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European Union Regulations Regulating Working Capital

An actionable summary of how European Union Regulations impact the working capital, and how an organisation should plan its next steps to drive the regulation.

CHAPTER 01

Executive Summary

Leverage European Union Regulations Improving Working Capital

The Payment Paradox

Managing working capital is always the most crucial long-term financial goals for all the companies irrespective of their size and region.

Earlier companies banked on the idea of delaying their payments. However, the late payment directive regulation in Europe, is now forcing companies to rethink their strategy.

While accounts receivables stands to benefit from this new regulation, the impact on the payables is negating the advantage gained.

Moreover, in the current fiscal landscape, easy access to affordable credit might likely be more elusive since interest rates might eventually rise which is again putting a dent in the working capital improvement strategies!

According to a survey by PwC, EUR 950 Billion could be released from the balance sheet of globally listed companies by addressing poor working capital performance.

This eBook aims to educate the readers on the certain upcoming EU regulations and explains what order to cash leaders could do to comply and create a positive impact on working capital.

What are the EU regulations you should be aware of?

In order to improve the European business and bring in more stability and security in the market especially for the Small and Medium Enterprises(SMEs) that consist a significant share, European Commission has come up with several regulations that can change the tide and actually help companies improve their working capital. In this ebook, we will discuss the implications and complications arising from the following 5 directives:

What are the EU regulations you should be aware of?

 

CHAPTER 02

Late Payment Directive

Directive #1:
Late Payment Directive

What is Late Payment Directive?

Each year across Europe thousands of small and medium-sized enterprises (SMEs) go bankrupt due to surging volume of uncollected receivables.

Late payment causes administrative and financial burdens, which are particularly acute when businesses and customers are in different EU countries

According to a survey by Intrum,  only 27% of the SMEs are aware and familiar with the provisions of the late payment directive.

Hence, EU Commission adopted this directive  combating late payment in commercial transactions. Some major provisions of the directive is as follows:

  •  Pay for the goods and services within 30 days or, maximum within 60 days.
  • Automatic entitlement of the payer to interest for late payment and for recovery

costs.40 minimum as compensation

  • Statutory interest of at least 8% above the European Central Bank’s reference rate.

What it means for your OTC team?

1.Faster payment cycle 

With the payment terms set in such a way that the suppliers will get the payments

within 60 days at maximum, the supplier could potentially reduce their cash conversion cycles.

2. Reduced bad debt

Under the fear of having to pay an extra compensation of £40, £70 or £100 depending on the size of the debt (under £1,000, under £10,000, and higher), plus additional reasonable costs incurred, the debtors will tend to pay on time.

Therefore, it will contribute in reducing DSO and consequently reducing the bad-debt that would have been written off.

3. Compensation for late payments

For debtors who still pay late will have to pay extra compensation along with the statutory interest of at least 8% above the European Central Bank’s reference rate.

Even at this stage, companies might have considered to pay late along with the extra charges involved. However, the high rates and fines ensure that late payment is compensated appropriately.

Next Steps: How to drive compliance

  1. Invoice customers promptly.
  2. Send proactive reminders.
  3. Process multiple payment formats.
  4. Go for a plug-and-play self-service payment portal for customers.
CHAPTER 03

Payment Service Directive(PSD2)

Directive #2:

Payment Service Directive (PSD2)

What is Payment Service Directive (PSD2)?

The second Payment Services Directive (PSD2) is a significant step in the commoditization of Europe banking sector that focuses on improving the security, innovation, and market competition.

This key aspects of this directive includes:

Extension of regulated transactions:

Scope of regulated transaction has extended towards any currency transactions as well as towards One-leg transactions

Stricter customer authentication:

Payment Service Provider (PSP) obliged to ensure a stricter customer authentication whenever they access their payment account by verifying customer biometric, PIN or security question as well as a hardware token or phone.

Internal dispute resolution:

Execution and application of adequate and effective complaint resolution procedures, and also stressing out maximum time for processing customer complaints.

Payment initiation services:

Regulation of payment initiation service providers (PISPs)  to provide secure communication, inform PISPs about payment initiation, and treat all initiated payments equally.

Account information services:

Access to the user’s account to the third party providers for secure account information aggregation services.

What it means for your OTC team?

Simplifying through the multitude of jargons, the PSD2 directive would contribute in a seamless payment processing with an additional component of security.

Here is why customers would want to adopt the electronic payment because of PSD2:

What it means for your OTC team

Next Steps: How to drive compliance

  1. Look for a PSD2 compliant portal.
  2. Increase the security measures of customer authentication.
  3. Ensure compatibility with Account Information Service provider.
CHAPTER 04

Mandatory e-invoicing

Directive #3:

Mandatory E-invoicing

What is Mandatory E-invoicing?

E-payment is an upcoming trend to be implemented in B2B landscape. However, a study reveals that 55% of the respondents in EU/UK do not expect a significant change in their B2B customer payment behaviour over the upcoming 12 months.

In this backdrop, Italy has made e-invoicing mandatory for all B2B, as well as B2G(Business to Government) transactions. The purpose of this is to introduce e-adoption of payments in Europe.

The key aspects of this mandatory e-invoicing include the following:

  • All B2B invoices should be transferred electronically through SDI from January 1, 2019.
  • All oil and gas sectors should comply this regulation from July 1, 2018.
  • All invoices should be generated in XML format with standard FatturaPA.
  • Invoices in other formats should be considered invalid, and would result in subsequent penalty.

This regulation is a result of Italian Budget Law  2018, the decision from EU council is awaited.

What it means for your OTC team?

