The SEPA payment instruments - one element of the financial supply chain

Whilst the achievements with regard to the harmonisation of SEPA payment transactions are impressive, it needs to be kept in mind that a payment transaction is usually the result of an interaction between a buyer and a seller; e.g. the exchange of goods and services. This process - commonly called trade - however, requires numerous interactions between the parties involved at different stages of the supply chain. In an advanced scenario of dematerialised business processes any of these manual, paper-based procedures would be replaced with electronic information exchange. Ideally, all standardised electronic solutions supporting the exchange of goods and services would perfectly match each other.

To better illustrate the matter: figure 1 (the so-called four corner model) depicts the flow of a payment transaction.

This model gives a very simple representation of a supply chain, assuming that a payment is the result of a purchase by a buyer who then instructs his bank to transfer an amount of money to the account of the seller.

Looking at this supply chain from a different - or more comprehensive - perspective, three flows taking place prior to or in parallel with the payment transaction can be identified:

1. The physical supply chain: this is the flow of goods or services that move between the supplier and the customer.
2. The financial supply chain: this is the flow of financial transactions (e.g. payments, invoice financing) that are implied by the move of the goods or services down the physical supply chain.
3. The underlying information flows: these are the supportive flows of both the financial and physical supply chains and pertain to aspects such as purchase orders, confirmations and invoices.

It should be noted that the way in which the buyer is informed about the amount to pay as a result of the purchase is the area of the development of the electronic invoice (to learn about the latest developments in e-invoicing in the EU refer to the article "Food for Thought. The EC Expert Group Final Report on e-invoicing"; a link to this article is set out below). It should also be noted that the information exchange underlying step B in figure 1 (representing the initiation of a payment by a buyer) and step C (representing the credit of the payment to the seller's account) is not necessarily limited to payment-related information, but may include other (ISO 20022¹) message-based services such as Invoice Financing, for example.

Taking a look at the big picture

A payment is not a spontaneous activity without a reason but has a root cause in the supply chain. It may therefore be assumed that acceptance of the SEPA payment services by bank customers acting as buyers and sellers is related to the degree of interoperability between SEPA payment instruments and the electronic solutions designed to facilitate interactions between buyers and sellers preceding or following a payment.

To explain the rationale for the dematerialisation of business processes - beyond payments - and to illustrate the correlation between related standardisation initiatives it is necessary to visualise the various interactions taking place between actors along the supply chain.

Figure 2 depicts the interactions between the buyer and the seller in the process of exchanging goods and services in greater detail, assuming again a single purchase and associated handling. Interaction may be direct (a purchase order sent from the buyer to the seller - A in figure 1) or indirect (the buyer makes a payment to the seller involving at least one SEPA payment service provider as intermediary - via B and C in figure 1). Figure 2, however, is still a simplification; figure 3 reveals in detail the actors that are (potentially) participating in the process of (international) trade - including the actions and underlying information flows necessary  to conclude a purchase. (Note that figure 3 represents the internationally accepted UN/CEFACT² BUY-SHIP-PAY model covering potentially worldwide trade transactions; the element "import and export licenses part" of the model does not apply to trade transactions in the EU).

Figure 2 (click to enlarge)

Figure 3 (click to enlarge)

Obviously, many more actors than just buyer and seller are involved in a single trade transaction and a multitude of information is exchanged in the process. If a figure at the same level of detail would be drawn up for the entire supply chain, then yet another multiple of information exchanges could be identified.

Currently, there are numerous developments taking place focused on the interaction between buyers and sellers including other actors. The goal is "dematerialisation of business processes": optimising the procedures deployed to exchange data throughout a trade transaction based on standardised electronic solutions. To fully realise the potential benefits inherent to the dematerialisation of business processes, however, it is necessary to extend the concept of Straight-Through-Processing to the entire supply chain. The STP concept describes the rate at which processes are automated, e.g. do not require manual intervention. Traditionally, this concept has been limited to the relationship between payers and payees. Increasing STP based on a perspective that takes into account the entire supply chain, as suggested above, requires interoperable electronic solutions from purchase order through invoicing to payment.

The rationale for the dematerialisation of business processes

If organisations use automated and electronic solutions which allow them to process information more quickly, they can cut lead times. But also a procurement process will be expedited if purchase orders are managed electronically. The introduction of data interchange using electronic means instead of paper is a major contribution to the effective management of information flows.

