Experian: No Silver Bullets for the SEPA Switch – Jonathan Williams
As companies continue preparations to replace their existing payment schemes with SEPA platforms, the need to ensure the quality of one's domestic account data is making migration a board-level issue. Jonathan Williams of Experian discusses the dangers of non-compliance and the lack of a silver bullet for finance functions looking to address the challenge.
The grand pan-European project that is SEPA has engendered much debate since the Lisbon Agenda and the creation of the Financial Services Action Plan 11 years ago. But much of the focus, up until now, has been on transactions across borders.
This is reflective of the way in which SEPA implementation has evolved. As of 2003, the European Commission has required the use of International Bank Account Numbers (IBANs) and Bank Identifier Codes (BICs) to enable straight-through processing for cross-border euro payments. Three years later, the use of IBAN and BIC was mandated for all euro transactions.
A single market for payments, that aligns the cost of cross-border transfers with that of domestic electronic transfers, is something that all corporates can buy into. Originators of cross-border payments have long been forced to follow these guidelines, obtaining IBANs from customers, suppliers and staff, and the proportion of euro transactions actually going cross-border - a little over 1% - means that any teething problems encountered in terms of data quality and conversion have led to minimal disruption.
However, with the replacement of domestic payment schemes by instruments such as SEPA Credit Transfer and SEPA Direct Debit on the horizon, the issue of migrating data for SEPA compliance so as to integrate the other 99% of transactions has the potential to pose significant challenges for corporates across the continent. Many finance functions are coming to realise the urgency of investigating domestic Basic Bank Account Number (BBAN) and IBAN data quality to ensure readiness for a transition that some are already predicting will be less than smooth.
The scale of the task was put into stark perspective in a recent white paper published by Experian, the global information services company. 'Will poor quality in domestic account data affect the migration to SEPA?' found that, on average, 12.9% of customer data drawn from a cross-section of industries and geographies contained one or more errors. This figure stood at 20.8% prior to an initial process of cleansing and refining the import format. Quality varied significantly by country and sector, but the need for validation, both as a part of the data conversion process and as a periodic cleansing process, was laid bare.
"It is certainly a high error rate," acknowledges Jonathan Williams, Experian's director of payments strategy development. "We believe at least a large part of that is down to the fact that payment data is not regularly refreshed, whether that's by business customers, retailers or even suppliers. When customers' branches close or details change and that information isn't passed on through the chain it has a cumulative effect, and over time records become stale."
While many domestic banks have long been in the habit of correcting faulty transactions without charging or notifying the originator of the payment, SEPA makes little provision for such repairs. Williams foresees a potential "avalanche of errors" undermining migration and endangering "this great European project" should data not be brought up to a suitable standard in time.
"Platforms will no longer be national; they will be pan-European and have much less of an understanding as to how individual domestic schemes have traditionally operated," he says. "It is therefore impossible for them to implement the same degree of exception handling. Take away those domestic automated methods of fixing payments and the potential for a major problem is there for all to see."
Trouble comes in threes
But in order to address a problem one must first know where the causes lie. Of the errors returned, Experian's report cited three main categories: content, format and integrity.
'Integrity' related to invalid check digits or violations of specific rules for a domestic account number; 'format' to the technical format of the bank account; and 'content' to the actual meaning of the data, such as unallocated bank codes. Gaining this insight should have allowed for a clear understanding of what type of validation would prove most effective for driving out error, but there was one problem: causation was split evenly between the three.
"It means there is no silver bullet," Williams declares. "A corporate can check that the right components and characters are in place, but that only covers you for formatting. Sort code directories will help confirm the accuracy of the data and that contents are correct, but it doesn't help with integrity. In some countries that can be easy to do, with one integrity check across all banks. Elsewhere it's not so simple - Germany has more than 120 separate rules for validation of account numbers. It would be nice to think you could get an off-the-shelf solution that will address the overall problem immediately, but it is only through tackling each of the three issues separately that you can ensure success."
This is a sizeable task and has seen corporates reaching out to external partners with the experience and tools to validate new and existing data, as well as ensure ongoing integrity on a periodic basis. "Banks have been increasingly educating their customers on the formats they will need to send in order to be SEPA-compliant and have also been looking around for services they can recommend to corporates needing assistance with migration," Williams explains. "It is essential that you are able to check data and keep it clean; the challenge is how you perform that task consistently and comprehensively. Yes, you can develop systems in-house across the countries in which you operate, but the more cost-effective model is to use an external supplier that specialises in getting this right."
Experian offers a data conversion service that provides an automated solution for validating and converting domestic payment databases from BBANs to IBAN plus BIC. Its Bank Wizard tool performs fast, automated IBAN and BIC validation. Furthermore, unlike a number of data providers that solely re-license and republish other external data sources, Experian maintains a dedicated in-house data team that is exclusively tasked with ensuring the integrity and quality of data updates.
"It's about making customers 100% secure that their data is of the best possible quality at any given time," Williams explains. "By providing data conversion and validation services across Europe, we've been able to build great relationships with various data sources and attain real insight into the specific challenges faced in various geographies and sectors."
Compliance gains pace
Recognition of this fact has seen a shift in the dialogue that Williams and his team have been having with corporate customers, who are regularly pointed in their direction by a number of leading banks, including JP Morgan, Citi, RBS and Credit Agricole. Domestic SEPA compliance has become a concern for those at the very top of the finance function.
"The people we've traditionally been in contact with over recent years have tended to come from treasury, concerned by the risk associated with their very large value supplier payments," he explains. "As the SEPA proposition broadens out into domestic payments, however, we're starting to see far more buy-in from finance directors looking at the compliance and risk exposure. Finance directors are particularly focused on the efficiency and cost implications - not necessarily from the perspective of repair charges, but the exception handling within the payments and receivables functions."
And for those not yet fully addressing the need for compliance, that 12.9% figure may only be the tip of the iceberg. Williams points out that multinationals moving their data across to SEPA compliance have tended to address each payment type as a bundle. A typical course of action is to begin with addressing staff salary payments before moving on to supplier payments and then corporate payments and retail collection.
"Staff accounts will tend to have a much lower error rate as your workforce is particularly motivated to ensure it gets paid quickly and one tends to deal with them on a monthly basis," he explains. "Some suppliers you may only enter into transactions once or twice a year, so the scope for data becoming stale is that much higher. As we get closer to addressing retail collection, one of the things I'm interested to see is whether the average error rate rises or falls. It's very difficult to call."
As the speed of migration towards SEPA compliance gathers pace, the results will soon be there for all to see. Until then, emphasis must be on driving awareness of the dangers that poor data presents and the options open to corporates looking to address the challenge.