10-28-2013, 05:59 PM
Using SEPA to Drive Centralised Receivables
Carin Ly, Citi - 11 Oct 2013
With account portability and standardised rules for euro automated clearing house (ACH) and direct debit collections for 33 countries, the single euro payments area (SEPA) can be a catalyst for re-engineering cash management structures and using strategically centralised receivables management to make efficiency gains, whether through a shared service centre (SSC) or a collection factory.
Until recently, sellers have predominantly had to hold in-country collections accounts to facilitate incoming payment from buyers. There have been broad technical, regulatory/tax and market reasons for this:
•Local restrictions on depositing certain collection instruments (cash, cheques and other paper instruments).
•A lack of centralised regional or global collection instrument types such as initiated cross border collections in payment markets (cross border direct debits did not exist in Western Europe until SEPA direct debits (SDDs)).
•The requirement for organisations to hold local residency status for tax purposes.
Common obstacle denominators include collection instruments that have been largely fragmented in terms of uptake and governed by different national rules and bodies in each market. Consequently a direct debit in country X is very likely to be different to one in country Y.
Moreover, sellers in many instances lack the desire or the negotiating power to dictate payment types or terms of trade unless they could participate in a seller-driven market. In addition, subsidiaries have naturally possessed more local specialist knowledge on the fragmented collection instruments used in each particular market and awareness of local buyers’ behaviours. Some collection instruments required local manual handling and manual reconciliation, hence the crucial need to keep local country teams as well.
For all these reasons, it is clear why centralising accounts receivable (AR) processes might seem like an insurmountable task for many organisations. It explains why the focus for treasurers and SSC managers has always been to tackle accounts payable (AP) and liquidity processes to quickly reap organisational efficiency gains and standardisation. As a result, days sales outstanding (DSO) continues to suffer and working capital remains not optimised.
Does SEPA Present the Opportunity to Turn a Corner?
However, as the payment landscape is changing together with buyers’ behaviours, we are seeing an opportunity for organisations to transform once again. With banks switching customers to the new SEPA payments instruments since the beginning of 2008, many of the previous pre-requisites required to centralise AR are now being partially or fully enabled and businesses can avail themselves of an opportunity to review their AR processes in conjunction with SEPA. Given that the adoption of SEPA before 1 February 2014 is an official regulatory requirement, organisations should ensure that they choose a migration strategy that will be sufficiently flexible and scalable to meet the time requirements and set the correct building blocks to centralised receivables processes in order to unlock maximum SEPA benefits in the very near future.
![[Image: Organisational_Transformational_Treasury.gif]](http://lucky.myftp.org:8181/pics/news/Organisational_Transformational_Treasury.gif)
Why does SEPA Offer the Right Framework for AR centralisation?
According to the World Payments Report 2013 from Capgemini and RBS, the most recent full- year figures (2011) show that non-cash transactions grew by 8.8% globally, continuing the growth impetus from the previous year, which stood at 7.1%. This points to a strong trend, driven by buyer convenience, to take up electronic payment (e-payment) methods, which is making it easier for sellers to collect more efficiently and avoid having to handle local paper instruments where possible. This is a conducive to achieving centralised receivables.
On the European regulatory front, the Payment Services Directive (PSD) has set the common legal ground needed to harmonise and simplify the cross regional European e-payment space in order to align differences between national payment schemes transacting what is, in essence, the same euro currency. The PSD enabled the commercial and technical framework to be developed for SEPA, which presents a real opportunity for organisations to utilise standardised regional collection instruments for a centralised receivables management strategy.
Technically, SEPA credit transfers (SCTs) and SDDs are standardised instruments operating under the same technical payment rules across 33 SEPA countries. Cross border-initiated euro direct debits are now possible with SDDs and the market has seen a number of organisations already choose to implement this new instrument. For all SEPA countries there are consistent rulebooks and standards regarding, for example, execution timelines; treatment of charges; mandate management flows; reject and refund codes; and refund rights, and so on. In addition, central bank reporting is due to be phased out by 1 February 2016 in the SEPA zone.
In summary, SEPA allows organisations to form one regional AR team covering Western Europe or more, providing a great foundation for a scalable end–to-end AR model manageable from a central location through a consistent technology platform that manages tasks such as collection initiation, mandate management for direct debits and cash application reconciliation matching tasks. Needless to say, this is an efficiency driver for multinational corporations (MNCswith footprint in many countries.
How can SEPA be Used as a Centralisation Catalyst?
To achieve true receivables centralisation, it is recommended that organisations open a dialogue with their bank partners on first taking steps to adopt a hybrid model for centralisation that takes account of local and other requirements. This would mean moving accounts to a strategic, centralised location, exploiting SEPA’s account portability feature, and keeping in-country accounts for remaining markets that still have local restrictions such as a need to facilitate paper instruments. This flexible modular approach would enable the centralisation of the remaining AR accounts at some later stage.