The results of extensive research³ identifying the number of actions and documents required for international trade clearly demonstrate the need for the dematerialisation of business processes.

For example: a study conducted by SITPRO⁴ (the UK's trade facilitation agency dedicated to simplifying the international trading process through the modernisation of established standards and business best practice) revealed⁵, perhaps for the first time, the underlying cost of paper documentation to the UK perishable food supply chain.

The most significant factors for the sectors studied were:

• The volume of paper from start to finish: it is estimated that the UK import perishable food supply chain generates 1 billion pieces of paper annually where 90 per cent of the paper documentation used is destroyed.
• The amount of duplication: duplicate consignment⁶ data is keyed in at least 189 million times every year.
• The cost of document-related administration in the sector of the perishable food supply chain is estimated to be around 11 per cent of the supply chain value per annum.
• The cost of delayed, incorrect or missing paperwork costs a little over £1 billion per annum.
• The total cost of generating paper documentation (4.5 million document sets) is estimated at £126 million per annum.
• The cost issues associated with paper documentation results in the consumer paying considerably more for the products than is necessary at the point of purchase.  

Conditio sine qua non: interoperability

Removing the paper from the process of trading - and paying for - goods and services asks for interoperability, i.e. the capability to run business processes seamlessly across organisational boundaries⁷ as not every actor involved in the information exchanges necessarily uses the same standards. Interoperability is achieved by understanding how business processes of different organisations can interconnect, developing the standards to support these business processes efficiently and by specifying the semantics of messages exchanged between the organisations to support these business processes in a scalable way.

Interoperability is central to establishing e-Business. The goal of interoperability is to allow information to be presented in a consistent manner between business systems, regardless of technology, application or platform. It thus provides organisations with the ability to transfer and use information across multiple technologies and systems by creating commonality in the way that business systems share information and processes across organisational boundaries.

A number of levels of interoperability can be identified, where the most important are (from bottom to top):

1. Technical interoperability based on common methods and shared services for the communication, storage, processing and presentation of data. This includes the technical foundations for a secure environment, compatible technical standards and a common framework, i.e. technical issues involved in linking computer systems and services like open interfaces, accessibility and security services whilst streamlining the integration, presentation and exchange of data.
2. Semantic or business interoperability designed to address discovery and collaboration aspects, including workflow and decision-making transactions. Creating interoperability in this area can require alignment of business processes as well as operational synchronisation of collaboration data to ensure that the precise meaning of exchanged information is preserved and well understood.
3. Organisational interoperability; e.g. the process by which different organisations (either in public or private sector) collaborate to achieve their mutually beneficial, mutually agreed service-related goals.
4. Legal interoperability, e.g. - in the context of the European Union - appropriate synchronisation of national legal regimes is required so that electronic data originated in any one Member State are accorded the proper legal weight and recognition in any other Member State. 

Evolution in the playing field

Several initiatives are currently underway to standardise the interactions between buyers and sellers across the entire supply chain including, but not limited, to:

• E-Invoicing is the replacement of paper invoicing with invoice transmission, processing and storage in dematerialised form using electronic means. The major push towards e-invoicing has been led by large buyers (both major multinationals and public sector organisations) seeking efficiencies from automating their supply chains. Another trend has been the replacement of paper by mass billers such as utilities, with the invoices being presented to customers via an Internet portal and increasingly through Internet banking. E-invoicing has become an important public policy objective as well as a clear trend in the business world for various reasons.
• The public sector generated the so-called SINGLE WINDOW⁸ concept designed to facilitate trade. This concept envisages the implementation of a Single Window system which enables international (cross-border) traders to submit electronically regulatory documents at a single location and/or single entity. Such documents are typically customs declarations, applications for import/export permits, and other supporting documents such as certificates of origin and trading invoices. The main value proposition for having a Single Window for a country or economy is to increase the efficiency through time and cost savings for traders in their dealings with various government authorities in multiple locations throughout the process of obtaining the relevant clearance and permit(s) required to move cargoes across national or economic borders.
• The CEN Workshop on "Business Interoperability Interfaces on public procurement in Europe" (WS/BII): the objectives of the workshop are to provide a basic framework for technical interoperability in pan-European electronic transactions, expressed as a set of technical specifications that cross-refer to relevant activities, and in particular are compatible with UN/CEFACT to ensure global interoperability.

