The post-financial crisis regulatory assault on the banking industry has had many unintended consequences. Corporates have been far from immune, not least when it comes to the impact of new rules that affect transaction services.
Regulation is the one issue that keeps treasurers awake at night, according to the Association of Corporate Treasurers (ACT). Its latest survey produced dramatically different results from the previous year, when 41% of respondents said they thought the level of regulation was about right. Now respondents are most concerned about the amount of time they are spending on meeting regulations, with very little apparent benefit to their businesses.
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It is not difficult to identify what is creating the problems. This year has seen the arrival of the Single Euro Payments Area (Sepa) and the European Market Infrastructure Regulation (Emir). Sepa requires that all transactions now take place in standardized XML messaging format, presenting a big challenge when this has to be implemented across every single bank and corporate making payments in euros across the European Union.
Emir requires every derivative contract to be entered into a trade repository, that risk-management standards are implemented for all bilateral over-the-counter derivatives, and that all OTC derivatives subject to mandatory clearing obligations are cleared through a central clearing counterparty.
The first wave of Emir regulation was imposed in 2013; the rest of the measures were implemented from the spring of 2014 – coinciding directly with the arrival of Sepa.
These regulations have brought one upside: the opportunity for the savvier corporate treasury teams to shake up operations and simplify processes.
Corporate treasurers will often find they are juggling numerous bank accounts just to keep day-to-day operations moving. The legacy of these accounts grew in response to a conflicting and changing banking environment.
The financial crisis led many corporates to expand their banking networks to avoid placing all their focus and finances with just one institution. The various requirements across different nations sometimes demanded multiple accounts in some countries, which, depending on the size of the company, could mean dozens of banks and accounts for treasurers to deal with.
The arrival of Sepa has imposed a single payments system across all European countries, removing legacy formats left in place from before the implementation of the single currency.
Bruno Demonie, deputy director of finance at Cigna Global Health Benefits, one of the world’s largest health insurance companies, explains that his company previously had to hold several accounts to meet the requirements of its European operations, with one central pooling account. Through the Sepa payments rules, the company has been able to consolidate to a single account held in its native Belgium. For him, it has been a value-adding regulation.
There is a big saving to be made on the reduction of transaction fees between countries. Rather than paying the cost imposed from each country, it is now based on the amount from the country of origin, which adds up to a big sum when multiplied across the whole business. As Demonie notes, fees in Belgium are already relatively low.
The company made the decision to consolidate to just one account with ABN Amro. “It becomes a significant number when you think of all the transactions completed in France, Italy and Spain where transactions are priced relatively high,” says Demonie. “If you could switch to an ordering account in Belgium, that could bring a huge saving.”
|Managing a bank account from a logistics perspective takes |
a lot of time and there are a lot of things to consider
Estimates from the European Commission suggest the implementation of Sepa will produce savings of €123 billion across the region over six years through the reduction of bank charges and improved transfer times of payments.
Michelle Price, policy and technical director at the ACT, says reducing the number of accounts brings about savings beyond the cost of each individual transaction.
“The banks charge not just for the transactions, there are also other associated costs like the bank’s fees for holding accounts,” says Price.
“Managing a bank account from a logistics perspective takes a lot of time and there are a lot of things to consider,” says Price. “Are the signatures up to date? Is the account still in use? These accounts all have to be reviewed, and there is a multiplier effect if this is spread across a number of countries.”
All the cash saved suddenly becomes an added boost to cash flows.
Demonie says that while his company decided to pay out the initial additional funds as a dividend to shareholders, it can be as easily pumped back into the business and reinvested in other ways.
The implementation of Sepa is also enabling companies to develop greater autonomy from their banks.
“A full review of each account would need to be done before the decision was made to close it. It would not be a difficult process, but it would take time,” says Price. “Corporate treasurers are inherently short of resource, and this would need to be done on top of day-to-day functions. If a company is only operating with two or three accounts, they need to work out if it is worth their effort to close them down.”
| Customers who remained stubborn and continued to pay through the old formats had their accounts shut down|
Demonie says the next step for his company is to look at Swift messaging as a further move away from depending on banks to pay other corporate entities. Euromoney’s cash management survey reveals how corporates are openly calling for the use of a common electronic payment system.
Sepa helps bring this forward with the standardized XML ISO 20022 format for messaging standards.
Although its compulsory use is only in Europe, other regions are monitoring the success of the roll-out to decide if it could be replicable.
Creating a standard globally would not be an easy task, but it seems to be something that global corporates are calling for.
The implementation of Sepa regulations might have its strong points, but moving over to the format was not plain sailing.
The start date was pushed back from February 1 to August 1 2014 thanks to the slow pace of corporate migration.
Banks attempted to push their clients along with additional advice, such as RBS’s Sepa Accelerator proposition, which moved payments to the standard ISO 20022 format as a short-term solution ahead of the original deadline.
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Demonie says that not all his corporate counterparties were up to speed as quickly as his own firm, and some pushing was needed to get them up to the standard of making payments correctly. But the two-year period in the run up to the implementation gave plenty of time to iron out these problems, he says.
“Customers who remained stubborn and continued to pay through the old formats had their accounts shut down and the funds were returned to them when they tried to pay,” Demonie explains. “It was giving them the reminder to change the hard way, but it got them to where we needed them to be.”
Perhaps one of the most surprising results to come out of the cash management survey was the finding that 2,297 (or 40%) of corporate respondents did not know if they were Sepa compliant. The survey was carried out just ahead of the extended deadline of August 1. A further 1,428 (or 25%) stated explicitly that they were not compliant. Of course, those corporates that do not make transactions in euros do not need to comply. Euros currently make up around 30% of all transaction traffic through Swift.
Although Sepa has had the biggest recent impact, there are still other regulations coming into play that customers need to be aware of. Equally, the banks themselves may also find themselves under increased scrutiny from their clients.
Inasmuch as the banks are eagerly carrying out due diligence on their clients through the implementation of know-your-customer (KYC) regulations, corporates are themselves turning the concept on its head with the notion of know-your-bank (KYB).
KYC was established so that banks could ensure they were working with customers who did not fall foul of sanctions or were a front for terrorist or money-laundering activities; now corporates want to be equally sure that through KYB they see a high standard of banking.
While it is an unofficial regulation, it could be very important for banks to keep in mind. KYB is placing them under scrutiny: can corporate treasurers trust the banks to provide them with even the most basic of services to ensure they get the best possible value out of their working capital, for example? Does the bank really understand the business and the regions in which it operates?
If a corporate does not feel like it is getting the service it deserves, the banks might find those services are no longer needed, and especially in the post-Sepa climate when dropping some banking partnerships can bring financial benefits.