To optimise even further, organisations can then take the next step to evaluate how they can adopt a receivables-on-behalf-of (ROBO) structure, whereby collecting entities are different from invoicing entities. Again, SEPA is technically different from legacy collection instruments and can support additional fields in the instructions files, such as the ultimate creditor field, that can be used for a ROBO structure. A key benefit of a ROBO structure is that it allows a collection factory to own all the operating bank accounts needed for the wider organisational group and hence eliminate surplus accounts.
For maximum benefits from account centralisation or rationalisation, organisations will also need to ensure that they have completed an extensive impact analysis with relevant tax, legal and IT partners, taking into account the following centralisation considerations:
![[Image: CitiSEPAtable.png]](http://lucky.myftp.org:8181/pics/news/CitiSEPAtable.png)
How can SEPA Data Points be used to Optimise Auto Cash Application Rates?
SEPA offers a rich range of standardised reconciliation match data that can be used to automate centralised cash application in euro markets with the right system adjustments on the seller side to capture and handle the new information. As opposed to legacy instruments such as the bank identifier code (BIC) and international bank account number (IBAN), for example, which are already standard requirements for all SEPA transactions. Citi has issued more reconciliation information as part of its countdown campaign.
What is more, SEPA transaction amounts must be credited in full, with any charges being deducted separately from the principal amount. Deductions are allowed from the principal amount if agreed between the beneficiary and the beneficiary bank.
There is one final thing to note. SEPA does not resolve more complex buyer behaviour situations, such as facilitating one payment for multiple invoices or where exceptions management is common. For these scenarios, organisations may need to continue to look into specialised cash application tools to aid their overall cash application.
Conclusions on Using SEPA to Drive Centralised Receivables
SEPA provides a fruitful growth environment, in terms of technical framework, regulatory foundation and now market critical mass, for organisations looking to centralise their historically troublesome AR processes. In practical terms, organisations can use SEPA to form a regional AR centre of excellence team, rationalise their account structures and optimise automated cash application rates. Centralised receivables is, and should be, an important item on an organisation‘s working capital optimisation agenda.
As the market is moving to meet the 1 February 2014 SEPA deadline, organisations should look to ensure that they choose a migration strategy that has been considered in tandem with a centralised receivables strategy. The priority should be to make the deadline in time, but to also allow flexibility to reap benefits of re-engineered AR process at a later stage.
The recommendation for organisations is firstly to evaluate adopting a hybrid centralisation model, to break down the task at hand, and eventually seek to move the remaining processes into a fully centralised AR model and, if suitable, a ROBO structure. Further details on SEPA can be accessed here.
Carin Ly, Citi - 11 Oct 2013
With account portability and standardised rules for euro automated clearing house (ACH) and direct debit collections for 33 countries, the single euro payments area (SEPA) can be a catalyst for re-engineering cash management structures and using strategically centralised receivables management to make efficiency gains, whether through a shared service centre (SSC) or a collection factory.
Until recently, sellers have predominantly had to hold in-country collections accounts to facilitate incoming payment from buyers. There have been broad technical, regulatory/tax and market reasons for this:
•Local restrictions on depositing certain collection instruments (cash, cheques and other paper instruments).
•A lack of centralised regional or global collection instrument types such as initiated cross border collections in payment markets (cross border direct debits did not exist in Western Europe until SEPA direct debits (SDDs)).
•The requirement for organisations to hold local residency status for tax purposes.
Common obstacle denominators include collection instruments that have been largely fragmented in terms of uptake and governed by different national rules and bodies in each market. Consequently a direct debit in country X is very likely to be different to one in country Y.
Moreover, sellers in many instances lack the desire or the negotiating power to dictate payment types or terms of trade unless they could participate in a seller-driven market. In addition, subsidiaries have naturally possessed more local specialist knowledge on the fragmented collection instruments used in each particular market and awareness of local buyers’ behaviours. Some collection instruments required local manual handling and manual reconciliation, hence the crucial need to keep local country teams as well.
For all these reasons, it is clear why centralising accounts receivable (AR) processes might seem like an insurmountable task for many organisations. It explains why the focus for treasurers and SSC managers has always been to tackle accounts payable (AP) and liquidity processes to quickly reap organisational efficiency gains and standardisation. As a result, days sales outstanding (DSO) continues to suffer and working capital remains not optimised.
Does SEPA Present the Opportunity to Turn a Corner?
However, as the payment landscape is changing together with buyers’ behaviours, we are seeing an opportunity for organisations to transform once again. With banks switching customers to the new SEPA payments instruments since the beginning of 2008, many of the previous pre-requisites required to centralise AR are now being partially or fully enabled and businesses can avail themselves of an opportunity to review their AR processes in conjunction with SEPA. Given that the adoption of SEPA before 1 February 2014 is an official regulatory requirement, organisations should ensure that they choose a migration strategy that will be sufficiently flexible and scalable to meet the time requirements and set the correct building blocks to centralised receivables processes in order to unlock maximum SEPA benefits in the very near future.
