Treasury and Trade Solutions

SEPA – Meeting the Deadline and Looking Ahead to the New Era

September 25th, 2013

Today’s Speakers:Jonathan JordanEMEA Market Manager,Payments and Receivables,Treasury and Trade Solutions,Citi

John Murray EMEA Head,Corporate and Public Sector, Cash Management Sales,Treasury and Trade Solutions ,Citi

Agenda

1. The Corporate Environment and SEPA

2. Market Update

3. Meeting the deadline

4. Leveraging SEPA – the agenda for 2014

4. Q&A

2

The corporate environment and SEPA

3

Working Capital Optimisation

Operational Efficiency

Cost Reduction

• Fewer Bank accounts

• Harmonised timescales

• Standardised formats and content

• Standardised remittance information

• Catalyst for rationalising banks, connectivity, formats

• Simpler Cash flow forecasting• Pay / Collect across 32 countries

from a single location

• Streamlining of Payables & Receivables processes

• Supporting reconciliation and centralisation efforts

• Reduced bank fees • Strengthen controls

Smooth Transition

• SEPA and Centralisation Experience

• Regulatory involvement

• XML Leadership and format flexibility

• Leading Connectivity options

• Maximum flexibility for your account location(s)

• IBAN Validation and Conversion Services

• Mandate Management Services

• XML conversion service

Advisory & SupportInformation & guidance

Citi is committed to a 4-pillar approach to help our clients unlock the benefits of SEPA

Maximum Flexibility

• Dedicated Teams of SEPA implementation managers and technical experts

• Proactive engagement to discuss migration planning

• Options, recommendations and project planning

• Rules & Country guidance

• Helping our clients understand the value and impact of SEPA

• Regulatory updates

• Guidance to assess SEPA

• Bi-weekly SEPA checklist (email on key SEPA project actions)

1 February 2014

SEPA Market Development Timeline

4

2009

Nov: SDD launch

2012

Mar- ongoing: Niche scheme announcements

2013

Feb: Migration end-date (SCT and SDD in euro Member States)

2008

Jan: SCT launch

2014 2016

Feb: SEPA regulation passed in European Parliament – end dates set

Feb: Migration end-date (niche schemes)

Oct: Migration end-date (SCT and SDD in non-euro Member States)

• SCT – SEPA Credit Transfer• SDD – SEPA direct debit

Adoption of SCT SDD and Process reengineering Further automation / rationalisation

Wait and See SCT/SDD adoption/Compliance Process reengineering

Early Adopters

Majority of the market

Corporate approaches to SEPA

2. Market Update

SEPA is the payments integration initiative of the European Union, removing the cross border barriers and driving simplification and harmonization of Euro ACH and Direct Debits.

The Context of SEPA• 33 Countries• Euro currency only• Euro ACH and Direct Debits within this geographical area

(Payments to/from SEPA countries not impacted)• IBAN and BIC• Single Legal Framework• Standardized Schemes on basis of ISO 20022 XML

Single Euro Payments Area (SEPA)

6

33SEPA Countries

Austria France Liechtenstein Portugal

Belgium Germany Lithuania Romania

Bulgaria Greece Luxembourg Slovakia

Cyprus Hungary Malta Slovenia

Czech Republic Iceland Monaco Spain

Denmark Ireland Netherlands Sweden

Estonia Italy Norway Switzerland

Finland Latvia Poland UK & Croatia

Highlight denotes EUR zone countries

Objectives of SEPA• Eliminate the distinction between national and

cross border payment transactions• bring standardised payment practices for EUR

payments• reduce the cost of sending EUR• overall standardisation, efficiency and

strengthening European integration

SEPA – Current Uptake across the market

7

July - 50%

SEPA Credit Transfers

%

Source: European Central Bank, Citi assessment

• SEPA Credit Transfer is steadily increasing month-on-month and stands at 50% at the end of July.

• We expect to see accelerated adoption during Sept-Dec as organisations across Europe switch over to SEPA.

• There is a lower level of SEPA awareness in Middle Market organisations. The European Commission are aware of this and asking countries’ SEPA bodies to push banks and market participants to inform this group.

• Main reasons in the market for reject/returns are:

• Account identifier invalid (i.e. invalid IBAN or account number does not exist or wrong BIC)

• Account closed

SEPA Direct Debits

July – 4.8%%

• SEPA Direct Debit adoption is still lagging well behind, however momentum is building.

• During the period Aug 2012 to May 2013 adoption remained between 2 – 2.7%, however in July we have seen an increase to 4.8%,

• Movement in countries is being driven by movement of Big Billers. In June we have seen a major national electricity provider in Ireland move to SEPA. Also increases in Netherlands SEPA Direct Debits.

