Corporate finance executives have been asking where's the benefit of the single European payment area, SEPA? Moti Porath of Fundtech argues that now is the time for those directors to reinvent their financial supply chain. Building on the electronic payment and invoicing services around SEPA standards will capitalise on existing investments and attract new business.
 

Single Euro Payments Area (SEPA) adoption promised to deliver on the grand visions of European harmonisation and a cashless society. But in reality it has been regulatory compliance that has driven adoption for most banks. Company directors and corporate finance departments have asked 'what's in it for us?' and been met with a wall of silence. It is no surprise that financial institutions have been reluctant to engage with the directive. But the vision of eSEPA, an electronic approach to SEPA, is beginning to attract interest.

Using SEPA rules as a driver, banks can create an electronic financial supply chain that is faster and more cost effective for customers, primarily those within corporate finance. Beyond compliance this is an opportunity to revolutionise the financial supply chain and create a 'win win'.

This progression is long overdue. In a recent report 'Is European Regulation the Stepmother of Invention?' TowerGroup research director Gareth Lodge notes that innovation in payments has been lethargic at best. "Many of the processes today are largely based on what was done yesterday - or rather yesteryear. SEPA gives the opportunity to change not just legacy solutions but legacy thinking. The regulation offers an opportunity for banks to reinvent their operations with an eye toward the future, not the past." The key element for corporates is the chance to reinvent the financial supply chain. Building services around SEPA standards will capitalise on existing investments and attract new business.

New supply chain finance depends on banks

The beginnings of this movement can already be seen. Leading European banks are becoming a part of the communications between commercial partners, including suppliers and buyers. These early movers are already recovering investments made in SEPA by charging for these services on a contract or transaction-by-transaction basis.

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By removing communication barriers between companies and their trading partners, banks can build the first stages of an eSEPA infrastructure, where services and payments are combined in an electronic environment. This begins with e-invoicing.

E-invoicing

E-invoicing is easy to validate, because the effect on the bottom line is immediate. Cutting paper from the invoicing process lowers costs for customers and promotes shared information between all firms in the financial supply chain.

It has been particularly successful in Nordic and Baltic regions, but currently there is no European standard. A European Commission (EC) Expert Group on e-invoicing is currently deliberating the issue and aims to set up a standardised European e-invoicing framework by the end of 2009. This will undoubtedly promote e-invoicing across Europe, but even after these standards are in place, the Payments Services Directive (PSD) must be changed to provide the legal foundation for the initiative and this could take several years.

This is time that banks can ill-afford to waste, when pan-European invoicing is possible now. For example, Royal Bank of Scotland (RBS) has partnered with Accountis, a division of Fundtech, to offer an e-invoicing system that
works with multiple standards. RBS is using the data it captures to enhance other services such as supply chain finance.

How it works

The solution works by turning invoices into PDFs, which are then sent to a central repository. An email is automatically sent to the buyer, notifying them that an invoice is awaiting their inspection. This automated data exchange between a bank and its customers allows information related to e-invoicing, customers and their suppliers to be logged in a global hub. In the future, multiple banks can use this hub to share more data. It is then easy for banks and corporate finance departments to use SEPA credit transfers to pay invoices. In time, the system could provide supplier finance, such as factoring or invoice discounting, against the invoices logged by its customers. This level of engagement - not only with customers, but their customers' suppliers and buyers too - is crucial if banks are to cut costs in the financial supply chain, which is what corporates are interested in.

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Europe-wide adoption of e-invoicing could generate savings to society of €238bn according to the EC ¹. But banks that partner with technology vendors which are already set up to handle multiple standards can start offering these services now and will be in a position to respond quickly as new standards emerge.

E-mandates

E-invoicing can generate revenue quickly, but the SEPA Direct Debits (SDD) framework is not far away and mandates are equally ripe for conversion to an electronic format. E-mandates are attractive to corporates as it allows them to offer priority and 'just-in-time' collection processes, which are already popular in the US. The European Payments Council (EPC) has put together a global
plan for the development of paperless mandates for use in SDD. This includes setting appropriate UNIFI (ISO 20022) XML message standards for e-mandate messages and inter-bank transport layer standards for issues such as guaranteed delivery, authentication and data integrity.

The EPC believes that as the use of electronic channels increases, it will drive demand for SDD by creditors and debtors², but in fact it will be the availability of e-mandates that will accelerate the use of SDD. Without e-mandates, SEPA's direct debit framework will never achieve the acceptance that the EPC hopes for. Yet, common standards for e-signatures and e-identity across Europe are fast approaching. Banks that pioneer the use of electronic communications have the opportunity to set benchmarks across Europe and see quick profits when SDD arrives.

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E-reconciliation

eSEPA will only work if companies bring all elements of the financial supply chain within an electronic infrastructure.

E-reconciliation is crucial if banks are to offer a complete service to customers. In an eSEPA environment, it is not only easier to use payments data for reconciliation, but additional information that is useful for reconciliation can be attached to other communications such as e-invoices. For example, once a payment has been successfully settled, this information is sent electronically to both the payee and internal accounts systems. Here data from e-invoices has been stored and the bill matched with the payees' records automatically. In time, as businesses embrace eSEPA, offerings such as e-reconciliation will become a business necessity, rather than a value-added service.

The final stage - a complete e-infrastructure

The opportunities in eSEPA for companies to lead the industry in financial supply chain messaging are clear. There is a chance for a few businesses to pave the way for a universal format for other documents, including approvals, purchase orders and adjustments. In an e-infrastructure, data can be incorporated into systems managing cash flow in and out of firms. This data can then be moved into systems for managing liquidity and risk, or used in management information. In this infrastructure, terms and conditions that have been signed with authenticated e-signatures, order acknowledgements, credit notes and many other communications can be exchanged electronically. With an infrastructure in place, common formats are all that are needed to make the end-to-end electronic financial supply chain a reality.

Seize the opportunity

SEPA may not be completed - with direct debits and the cards framework yet to be implemented - but an electronic framework is here now. Financial institutions that wait for the completion of SEPA implementation before considering eSEPA will miss out on early adopter advantages and fall behind the rest of the industry. More than this, they will miss the chance to become an integral part of their clients' financial supply chain. Transformation of the financial supply chain can begin now and banks that build electronic channels today and set up an e-infrastructure to handle multiple standards will drive SEPA back up the agenda for corporate customers.

E-invoicing is the first step towards proving the value of SEPA to corporates. Banks that use the legislation to drive the electronic financial supply chain will strengthen relationships with customers, and see improvements in acquisition, retention and profitability in the medium to long term. Banks that help corporate clients to move from paper-based to electronic processes will quickly gain new product revenue and be in a position to take these services to new clients. This is what banks have been looking for - to once again make profit from payments and justify the investment already made in SEPA. The answer to the CEO's question ‘what's in SEPA for us?' has suddenly become very clear.

¹ http://ec.europa.eu/enterprise/ict/policy/einvoicing/einvoicing_status_report_final.pdf [1]

² European Payments Council - e-Mandates related to the SEPA Core Direct Debit Scheme

Fundtech is a provider of software products and services to banks of all sizes around the world, developing transaction banking solutions that automate activities such as payments, cash management, settlement, liquidity management, and the financial supply chain.