Sepa threatens to induce SME cash-flow squeeze
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Sepa threatens to induce SME cash-flow squeeze

European companies, and particularly small and medium-sized enterprises (SMEs), could yet suffer a cash-flow squeeze from direct debits under the Single Euro Payments Area (Sepa) regulation, despite the European Commission handing companies an extra six months to comply.

According to European Central Bank data, only 41% of companies were Sepa direct debit (DD) compliant as at the end of December 2013, in contrast to 74% for Sepa credit transfers, despite the fact Sepa has been six years in the making.

Alex Weaving, at BAML

“If a company is not able to collect Sepa DDs by August, they risk materially impacting their working capital,” says Alex Weaving, head of commercial sales, global transaction services, EMEA, at Bank of America Merrill Lynch (BAML). Indeed, Karin Flinspach, managing director for treasury and trade solutions at Citi, says while it’s good to have an extended transition period, there are still concerns about SMEs as they are not as advanced technologically as larger companies.

Even then, many large companies have underestimated the work required to become Sepa DD compliant, market participants say.

“There could be pressure on the daily cash flows of SMEs that are not yet Sepa compliant,” says Flinspach, particularly relating to DDs. “I hope SMEs will get ready over the next five months, but they have limited resources compared with multinationals and depend on their local banks for information.”

However, while a “blanket” six-month extension to Sepa by the EC has reduced the pressure for Sepa compliance, some countries are ahead of others, says Flinspach. “The EC could have been more specific in setting dates for those markets that required an extension,” she adds.

This “blanket” extension has led to EU member states adopting a staggered approach to implementing Sepa, according to Citi data.

Slovakia, Finland, and Germany (the latter B2B only, not including consumer/retail DD) have kept the February 1 deadline, while seven countries – comprising Germany, Austria, France, Portugal, Netherlands, Luxembourg and Italy – will be fully Sepa compliant at the end of the six-month extension on August 1.

Spain will be fully compliant by June 9, while Ireland and Belgium have set a deadline of March 31.

“The recent extension to the Sepa deadline is a sign of the significant work still to be done,” says Hamish Thomas, director in financial services at accountancy firm Ernst & Young. “Sepa is intended to drive a uniform method of payment across the eurozone, and customers will see this in some respects.

“However, the guidelines have been interpreted slightly differently across banks and geographies. This, along with the approaching deadline, is challenging for firms, and is more pronounced for Sepa direct debit than for Sepa credit transfer, because it is more complicated in its execution.”

Challenges of this kind could result in rejected payments, unpaid invoices and other difficulties, notes Thomas. “This may cause problems for all sizes of organization, but would be felt more acutely by smaller businesses, for which tight working capital management is key to successful operation,” he adds.

Alarmingly, there appears to be a high level of rejection and return rates under the new DD Sepa system compared with the old one. Under the old regime, there were different codes describing the reason for a non-DD payment.

“Under the legacy direct debit schemes, some countries would specify the reason for a direct debit rejection, but now may not specify a clear reason which causes a lot of confusion in the market,” says Flinspach.

If a company has historically collected payments through a legacy domestic DD scheme and would like to move the customer to Sepa core DDs, they don’t need to create a new mandate with that customer, says BAML’s Weaving.

“That said, there may be instances where the debtor bank’s interpretation of the scheme rules causes them to reject the collection attempt because they see no mandate in place,” he adds.

Given the squeeze on bank lending under Basel III, companies, particularly SMEs, are even more reliant on customer receipts compared with larger companies that have access to a more diverse funding pool, says Weaving – a situation that could be compounded by Sepa.

And a credit crunch among SMEs could be damaging to the eurozone’s fragile economic recovery.

Banks may experience teething problems when moving to Sepa direct debit collections for the first time,” says Weaving.

“Although institutions on both sides of the transaction [creditor and debtor bank] may be Sepa compliant, either party may interpret the scheme rules, and therefore their responsibilities, differently,” he says, highlighting that Sepa DD mandates are a good example of a possible tipping point for creditors.

However, despite issues surrounding implementation, the EU should not lose sight of the benefits of Sepa, accountancy firm PwC stated in a report last month. Top of the list is an estimated recurring potential yearly saving of €21.9 billion from price convergence and process efficiency, and a reduction of up to nine million bank accounts, resulting from more efficient corporate euro cash-management infrastructures.

That said, companies appear to be suffering somewhat from regulation fatigue with all the additional reporting and regulations since the financial crisis.

However, the way in which companies are structured appears to be shaping their view and enthusiasm for implementing Sepa.

“More centralized companies have led the way in taking advantage of the efficiencies that Sepa offers,” says Flinspach. “More decentralized companies have not yet taken steps to fully benefit from Sepa.”