centrally managed accounts. And a centralized organization allows the business to decommission its disparate country-specific systems, focusing resources on centralized solutions for euro-denominated payments and/or receivables processing. This can substantially reduce an organization's technology infrastructure costs.

In fact, a company might consider taking its A/R and A/P centralization even further. The same benefits that it can achieve in the Eurozone may be available if the organization rationalizes and centralizes all payments on a global scale. Because of the move to one currency and one set of scheme rules, SEPA naturally guides an organization toward a centralized approach to cash management. What may be less obvious to corporations is that they can harvest similar efficiency gains by centralizing payments processes across all payment types, banks, and countries in which they operate. The move to a global reengineering project can begin in conjunction with a SEPA compliance project, even though it will likely involve activities that may not be seen as part of SEPA. SEPA requirements build a great launch pad for multinational businesses that want to improve process efficiency throughout their organization.

Andrew Owens is SVP of Enterprise Payments in SunGard's corporate liquidity business, where he is responsible for the Corporate Payment Factory business, supplying comprehensive software and services solutions to large corporations. Owens has substantial business and technology experience relating to both payments and SWIFT across the corporate and bank sectors.