SEPABank StrategyCorporate Update on BIC/IBAN Repair Charges

Corporate Update on BIC/IBAN Repair Charges

As we move forward to the creation of the single euro payments area (SEPA) in 2008, one of the first tasks for corporates (in terms of preparation) has been getting to grips with the introduction of international bank account numbers (IBANs) and bank identifier codes (BICs). Corporates who send payments messages that do not meet the requirements of the Interbank Convention on Payments (ICP) – i.e. the messages are not formatted correctly – are subject to charges, known more generally as repair charges. Repair charges are applicable when messages do not contain a valid IBAN in the correct field and/or an invalid BIC in the correct 52A to 57A field.1

Corporates should be aware that it is the sending client who is charged the repair fee by their bank, as it is their responsibility to get the BIC and IBAN details from their trading partner in order to update their payment records and effect the payment.

Payments that originate outside the European Union (EU) or European Economic Area (EEA) are not included in the scope of the EPC Resolution (see box below) for mandatory use of BIC/IBAN formats but remitters are urged to use the new EU standards to enable straight-through processing (STP).

Background to IBANs and BICs

The 2005 European Payments Council (EPC) Resolution dictated that from 1 January 2006, use of the beneficiary’s BIC and IBAN became mandatory on all cross-border euro payments within the EU/EEA.

The EPC recognised the mammoth effort required to achieve this by the deadline and so banks were granted approval to process payments without BIC and IBANs – but only under exceptional circumstances. Banks were able to treat these transfers as a ‘value-added service’ and, therefore, help corporates make the changes needed (i.e. obtain the BIC and IBAN details) until 1 January 2007. This meant that the non-compliance charge could be sent back to the originating customers.

As of 1 January 2007, all banks are entitled to reject or return, as a matter of course, any cross-border euro payments that do not contain the appropriate BIC and IBAN details.

According to Gerard Hartsink, EPC chairman, “The EPC has, in general, no position on pricing [of extra services] by banks to their customers. The Regulation 2560/2001 requires that banks do not make a distinction in their pricing, provided that a correct IBAN and BIC is given by the customer in the payment order. If customers for whatever reason do not give the IBAN and BIC in a payment order, their bank has to deliver extra services and is fully entitled to charge the customer for the service.”

Impact of the BIC and IBAN Resolution

To date, most sending and receiving banks continue to process corporate payments for their own customers without the mandatory formats but the receiving bank will generally apply a repair fee back to the sending bank. This is either passed back to the customer or absorbed by the sending bank – as the customer was charged an additional up-front fee by their bank – depending upon local market practice.

Since 2005, through regular communications, banks have continued to inform their clients of the likely penalties for failing to use BIC and IBAN for cross-border euro payments. In turn, customers have been updating their payment data by corresponding with their suppliers and business partners.

Speaking on behalf of the HSBC customer base, the use of BIC and IBAN for cross-border euro payments increased from 25% to 80% in 2006. This is expected to continue to increase as HSBC passes back correspondent charges for non-use of BIC and IBAN. This reflects significant take-up of the new standards for European payments and proves that the threat of a repair fee is sufficient to make customers approach their trading partners for the BIC and IBAN details.

Governance of Repair Charges

Repair fees are not capped and this is a concern for corporates. Currently, repair fees are around €10 per payment across the whole of Europe. The ICP has not fixed or put an upper limit on these charges, which means that they are not subject to regulation. Admittedly, regulating repair fees is difficult as pricing is generally fraught with anti-competition issues. As a result, there is no maximum timeframe within which repair fees can be charged, nor is there an industry standard or format that outlines the reasons that need to be provided for charging repair fees.

Banks monitor incoming bank charges to ensure that they relate to the parameters defined by the EPC Resolution and the amount of charges taken by other banks, which they pass onto their customers. The resolution is an important step towards SEPA with the single payment standards but it is not a regulation in itself.

Bank Approaches

In terms of charging for repair fees, different approaches have been adopted by the banking community, which fall broadly into three main categories:

1. No charges issued

Some banks have been slow to communicate with their customers and apply charges for non-compliant payments received from another EU bank. This may be because there are IT implications in being able to charge for identifying non-compliant payments. Things are improving but domestic banks are less likely to be inclined to communicate with their clients on the repair charges.

From January 2007, banks should have been communicating with their customers and educating them about the new payment standards. Failure to do so will mean that their corporates will be unable to benefit from the new SEPA payment products in 2008. Corporates in this situation are advised to contact their bank for details about the mandatory formats that are required.

2. Charging additional up-front fees for non-BIC and IBAN euro payments

The corporate receives an invoice (monthly or quarterly) from its bank for payments made without BIC and IBAN at the bank’s fee for such repairs. Charges are relatively less transparent, as they are based on a prediction as to what penalty fees they will be charged from the receiving bank.

3. Charging the sending or remitting banks additional fees for non-BIC and IBAN euro payments

This is the most transparent method of charging and – while variable – the charges would actually be more accurate than the second approach. Whether this approach is more cost effective depends on the size of the upfront repair fee charged (see above). However, given that all receiving banks do not charge back for such repairs the fees are likely to be lower than approach two overall.

One Bank’s Policy

Eventually, banks will move to making the inclusion of BIC and IBAN mandatory. However, at this stage we will continue to execute euro payments with or without BIC and IBAN. HSBC will not charge corporate clients additional fees at this stage. However, should we execute a payment without the mandatory BIC and IBAN information and subsequently receive a charge from the receiving bank for processing the non-compliant payment, we will pass this charge back to clients. This is because our sending customer has sent a payment without BIC and IBAN and we have received a penalty from the receiving bank, which we pass back (as per approach three above).

Equally, where a bank sends HSBC a euro payment for the credit of an account in our books without a BIC and IBAN, we will still process that payment but also send an additional fee to the bank that sent us the payment. We believe that this is a fair and transparent way to implement the Resolution. Generally, banks will have sent out a general communication about charges, and/or SWIFT instructions advising of the fees they will levy.

Corporate IBAN and BIC Checklist
  • The resolution on BICs and IBANs was passed in 2005, which means that at this stage corporates should be well advanced in transferring all of their euro cross-border payment details for trading partners to BIC and IBAN. If not, they will already have been receiving hefty penalties or experiencing payment delays depending upon volumes of payments processed.
  • Corporates should contact business partners and obtain these details and/or check incoming supplier invoices. There are payment software companies in the marketplace who can validate and cleanse client databases and even write on behalf of the corporate to collect BIC and IBAN details.
  • SEPA compliant products will all have to include BIC and IBAN details as standard from 2008 onwards, therefore, if corporates wish to benefit from lower cost products within the SEPA environment and avoid penalties, delays and/or rejections, they should be using these formats now.

Conclusion

The message is loud and clear: cross-border euro payments must contain the beneficiary’s BIC and IBAN details, and it will become increasingly difficult to make euro payments without BIC and IBANs. Failure to adhere to this pan-European initiative will continue to result in higher payment processing charges or the rejection or return of your payments.

To avoid the repair charges, corporates must make sure they comply with the ICP’s IBAN/BIC requirements. This should be a straightforward task; indeed, compliance is as easy as checking incoming invoices from your suppliers and/or contacting your clients directly.

1Fields 23E and 72 should not contain text and fields 26T or 77B should not be used.

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