KLM Case Study

Transaction Services
KLM: SSC fast-tracks efficiency gains
from SEPA
KLM Royal Dutch Airlines is a worldwide company based
in the Netherlands.
The Challenge
When the banking industry began
planning the Single Euro Payments
Area (SEPA), KLM decided it wanted
to be an early adopter. SEPA creates
a Europe where payments in euro
— domestic and cross-border — are
made using common payment
instruments and infrastructures,
and take place according to the
same business rules, pricing
structures and technical standards.
The first phase came into effect
in January 2008, with the SEPA
Cards Framework (SCF) and SEPA
Credit Transfers (SCTs). By the end
of 2013, the vast majority of euro
transactions will have migrated from
national schemes to SEPA standards.
“We wanted to start using SEPA
payment instruments as soon as
they became available, as they are
more efficient than national ones,”
says David van Mechelen, a Senior
Manager in KLM’s Treasury and
Corporate Finance department.
“The fact that KLM is active in so
many European countries made
it obvious there were big benefits
to be had from harmonizing
payments and collections.”
This objective presented two key
challenges: first, for KLM’s global
payment factory to adopt the SCT
as soon as it became available
in January 2008; second, to
change the payment format to the
XML standard used by SEPA.
The Solution
KLM was already a long-standing
Citi client, and the two had
worked together to create the
global payment factory several
years earlier, which had brought
with it significant efficiencies.
It was therefore a relatively
straightforward matter for the
two organisations to cooperate to
make all the changes necessary
for KLM’s payment factory to
operate to SEPA standards, but it
required thorough preparation.
“For a company, implementing
SEPA is heavily IT-driven, so you
need to work closely with the
internal people responsible for the
software in the payment factory
and the IT team in the transaction
bank,” says van Mechelen. The
work involved creating new security
standards, new connectivity checks,
implementing procedures for SEPA
collecting and validating BICs
(Bank Identifier Codes) and IBANs
(International Bank Account Numbers)
from payees, and much more.
As for switching to the XML standard,
the two organisations’ IT teams
Transaction Services
created a workable format and then
ran a small pilot to test it. Once that
proved a success, they rolled out the
XML format and the SCT in all 22
SEPA countries where Citi provided
KLM with transaction services.
The Result
KLM has made significant external
and internal cost savings in its euro
payments. The external savings have
come from the fact that SCT rates
are lower than domestic ACH credit
transfer rates, and from the ability
that SEPA offers to reduce the
number of bank accounts it holds.
The internal savings are even
greater and come in several areas.
“First, thanks to the SEPA pilot,
which forced us to review all the
processes from receiving the invoice
to making the payment in each
country, we identified and acted on
a number of inefficiencies,” says
van Mechelen. “Second, we now get
a better insight into the volumes
and costs of the transactional
services we use. As one of the
consequences of this, KLM replaced
more expensive payment types with
cheaper ones where possible.”
cash-management banks. It’s an
easy standard to use and it gives
better control in routing payments.
A fourth internal cost saving
has been made in back-office
administration. With the reduction
in the number of bank accounts,
there has been a corresponding
reduction in the need for monitoring,
reporting and reconciliation.
This case study was written shortly
after the SCT introduction.
A third internal cost saving has
come through standardization,
especially the XML messaging
standard that the SCT uses and
that KLM now uses with its three
Transaction Services
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