• Slower adoptions can be attributed to the complexity of adopting SEPA Direct Debits - technical changes, additional information requirements, changes to mandate processes and internal decision making.

• Main reasons for reject/returns are:

• Insufficient funds

• Not specified reason (by debtor bank)

Citi observations and discussions in the marketEnd Date There is no talk of a change in the end date – EC/ECB/EPC continue to reiterate that “there is no official Plan B”.

Bank Readiness

Many banks are making changes to their cash management infrastructures to become SEPA and ISO 20022 XML compliant.

SEPA credit transfers - High market readiness. Sporadic issues with banks not yet recognising the Category Purpose Code (e.g. “SALA” for salary payments) contained within the SEPA messages.

For SEPA Direct Debit – Medium market readiness. Bank infrastructure adjustments for SDD are additionally complex. Citi understand that there are many banks still preparing automated processes to meet SDD requirements.

Market Discussions

SEPA DD ‘R’ Reason Codes –

Reason code ‘Not specified reason’ is commonly used. In a number of European countries, more accurate reason codes are not used because of legal restrictions (e.g. data protection laws) or local business practices. EBA working group has published further guidance on this to banks and the market.

Ireland – Market expected to adopt SEPA DD Core scheme. Irish electricity provider migrated in June. Discussions on usage of restricting refund rights in Core scheme.

Italy – Market expects the SEDA Direct Debit AOS to go live in October/November.

Spain - Main Billers representing 80% of the SEPA DD volumes have announced migration for beginning of Q4 2013.

France - Main utility companies expected to move to SEPA DD in October.

Belgium – Large biller, Electrabel GDF Suez, migrated to SEPA DD in Nov 2011. Other big billers expected to migrate during October/November 2013.

Sources: Citi assessment, European Payments Council 8

3. Meeting the Deadline

SEPA scheme fundamentals

10

SEPA Direct Debits

Core Scheme B2B Scheme

• Consumer and Business collections

• Longer refund period for debtors

• Creditor mandate responsibilities

• Existing mandate valid

• D-2 standard execution cycle

• Business collections

• Irrevocability of collection

• Creditor & Debtor mandate

responsibilities

• New mandates required

• D-1 standard execution cycle

SEPA Credit Transfers

• Standardised Scheme

• 140 characters of remittance information

• New Fields to identify purpose of

transaction and facilitate POBO structures

• D+1 standard execution cycle

Data gathering (BIC/IBAN)

Technical and processing changes

Send FRST transactions & manage R transactions

Choice of Scheme

Existing Mandate reconciliation & New mandates

Data Gathering (e.g. CSID)

Technical and processing changes

Challenges encountered

11

• Timeframe and year end freezes• Internal Traction – especially amongst clients operating decentralised models. Challenges also arise when

there is no central point for the SEPA project, which impacts multiple stakeholders. • Data gathering- Gathering BIC/IBAN directly from customers/vendors is intensive. Simple conversion

algorithms to convert data introduce errors. • Technology - assessment of changes, requirements definition and scheduling requiring time and budget.• Market - local market guidelines and options causing confusion

– SEPA CT- Payroll - often managed differently to core payments - often domestically managed or via HR function. Some corporates assume payroll to be ‘out of scope’. External payroll providers can create a dependency / impact timelines.

– SEPA DD- SEPA DD has greater process change and technology implications. Approach to SEPA mandate processes can lead to internal discussions and decisions taking time. • Some corporates managing SDD migration separately to SEPA CT.

Challenges

Addressing challenges

12

At a minimum, organisations need to ensure basic readiness for 1 Feb 2014. This means the ability to pay your suppliers/vendors/employees and the ability to receive payments from your customers on 1 Feb 2104. No disruption to cash flows.

Project Traction

– Appoint a central SEPA project management team with authority to engage across internal stakeholders.– Gaining full visibility over cash management footprint is key.– Form a migration critical roadmap of essential activities– Increase visibility (e.g. weekly reports to decision makers)– Engage Citi for advise, including contingency options

DataGathering

– Consider use of third party provider – e.g. Experian. BIC/IBAN gathered in a matter of days.– SDD data via mandate management provider (e.g. CGI), Citi support

Technology– Consider services of mandate management provider – e.g. CGI. Note lead times to implementation.– Understand online banking options, e.g. CitiDirect

Payroll– Engage third party payroll providers. Push for immediate move to SEPA.– Engage HR and other parties to clarify and ensure ownership.

