It’s been six years since 13 European
countries agreed to discontinue use of
national currencies and adopt the euro.
Residents and visitors now only carry one
kind of money when traveling within the
euro zone and, although this has eliminated the need for currency exchange, processing cross-border payments is still complicated. The European Union (EU) plans
to change that by establishing the Single
Euro Payment Area (SEPA) to create a
common euro payment process and settlement across European borders. Although
this initiative is aimed at reducing the high
cost associated with transferring electronic, low value, non-urgent cross-border payments within Europe, it will also affect
non-European banks in some capacity.
Paul Trozzo, group product manager in
PNC’s treasury management group, talked
to Smart Business about SEPA’s potential
impact on U.S. companies and what steps
you can take to minimize its impact on
your business.
How will SEPA impact U.S. companies and
when does it go into effect?
If your company works with suppliers
and trading partners in Europe, you may
have already received invoices with
requests that payments be directed to a
European Bank and routed using the company’s IBAN, or International Bank
Account Number. This unique identifier,
created under the auspices of SEPA and
issued only in the European Union, will
now be required as the primary euro
account number for beneficiaries in
Europe.
Any cross-border payments originating
in the U.S. should contain a Bank
Identifier Code (BIC) and IBAN combination in order to be SEPA compliant if the
payment will terminate at an account
domiciled within Europe. One of SEPA’s
primary objectives is to make the
BIC/IBAN combination as efficient in processing electronic payments in Europe as
the MICR usage has made automating
check processing in the United States.
SEPA is essentially effective now and
has been implemented in stages. The target time frame for all of the SEPA-based payment instruments to be fully operational and utilized exclusively is 2010. The
degree of impact will depend upon the
type of business transaction and customer
account structure supported. It’s best to
work with your financial adviser to learn
the new SEPA standards, processing rules
and dispute arbitration protocols now
to help to ensure compliance in future
transactions.
What are the consequences of not adhering
to SEPA regulations?
Failure to include certain information
required for SEPA compliance in a payment instruction may result in a delay in
payment receipt or complete rejection of
the payment to an intended beneficiary. If
you are the sender, this could potentially
increase your costs and require time for
originating banks to resolve exceptions.
Accordingly, it is recommended to at least
include the BIC and the IBAN to try and
avoid this outcome.
While SEPA is primarily a euro zone initiative intended to lower the cost of cross
border payments between countries in the European Union, it is also likely that payments originating outside of this region
may be held to the same standard. Without
this criterion, banks in the European Union
would have to update their systems to recognize cross-border payments within the
euro zone differently than payments from
other regions of the world.
What are some actions U.S. companies can
take now?
Identify and follow the payment instructions contained on any invoices you
receive. Determine if they contain a BIC
and an IBAN. If the invoice contains your
counterparty’s IBAN, then include this
information in the payment instructions
you provide. It is important to note that
there are no IBANs issued within the
United States’ banking system. Giving your
counterparty a SWIFT BIC or routing transit number and your bank’s DDA number
should be sufficient to apply the funds to
your account immediately.
Also, talk with your business partners in
the European Union and ask them to provide you with appropriate payment instructions to avoid delays in payments or higher
processing fees. Communicate with your
bank throughout this transition so that you
become familiar with SEPA and understand the new processing requirements.
This article was prepared for general
information purposes only and is not
intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own
risk. Under no circumstances should any
information contained herein be used or
considered as an offer or a solicitation of
an offer to participate in any particular
transaction or strategy. Opinions expressed herein are subject to change without notice.
©2008 The PNC Financial Services
Group, Inc. All rights reserved.
PAUL TROZZO is a group product manager in PNC’s Treasury Management Group, part of The PNC Financial Services Group, Inc.
Reach him at (412) 762-3726 or [email protected]. To learn more about SEPA compliance and conducting business in the euro zone,
check out PNC’s Middle Market Advisory Series at pnc.com/joinus.
