For middle market corporates in North America, expanding overseas is becoming increasingly commonplace in todays globalized world, with Europe being the first port of call for many.
While operational issues such as payments can be a relatively straightforward process for larger multi-billion dollar corporates, this is not necessarily the case for smaller U.S. mid-caps.
In a recent survey of 61 U.S. mid-sized corporate clients by Bank of America Merrill Lynch, the three largest payments challenges in Europe ranked as follows: 37% using the right mix of payment instruments for each market; 27% evaluating how to set up FX controls when taking international payment flows into consideration; and 21% recognizing when to establish local accounts to support transaction needs.
One of the most glaring differences between the North American and European payments landscape is the reliance on checks, or lack thereof. Although routine in North America, checks have been in broad decline in Europe since 2010, when just over 5 billion were issued compared with 4.2 billion two years later. This decline is not however, consistent across the whole continent. For example, in the Netherlands and Belgium cheques have not been in vogue for the last 25 years, while in the UK, Ireland and Italy, they still account for around 15% of all country transactions. Setting checks aside, the broader trend in the balance of payments instruments in Europe is shifting towards cards, ACH credit transfers and direct debits, which comprise 41.1%, 27% and 25% of all European transactions, respectively. Mid-sized companies therefore, need to be prepared to adapt to the change in tide if they are to serve their customers in Europe, many of whom are accustomed to vastly different payment mechanisms.
While the introduction of the Single European Payments Area (SEPA) has removed some of the differences in treasury practices by eliminating the need for individual domestic accounts for many payments instruments, the reality is that going global often requires staying local. SEPA continues to be implemented differently at a domestic level and for global corporates, account opening and reporting requirements all require localised payment methods.
A key issue for a U.S. mid-sized companies operating in Europe is the repatriation of funds to the U.S., and this is often an area where treasury managers may not have much expertise outside dollar-denominated cash management.
Typically, treasurers are faced with three issues: how to handle a local treasury managers funding requirements; deciding what type of provider to use for third-party platforms; and determining the denomination of an invoice for a buyer or overseas supplier. There is never an easy answer. Local offices often use an online banking treasury workstation to input transaction instructions. Third party platforms are favourable instruments for high-value, single currency payments, whilst bank providers cater to low-value, multi-currency transactions which are automated and standardised against U.S. reporting requirements.
Growing a business through transatlantic acquisitions presents the treasurer with a variety of challenges, many of which are peculiar to individual payment jurisdictions. Regulatory changes under SEPA have prompted a shift towards a more universal payments system akin to that of the U.S., but the way things are done is changing, crucially at varying paces across Europe. From electronic invoicing to the interpretation of XML formats, the considerations are vast. Keeping up with this pace of change is crucial to navigating the European payments landscape; a brave new world for many U.S. mid-sized companies.
Alex Weaving is head of commercial sales for global transaction services for EMEA at Bank of America Merrill Lynch.