These initiatives pose a number of requirements, where the most important are:

• Business process mapping (by trading partners)
• Identification of data to be exchanged (export data / import data)
• Common data definitions (UN/CEFACT data standards)
• Interoperability of data communication (UN/CEFACT message standards).

These requirements find their origin in the need for interoperability at the various levels shown and the way to achieve it as mentioned above.

Opportunities for SEPA service providers

For buyers and sellers, the interaction with banks required to execute a SEPA payment transaction represents only a fraction of the process steps involved in the exchange of goods and services. The creation of SEPA could therefore be viewed as just one element of a broad strategy designed to dematerialise all business processes, e.g. to migrate from paper-based and manual procedures towards electronic information exchange within and between organisations (acting as buyers and sellers).

Ideally, the SEPA payment schemes defined by the EPC in the cooperative space as well as the SEPA payment products and services developed by individual banks as part of their commercial propositions would be a perfect match to the interoperability stack outlined above linking the actors in trade. Such a state of affairs, that is STP along the entire supply chain, in turn would further contribute to the willingness of customers to adapt their ways of doing business and to embrace the opportunities associated with new services including innovative SEPA payment products.

Peter Potgieser is Senior Consultant Industry Standards with Royal Bank of Scotland. He participates in various national and international bodies that deal with formulating and applying standards. He is chairman of the "Netherlands Board on E-business Standardisation" (NeBES) and the "Web Services Association" (WSA). He is also chairman of the international CEN/ISSS "eBusiness Interoperability Forum", which operates from Brussels. In addition to this, he is a member of the Dutch national delegation to UN/CEFACT plenary meetings, member of the UN/CEFACT "e-Business, Government and Trade" Group, member of the (former) "Expert Group on Electronic Invoicing" appointed by the European Commission, member of the CEN delegation in the European ICT-Standards Board and represents the Netherlands in ISO-TC68 "Banking and Financial Services" and ISO-TC154 "Processes, data elements and documents in commerce, industry and administration".

Related articles in this issue:

Everybody loves E! The role of the EPC in the creation of e-SEPA.

Food for Thought. The EC Expert Group on e-Invoicing Final Report.

Related links:

The United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT): www.unece.org/cefact/

UN/CEFACT International Trade & Business Process Group (TBG): www.uncefactforum.org/TBG/TBG%Home/tbg_home.htm (especially TBG1 and T BG 5)

UN/CEFACT TBG1 project information: www1.unece.org/cefact/platform/display/TBG/TBG1/

ISO 20022 Universal financial industry message scheme: www.iso20022.org

ISO TC154 - "Processes, data elements and documents in commerce, industry and administration": www.iso.org/tc154

ISO TC68 - Financial Services: www.iso.org/tc68

CEN Workshop on "Business Interoperability Interfaces on public procurement in Europe" (WS/BII): www.cen.eu/CENORM/Sectors/ISSS/Activity/Ws_BII.asp

Report of the meeting on UN/CEFACT and UBL convergence -  Brussels, October 2008: www.cen.eu/CENORM/Sectors/Sectors/ISSS/Activity/ebif08009reportmtgublcefactbii.pdf

1. See www.iso20022.org or refer to the focus section of the EPC Newsletter issue 3 (July 2009) at http://www.europeanpaymentscouncil.eu/article.cfm?articles_uuid=971BB204-C937-A732-55042A056D152192

2. The United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) has a  global remit and is one of the working parties of the United Nations Economic Commission for Europe. Its principal focus is on facilitating national and international transactions through the simplification and harmonisation of processes, procedures and information flows, and so contribute to the growth of global commerce.

3. www.doingbusiness.org/features/Highlights2010.aspx, especially www.doingbusiness.org/ExploreTopics/Trading/TradingAcrossBorders

4. www.sitpro.org.uk

5. www.sitpro.org.uk/reports/hermes.pdf

6. Consignment is the act of consigning, which is placing a thing in the hand of another, but retaining ownership until the goods are sold. This may be done, amongst others, for shipping or for sale in a store.

7. UNILEVER, 2009

8. www.en.wikipedia.org/wiki/Single_window