Wider Readiness

– Many corporates have multiple entities who are preparing for SEPA. Some more advanced than others.– Consider how internal business units could support payment/collection for other internal entities.– Consider the help of external project resources– Discuss with Citi

Ensure IBAN/BIC readiness

• SEPA transactions require mandatory BIC and IBAN information. Many organizations do not hold complete BIC and IBAN for all impacted payment beneficiaries in their payment databases.

• Citi is working together with Experian, who offer data cleansing and conversion services to help clients convert their existing database so clients do not need to contact individual customers, suppliers and employees to obtain this information

• Data needed for an IBAN conversion– Experian provide information on the layout of the files which can be used to submit account

data– Experian request a sample file from the client to see if there are areas in the export that can

be improved before the conversion process

• Outputs from Experian– At the end of the conversion, clients receive a cleansed and updated file containing

beneficiaries’ relevant IBANs and BICs – Clients will also be provided with a report detailing passed and failed records and

recommendations to improve data quality

SEPA schemes require the provision of BIC and IBAN information. Thus clients must provide the BIC and IBAN information instead of national bank account numbers.

Challenge

Citi’s Solution

Existing Payment Database / Records

Working together with Citi Cleansed and Enriched

Data baseSEPA Ready

Database

13

Mandate Management Services - CGI Should your organisation require assistance with mandate management and general adoption of SDD, CGI can provide short term and ongoing solutions.

• Option 1 – Outsource Mandate Migration Only

• This option is for organisations who only require to partial assistance to gather required mandate data to become SEPA compliant.

• The creditor provides existing domestic DD mandate information to Logica.

• BBAN to BIC/IBAN conversion• Unique Mandate Reference generation• Returns SEPA compliant mandate file back to

corporate

Mandate Migration

• Dematerialize mandates • Notification to debtors

Optional Services

• Option 2 - Outsource Mandate Migration & Ongoing Management

• Database to create, search, amend and cancel mandates

• Mandates history / Print mandates Mandate

Management

• BBAN to BIC/IBAN conversion• Unique Mandate Reference generation• Notification to debtors• Bulk conversion of legacy mandate data

Mandate Migration

• Enrichment of legacy collections• File based, screen upload & manual creation

of collections• DD transaction traced through its life cycle

(successful, R-message)• Display of collections on screen

Enrichment & Collection Handling

• Mandate dematerialisation• Mandate pack production and distribution• E-archive and physical archive• Multilanguage service helpdesk

Optional Services

14

4. Leveraging SEPA - the agenda for 2014

SEPA – enabling standardisation, efficiency, rationalisation

Cash Management Strategy

Operating Structure

Bank Relationships

Technology Infrastructure

Account Rationalization

~20% of Citi's corporate clients have already taken the opportunity to change their cash management structures in conjunction with SEPA.

Account rationalization possible with the ability to make and receive EUR payments

Harmonized process and account formats ease technology standardization and rationalization

Fewer processes and account requirements = bank rationalization

Standardizing AP and AR processes

Centralization and efficiency agenda, enhancing visibility and reducing costs

Centralization Path Opportunities through SEPA

16

Looking ahead

17

Increased focus on Bank Rationalisation

Location of accounts in centre of choice

• Centralise where possible, retain local where necessary

Further Technology rationalisation

•Reduction in duplicate systems and connectivity and formats

•Adoption of SWIFT and ISO XML

SEPA Credit Transfer•Investigating Payment Structures

(e.g. POBO)•Centralisation of payroll payments

SEPA Direct Debit•standardise collections, mandate

processes , remove duplicate efforts•standardise collection

cycles/liquidity management

Leverage SEPA overall a means to standardise

reconciliation

Shared Service Centres adopting further responsibilities/ standardisation

Corporate focus on standardisation beyond

Euro zone•UK, Nordics, Switzerland•Central & Eastern Europe

Achieving these ObjectivesAssessment of Current Cash Management Structures and Processes

• Accounts, payment and collection instruments, systems, processes, legal entities, etc.