Shorter Payment Cycles

Adoption of e-invoicing will lead to faster cash conversion cycle, eliminating invoicing issues.

Standardized Invoicing

If invoicing across EU becomes standardized, it will be easier for the treasury/AP team to accept the payments and reflect them in the books.

Elimination of Spesometro

The Spesometro report was sent to Agency of Revenue, meant to control tax-evasion, which is no longer required after this mandate is effective.

Seamless transition to Automation

It is better to experience an exponential growth in automating rather than a disruptive one. E-invoicing facilitates the same.

Next Steps: How to drive compliance

  1. Ensure ERP compatibility with SDI.
  2. Discard all existing invoicing methods except e-invoicing.
  3. Enable a customer self-service payment portal.

 

CHAPTER 05

Regulation on Cross-Border Payments

Directive #4:

Regulation on Cross-Border Payments

What is Regulation on Cross-Border Payments?

Earlier, individual inter-geographical transactions meant an additional cross-border fees. However, recent changes by the EU has led to amendment of the cross-border fees to create a bucket-full of cross-border business opportunities. The key features of the regulation include:

From January 1, 2019, the Payment Service Providers should charge the same fee for the cross-border transactions as they charge for domestic transactions.

However, Europe market is yet to comply to this regulation, and based on the current payment behavior, Europe market is divided in the following zones:

Zone 01 : 19 countries which have eliminated the concept of cross-border fees.

Zone 02 : 8 countries in EU are yet to integrate their payment systems. They are currently operating in their local currencies

Zone 03 : 1 country in Eurozone(Sweden) is still using local currency but has eliminated cross-border fees

Cross-border payments could come up with high fees. A recent report by Deloitte reveals that the cross-border bank charges could vary as a minimum of 4.55 pounds to a maximum of 11.37 pounds in UK(which is a Zone 2 country).

What it means for your  OTC team?

Transparency in Dynamic Currency Conversion

Customers could choose paying with the foreign currency or their local currency. The EU regulation on cross-border payments enables visibility in the Dynamic Currency Conversion process which earlier had many hidden charges.

Possibilities of Business  Expansion

Customers are allowed to pay negligible cross-border fees would encourage a seamless expansion of your business across boundaries.

Greater Savings on the  Customer Side

Customers could save on a greater extent through this regulation. A report by Deloitte reveals that cross-border bank charges in UK could range even up to 11.37 pounds. Savings on the customers end would enhance their experience as well.

Next Steps: How to drive compliance

  1. Make the customers aware of potential savings.
  2. Ensure the provision of cross-border payments.
  3. Go for a online payment portal to be used by the customers.
CHAPTER 06

PCI DSS Compliance

Directive #5:

PCI-DSS Compliance

PCI-DSS compliance is a matter of bread and butter for US but the calls to enforce the same has been unheard in Europe. Many organizations assume that PCI-DSS compliance is mandatory only when they process credit cards through website, not through a call or even outsourcing to third-party agencies.

However, some countries such as Spain are taking the initiative to push the market to comply PCI DSS standards.

What is PCI-DSS Compliance?

  • Build and Maintain a Secure Network
    Installation & maintenance of a firewall configuration to protect cardholder data; not using vender-specified defaults for passwords and security parameters.
  • Protect Cardholder Data
    Protection of stored cardholder data; encrypted transmission of cardholder  data across open, public networks.
  • Maintain a Vulnerability Management Program
    Regular update of  anti-virus software; Development and maintenance of secure systems & applications.
  • Implement Strong Access Control Measures
    Restricted access to cardholder data;Assignment of a unique ID to each person with computer access; restricted physical access to cardholder data.
  • Regularly Monitor and Test Networks
    Tracking and monitoring all access to network resources and cardholder data;

    regular testing of  security systems and practices.

  • Maintain an Information Security Policy
    Maintaining a policy that addresses information security.

What it means for your OTC team?

Next Steps: How to drive compliance

  1. Use Level III data processing.
  2. Enable 3rd party tokenization.
  3. Ensure secured data storage.
CHAPTER 07

Conclusion

Summary

How do these regulations affect Working Capital?

summary

CHAPTER 08

About HighRadius

HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company. The HighRadiusTM Integrated Receivables platform reduces cycle times in the order-to-cash process through automation of receivables and payments across credit, electronic billing and payment processing, cash application, deductions and collections.

Powered by the RivanaTM Artificial Intelligence Engine and FredaTM Virtual Assistant for order-to-cash teams, HighRadius enables organizations to leverage machine learning to predict future outcomes and automate routine labor-intensive tasks. The radiusOneTM B2B payment network allows suppliers to digitally connect with buyers, closing the loop from supplier receivable processes to buyer payable processes.

HighRadius solutions have a proven track record of optimizing cash flow, reducing days sales
outstanding (DSO) and bad debt, and increasing operational efficiency so that companies may
achieve strong ROI in just a few months. To learn more, please visit www.highradius.com

HighRadius’ Integrated Receivables Platform

Integrated receivables Flow Diagram: HighRadius Solutions

Integrated Receivables optimizes accounts receivable operations by combining all receivable and payment modules into a unified business process. The Integrated Receivables platform provides solutions for credit, collections, deductions, cash application, electronic billing, and payment processing – covering the entire gamut from credit-to-cash.

The HighRadiusTM Integrated Receivables platform stands out by enabling every credit and A/R operation to execute real-time from a unified platform with an end goal of lower DSO, reduced bad-debt, and faster dispute resolution while improving efficiency and accuracy for cash application, billing, and payment processing.

HighRadiusTM Integrated Receivables leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes. The Integrated Receivables platform also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier Accounts Receivable process to the buyer Accounts Payable process.