Mañana, ahora, eso ISO

SEPA as lever for supply chain financing

Mañana, ahora, eso ISO

The Single Euro Payments Area (SEPA), as a subset of the ISO 20022 XML standard, promised companies standardization and effi ciency across the eurozone and non-euro countries that have accepted the SEPA standard (e.g. Denmark and Switzerland). SEPA adoption however falls far behind expectations. Shifted priorities due to the 2008 credit crisis and the fact that some popular local payment products have been kept outside the SEPA scheme are often cited as the culprits.

How can SEPA and ISO 20022 drive innovative trade finance?

With ISO 20022 extending to invoice-messaging, and SEPA pushing for an alternative to local products such as RIBAs in Italy, Vcom in France and Pagares in Spain, companies should consider leveraging the SEPA and ISO 20022 framework for working capital effi ciency. Smaller companies have benefitted from the local type of collection and payment instruments such as RIBA that allowed these companies to get access to (cheaper) asset backed working capital fi nancing. If these electronic local bill-of-exchange type instruments were eventually to disappear under the SEPA harmonization schemes, this would have a major impact on the ability to access credit and the conditions thereof.

This article provides a vision about how SEPA and ISO 20022 can be the catalyst for innovative and attractive trade fi nance solutions. In order to leverage the ISO XML framework, companies will need to take a serious look at e-invoicing some time soon. While the process effi ciency of up to 65% cost reduction is a great incentive, project managers need to break down barriers such as network, security and authentication. Banks too have taken a fresh look at interfacing because it strengthens their commercial fi nance propositions due to standardization and automation. Banks have expanded their classical factoring and vendor fi nancing products in the aftermath of the credit crisis for two reasons: 1) increased demand from the clients and 2) risk reduction in their trade fi nance portfolio as part of their Basel III strategy.

XML sets the standard

The drive for cost reduction, standardization and efficiency for both companies and banks alike comes at a time when systems vendors have incorporated the XML framework in their solutions and sometimes even pre-defi ned the ISO 20022 standards for their clients. Furthermore banks and SWIFT have embraced XML and ISO 20022 as their industry standard. The SWIFT MX framework, successor to all Swift MT messages, is based on XML and is ISO 20022 compliant. This makes ISO 20022 the standard for fi nancial messaging to bet on. In our project too we notice a take up of XML and ISO 20022.

It would be helpful if the execution of transaction processing projects and funding initiatives could be merged, at banks and companies alike, or at least managed as a ‘working capital improvement’ initiative. E-invoicing, for instance, does not merely reduce fi nance processing costs, but also facilitates the effi ciency of trade fi nancing such as factoring and vendor fi nancing. With the adoption of ISO 20022, for instance, the implementation cost of a VF scheme is signifi cantly reduced, because standard acknowledgements speed up dispute resolution and make invoices available for discounting sooner.

Barriers to overcome

Further standardization of invoice messaging will make ISO 20022 and therefore also SEPA eligible to replace local payment products such as Vcom in France and RIBA or Pagares in Italy and Spain. These local products resemble vendor fi nancing but within a local scheme.

With the messaging standard barrier close to being solved, other barriers still have to be overcome. Invoices need to comply with legal requirements and parties need to rely on the authenticity and correctness of the digital invoice. Legal harmonization on VAT and invoicing in Europe is under way for incorporation in national legislation in 2013 (COM (2009) 211).

Adoption of this directive is certainly a precondition, but the technical solutions on authentication and non-repudiation require a collaborative approach towards a universal network. Cloud computing based on the principle of distributing business functions over the net rather than making applications available could prove to be pivotal in this respect. Applications on a universal secured network such as SWIFT can provide the backbone required for secure and reliable exchange of digital invoices comparable to today’s postal services.

SEPA and e-invoicing

From here back to SEPA is a small step. After all, SEPA blueprinted universal reach for electronic messages based on the 4-corner model without putting limits on the technique used by participants.

The European Banking Association (EBA) and some invoice consolidators have explored avenues for expanding the SEPA-framework to e-invoicing. SWIFT has piloted a FileAct-based solution for e-invoicing. This combined with the 3SKey solution might prove to be the building blocks for a secure and reliable e-invoice solution. Collaboration between banks and SWIFT could make the reach universal.

ISO 20022 messaging standards can take trade finance even further. The status messaging can be used on cloud computing-based infrastructures for collateralized fi nance by banks outside the trade relationship. This will introduce more competition and reduce interest cost within trade fi nancing solutions to the benefi t of trading partners and world trade. This potential use of ISO 20022 can provide an alternative to local payment products that are not currently SEPA compliant (i.e. RIBA, Vcom and Pagares).