Borderless Europe

The SEPA initiative is already live and is supposed to be as significant for European business as the introduction of the Euro in 2002. However, glasses are not clinking. Complaints, concerns and finger-pointing among regulators, banks and corporates have been the most common responses. There is a general consensus that collaboration and cooperation will help overcome these initial reactions but none of the constituents seem willing to make the first step. This is why corporates feel SEPA is a straight jacket.

SEPA will surface on the corporate executives' agendas once its tight connection with the financial supply chain becomes evident. Concerned at the loss of revenues in some parts of the payment business, banks have targeted the financial supply chain, in particular the transactions between corporates, on which they have paid only a minimal part until today. If a corporate can automate its back-office, it will be able to gain more accurate information about its treasury operations, thus reducing the risk of its processes. It should also be able to get better finance and credit deals because these will be based on actual positions instead of estimates from historical data. The information resident in the supply chain can be truly exploited if straight-through processing is present along the entire chain.

Yet, as of today, much of the corporate perception of straight-through processing is from a bank's front door to its back door and not through the complete process, which involves all constituents of the value chain. For instance, the need of a bank identifier code (BIC) to route payments is seen more as an internal bank's logistic issue, rather than a real added value to a corporate's operations.

The importance of getting SEPA right is reflected in Figure 1, where survey respondents believe supply chain management and finance should jointly cooperate to introduce and implement SEPA. This is even more evident once managers from the operational departments are made aware of the possible repercussions that SEPA will bring to their daily business processes. Treasury and finance were made responsible for conducting SEPA. This clearly confirms that ensuring compliance to SEPA guidelines is considered an administrative duty.

Effects on the supply chain

The survey reports an evident willingness to link supply chain and finance in the collaborative responsibility of managing SEPA within the organisation. It is currently acknowledged that many organisations have invested heavily in their physical supply chains and justifiably expect a fair return. A closer inspection of the procure-to-pay and order-to-cash process flows clearly proves that significant value can be derived from the financial portion of these chains.

In response, banks are digitising and automating the offer of financial services that support the electronic execution of key functions. Firstly, they support transaction management by encouraging the digital exchange of information, which pushes clients towards paperless transactions. This reduces the burden of processing documents manually. Secondly, they support working capital management by improving their clients' cash utilisation.

Banks do so by facilitating clients' operations with suppliers, especially those located in emerging countries. Pre and post-shipment working capital finance is the foundation of a bank's supply chain finance portfolio. Complete visibility of all transactions over a portal is, of course, the key technical enabler. The mitigation of risk in the daily operations of the physical supply chain also benefits from the improved visibility acquired through the portal platform.

Corporate executives are tasked with generating working capital in the most efficient ways, and endeavour to find solutions that optimise cashflow, cash cycle days and cost.

In order to improve effectiveness and efficiency, they are actively considering instruments that finance all aspects of the supply chain, such as payables, inventory and receivables.

The continuous research to identify solutions that optimise supply chain process by improving visibility, reducing processing errors and time delays demands a wealth of technical resources and implementation efforts, solid skills in ongoing treasury administration, and management of risk. The ability to implement methods, practices and solutions that ensure transparency and visibility between customers and suppliers becomes the watchword for those players that want to succeed in this environment. This area of supply chain finance is one that will develop and deploy the most beneficial instruments and products in response to corporate supply chain management expectations.

The electronic invoice

The notion of an electronic invoice, connected with payment flows, can be the element that triggers the interest of corporates for a single standard. It becomes extremely important that banks take into account the instances of integrating payment systems and commercial cycles.

SEPA can provide the basic standard protocols that will activate the automation of the supply chain. Banks that will be presenting an electronic invoice as the bridge between payments and the physical supply chain will work to integrate the invoice documents with payment systems through the SEPA standards. Carmen Ciciriello, CEO of SEPA International, a service and consulting firm, believes: "The harmonisation of payments is not key to a corporate. It becomes so once it's connected to the concept of the electronic invoice."

Spreading the word

SEPA is the enabling framework that facilitates payments, and its end-to-end straight-through processing promise can be accomplished once banks really understand how to link the monetary flows with the physical flows.

Strategy advisor Celent believes that in the next two years banks and financial players will be dedicated to building knowledge on topics such as the financial value chain, and its connections with payment standards. Special attention will be given to education, with a number of conferences and seminars on the subject.

However, banks and corporate users would be well advised to carefully scrutinise the content and agendas of such events. There are educational seminars that promote financial supply chain content in an improper manner, essentially using the financial supply chain as a marketing banner. As a result, supply chain executives have suspected that the financial supply chain is nothing more than a marketing hype bandwagon.

Is it worth paying for?

Some have asked whether corporates would pay banks for SEPA-related services. However, data points of Figure 2 make it evident that the idea of paying banks is not popular.

Most interestingly, those respondents who confirmed being available to consider some form of compensation were the ones who declared to know nothing of SEPA. They generally work in non-finance units. According to the analysis, these individuals, who work in operations, are used to dealing with third-party providers of outsourced services that impact business processes and perceive that SEPA could, somehow, impact significantly their business processes.

They are aware they know very little of it but are willing to get external support to sustain and improve any initiative that promises to bring financial benefits, especially if the initiative is connected to swifter ways of managing operations that often restrict the regular flow of the physical goods.