Why does SEPA Offer the Right Framework for AR centralisation?
According to the World Payments Report 2013 from Capgemini and RBS, the most recent full- year figures (2011) show that non-cash transactions grew by 8.8% globally, continuing the growth impetus from the previous year, which stood at 7.1%. This points to a strong trend, driven by buyer convenience, to take up electronic payment (e-payment) methods, which is making it easier for sellers to collect more efficiently and avoid having to handle local paper instruments where possible. This is a conducive to achieving centralised receivables.
On the European regulatory front, the Payment Services Directive (PSD) has set the common legal ground needed to harmonise and simplify the cross regional European e-payment space in order to align differences between national payment schemes transacting what is, in essence, the same euro currency. The PSD enabled the commercial and technical framework to be developed for SEPA, which presents a real opportunity for organisations to utilise standardised regional collection instruments for a centralised receivables management strategy.
Technically, SEPA credit transfers (SCTs) and SDDs are standardised instruments operating under the same technical payment rules across 33 SEPA countries. Cross border-initiated euro direct debits are now possible with SDDs and the market has seen a number of organisations already choose to implement this new instrument. For all SEPA countries there are consistent rulebooks and standards regarding, for example, execution timelines; treatment of charges; mandate management flows; reject and refund codes; and refund rights, and so on. In addition, central bank reporting is due to be phased out by 1 February 2016 in the SEPA zone.
In summary, SEPA allows organisations to form one regional AR team covering Western Europe or more, providing a great foundation for a scalable end–to-end AR model manageable from a central location through a consistent technology platform that manages tasks such as collection initiation, mandate management for direct debits and cash application reconciliation matching tasks. Needless to say, this is an efficiency driver for multinational corporations (MNCswith footprint in many countries.
How can SEPA be Used as a Centralisation Catalyst?
To achieve true receivables centralisation, it is recommended that organisations open a dialogue with their bank partners on first taking steps to adopt a hybrid model for centralisation that takes account of local and other requirements. This would mean moving accounts to a strategic, centralised location, exploiting SEPA’s account portability feature, and keeping in-country accounts for remaining markets that still have local restrictions such as a need to facilitate paper instruments. This flexible modular approach would enable the centralisation of the remaining AR accounts at some later stage.
To optimise even further, organisations can then take the next step to evaluate how they can adopt a receivables-on-behalf-of (ROBO) structure, whereby collecting entities are different from invoicing entities. Again, SEPA is technically different from legacy collection instruments and can support additional fields in the instructions files, such as the ultimate creditor field, that can be used for a ROBO structure. A key benefit of a ROBO structure is that it allows a collection factory to own all the operating bank accounts needed for the wider organisational group and hence eliminate surplus accounts.
For maximum benefits from account centralisation or rationalisation, organisations will also need to ensure that they have completed an extensive impact analysis with relevant tax, legal and IT partners, taking into account the following centralisation considerations:
How can SEPA Data Points be used to Optimise Auto Cash Application Rates?
SEPA offers a rich range of standardised reconciliation match data that can be used to automate centralised cash application in euro markets with the right system adjustments on the seller side to capture and handle the new information. As opposed to legacy instruments such as the bank identifier code (BIC) and international bank account number (IBAN), for example, which are already standard requirements for all SEPA transactions. Citi has issued more reconciliation information as part of its countdown campaign.
What is more, SEPA transaction amounts must be credited in full, with any charges being deducted separately from the principal amount. Deductions are allowed from the principal amount if agreed between the beneficiary and the beneficiary bank.
There is one final thing to note. SEPA does not resolve more complex buyer behaviour situations, such as facilitating one payment for multiple invoices or where exceptions management is common. For these scenarios, organisations may need to continue to look into specialised cash application tools to aid their overall cash application.
Conclusions on Using SEPA to Drive Centralised Receivables
SEPA provides a fruitful growth environment, in terms of technical framework, regulatory foundation and now market critical mass, for organisations looking to centralise their historically troublesome AR processes. In practical terms, organisations can use SEPA to form a regional AR centre of excellence team, rationalise their account structures and optimise automated cash application rates. Centralised receivables is, and should be, an important item on an organisation‘s working capital optimisation agenda.
As the market is moving to meet the 1 February 2014 SEPA deadline, organisations should look to ensure that they choose a migration strategy that has been considered in tandem with a centralised receivables strategy. The priority should be to make the deadline in time, but to also allow flexibility to reap benefits of re-engineered AR process at a later stage.
The recommendation for organisations is firstly to evaluate adopting a hybrid centralisation model, to break down the task at hand, and eventually seek to move the remaining processes into a fully centralised AR model and, if suitable, a ROBO structure. Further details on SEPA can be accessed here.