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@example.com. 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.