Charles Kohler, Head of Financial Institutions – Americas, Global Transaction Banking, Deutsche Bank
European integration has been accelerating since the introduction of the euro in 1999. Consolidation initially impacted wholesale payments to Europe and soon after expanded to include cross-border commercial payments. Now, the introduction of the Single Euro Payments Area (SEPA) is impacting mass payments.
SEPA, a European Commission and European Central Bank-backed initiative, is due to go live on January 1, 2008 and is aimed at creating standardized payment instructions for euro mass payments. The ultimate goal is to create one payment area to replace the myriad of existing national payment schemes – some 39 in 25 countries – that have proved a hindrance to commercial harmonization within the eurozone.
As Europe prepares for the introduction of SEPA, it is critical to understand how markets such as Latin America fit into the Single Euro Payments Area. SEPA is relevant to any Latin America-based financial institution or corporation that has payment activity within and to Europe. While the dollar still is Latin America’s principal trading currency, euro payments are growing significantly. Deutsche Bank’s euro clearing volume with Latin America-based institutions has grown at a rate of 30% over the past year.
What to Do
Banks and corporations with euro payments can take advantage of SEPA’s introduction by implementing more efficient payment mechanisms that can help companies reduce costs. By working through a consolidated SEPA payments system, Latin American companies can also gain access to new markets across Europe.
As companies continue to globalize in an effort to increase revenue and reduce costs, corporate cash managers are increasingly focusing on improving control over risks and creating efficient processes. The introduction of SEPA will offer numerous advantages for Latin American corporations with business in, or relationships with, European Union countries. Latin America-based corporations that move to a pan-European payments infrastructure will need to utilize a bank that allows companies to make cross-border payments from a single primary bank account within a single country for all activity across the eurozone. This can reduce costs associated with maintaining and reconciling multiple euro accounts. As a result, Latin America-based corporations have an opportunity to streamline and consolidate accounts payable and receivable processing.
Some Latin America-based multinationals do not operate local euro accounts in each European country due to cost considerations related to low volumes. Such companies, or those multinationals expanding into new territories in Europe, would receive immediate benefits from operating a single euro account structure because it would facilitate a broad reach across the entire euro marketplace. These companies could make cross-border payments and collections from a single account, under a standard set of rules and in a cost-effective manner, to any EU country.
With SEPA, payment clearing cycles will be standardized, removing some of the intricacies and uncertainties surrounding the receipt of funds from multiple countries and clearing systems. The existing complex euro liquidity structures utilizing pooling and sweeping can be simplified, allowing for improved intraday availability of euro liquidity and enhanced visibility of euro cash positioning for all accounts held in Europe.
Financial Institutions
Latin American banks operating from a single European location such as London or Frankfurt have traditionally found it difficult to compete for corporate cash management business with European banks that have a large branch network, due to lack of access to the various payment channels. Banks now have the ability to offer corporate clients access through one consolidated payment channel. However, first they need to invest in their own internal systems to allow the processing of SEPA transactions. This will require significant project teams and senior management attention at a time when the banks are facing increased competitive pressure.
With globalization and consolidation, Latin American banks are confronted with increased competition in their own country and also on a pan-European basis, which is putting greater pressure on the banks to reduce margins in both continents. Each bank – including the European entities of the Latin American banks – needs to review its individual business case and decide on whether to include upgrades for SEPA in its long-term payments strategy. Financial institutions can choose from a wide range of SEPA solutions to support their expansion. Solutions vary from employing a simple outsourced clearing system to complete insourcing, where banks can implement a partner’s technology platform for processing SEPA-related transactions.
There will be other implications of SEPA that Latin American financial institutions should watch for. Banks within Europe face margin compression and increased costs from SEPA. Unless those banks are able to offset the expected revenue decline and the increased investment requirements of SEPA by reducing operational costs or by increasing payment volumes, they will likely have to impose higher payment charges, interbank charges and repair fees.
Other Implications
One area of repair fees likely to become more prevalent under SEPA is for payments missing international bank account numbers (IBANs) and bank identifier codes (BICs) for high-value payments. Current EU regulation does not require the inclusion of IBANs and BICs for payments that originate outside the EU. A select number of banks, including Deutsche Bank, do not charge repair fees to correspondents making payments to beneficiaries in Europe if the payment instruction is missing an IBAN or a BIC. However, once SEPA is in place and as the market matures, companies sending payments from Latin America into the eurozone will be expected to use IBANs and BICs, or face higher fees.
Therefore it is recommended that remitting banks begin to ask their remitters to provide IBANs and BICs in their payment instructions right away. This best practice will benefit all over the long-term.
To benefit from SEPA, financial institutions and corporations should arrange strategic partnerships with banks in Europe and get advice on how to best migrate to the new operating environment. A bank with a broad and long-standing network in Europe and on-the-ground expertise in local payments can provide valuable insight and support to clients on how to best leverage SEPA, based on their existing cash management structure and strategic objectives. Corporations will be offered new payment instructions and SEPA-specific value-added services, preparing them for SEPA’s inception next year.
For example, it’s worth noting that SEPA has certain limitations. Geographically, it only covers the EU countries and will not cover all of Europe, nor will it cover all of the European currencies – just the euro.
Consolidation
It is also important to emphasize that creating efficiencies through consolidation of payment activity can also only be taken so far when a company uses a network of multiple banks to access credit and send payments in euro currencies. As Latin America’s capital markets expand, corporations and banks are increasingly turning to both local and global markets for liquidity. While credit support remains an important consideration when choosing a banking partner, service and execution capability are quickly becoming the primary relationship drivers.
The introduction of SEPA next year will reduce the complexity of clearing systems, accounting platforms, legal framework and the number of payment instruments available in the market. It will bring clarity and simplicity in charging mechanisms, and it is likely to accelerate the trend towards bank consolidation as it makes more sense for banks and corporations to access a complete range of payment channels through a single provider.
SEPA should also reduce the need to maintain multiple European bank accounts for payment purposes and could eventually lead to a single bank connection in Europe to handle both mass payments and high-value payments. Banks with sufficient scale to make investments in technology to accommodate SEPA and other regulatory changes will prosper in this highly competitive market by bringing efficiencies to their clients.