• Banking partners and configuration• Treasury and operational

strategies• Process owners• Visibility and Controls in place today

Definition of Future State

• Future cash management strategy

• Bank strategy (e.g. rationalisation)• Process vision (SSC, payment

factory)• Technology strategy• SEPA changes to AP

processes/reconciliation• Scope of changes (vendor, payroll,

T&E, treasury etc.)• Engagement of parties to form this

vision• Clearly defined benefits

Implementing Change

• Senior sponsorship for changes ahead

• Shared vision across Finance,AP, Technology, Treasury

• Budget• Project management / Timing• Alignment with other major projects,

e.g. ERP upgrade (one instance of SAP)

• Benefits tracking to ensure continued traction

18

Citi’s capabilities to support your migration

19

Migration Tools

enabling a smooth SEPA transition with

maximum flexibility

• Leading Connectivity options and ERP integration

• CitiDirect electronic banking access across web, mobile, and tablet

• XML Leadership and format flexibility• XML Conversion service for non-XML

formats – 10 file formats• Maximum flexibility for your account

location(s)• IBAN Validation and Conversion

Services• CitiDirect Pre-format Enrichment to

store payment details including IBAN and BIC

• Mandate Management Services

• Enriched Statements to support Straight Through Reconcilement

• Real-time payment status reports• Account protection to reject/return SEPA

Direct Debits• SEPA Credit Transfers from non-Euro

accounts• Bookkeeping flexibility with choice of

itemised or bulk statement reporting• Electronic advises to payment

beneficiaries• Warehousing capabilities to drive

operational efficiency and maintain DPO• CitiDirect Recurring Payments Solution

to automate repetitive payments

is committed helping clients meet the challenges of the regulatory deadline and to unlock the benefits of SEPA

Complete Production Verifcation Test with Citibank with real vendors and/or customers as required.

Agree cutover plan in terms of timing of migrating full production flows.

Migrate required configuration and technical setups.

Enable full process on SCT and SDD

Agree a date where your ACH can bedecommissioned.

Make required changes to connectivity,file format, data requirements as required.

Conduct syntax (file format) and contenttesting in Citibank's designated CustomerTest Environment.

Perform volume testing to scrutinise any BIC andIBAN migration.

Examine existing vendor and customer master data for SEPA compatibility.

Consider approach for making master data SEPA compatible, would a conversion service be of use to you?

Update your master data based on your chosen data collection method.

Implement new process for SDD based on choice of CORE and/or B2B schemes.

Do you require any mandate management services?

Comprehensive Advisory & Migration Support Assess your current EUR ACH and Direct Debit flows

Analyse your account usage, is there scope for consolidation? Solution re-engineering?

Evaluate SEPA impact on current processes, costs, value dates, data requirements, etc.

Review technical capabilities with your bank, is your current solution SEPA capable? Is there scope for consolidation?

Consider resourcing and any internal projects you have that may conflict with the SEPA rollout (e.g. ERP upgrade).

Impact Analysis and

Planning

Data Collection / Process Re-engineering

Development and Testing

Production Migration

20

Useful SEPA Resources

21

• Topics covered to date:• 52 weeks to go - Are the following actions part of your organization's SEPA migration checklist?

• 50 weeks to go - What should I consider when choosing between SEPA Direct Debit Core and SEPA Direct Debit B2B schemes?

• 48 weeks to go - How do I assess my payment flows and account usage?

• 46 weeks to go - How do I convert legacy account data to IBAN & BIC?

• 44 weeks to go - Who should be engaged internally for our SEPA project?

• 42 weeks to go - I pay my vendors by direct debit, what do I need to do for SEPA?

• 40 weeks to go - Do I need to use ISO 20022 XML for SEPA transactions?

• 38 weeks to go - What are niche schemes and how do they impact your SEPA planning?

• 36 weeks to go - Where can you find guidance and country information for your migration to SEPA Direct Debit?

• 34 weeks to go - How does mandate management change with SEPA?

• 32 weeks to go - What do I need to consider for Payroll?

• 30 weeks to go - Ongoing gathering of bank account details & Informing your customers

• 28 weeks to go - Can I use the SEPA Direct Debit B2B scheme to collect from Micro-enterprises?

• 26 weeks to go - The importance of lodging SEPA Direct Debit B2B mandates with your bank

• 24 weeks to go - What is the current market adoption of SEPA? What is the readiness by Country?

• 22 weeks to go - What is a Creditor ID (CSID) and how can I obtain this information?

• 20 weeks to go - How does SEPA support reconciliation?

• 18 weeks to go - What are the different versions of ISO 20022 XML in relation to SEPA?

• Please contact your Citi representative if you are interested in receiving this email series.

Citi SEPA Countdown series – a SEPA Migration Checklist – bi-weekly email - Addressing key questions

Additional Information

• SEPA Direct Debit Country Guide

• Market Commentary and insights on reengineering with SEPA

• Please visit our SEPA website at transactionservices.citi.com/SEPA/

• Regulatory information, niche schemes, case studies, further information

• Additionally EPC website provides helpful SEPA information (e.g. Mandate Templates) www.europeanpaymentscouncil.eu

• Bank SEPA Reachability can be checked on the EBA clearing website:

https://www.ebaclearing.eu

22

Q&A

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