The launch of the SEPA Credit Transfer (SCT) in January and the SEPA Direct Debit (SDD) late next year aims to offer both corporate and consumer banking customers the opportunity to make more cost-efficient cross-border and domestic credit transfer or direct debit transactions. The initiative also aims to provide customers with common rules, predictable maximum time cycles for both one-off and recurrent transactions, as well as uniform costs for transactions made within the eurozone.
There are many challenges involved in transferring from the old to new payment order formats and systems though and this year corporates will have to face up to the realities of SEPA.
How is the SCT Affecting the Industry?
At the end of January this year, SCTs went live. Even though this has gone largely unnoticed by the general public and corporates, it means that payment services providers are now able to offer a core credit transfer service in euros for single, bulk and/or repetitive payments with a maximum execution time of three days between any point in the single euro payments area (SEPA). For most payments users, the introduction of the SCT has made no practical difference to the payments they want to make. This should come as no surprise because, despite SEPA originally being created primarily with corporates and consumers in mind, it is the banks that have ended up defining the detail behind the SEPA framework.
Consequently, most banks will be offering SCT to their customers without explicitly advertising the fact, mainly because SCT was always meant to be a ‘business as usual’ service. What the banks have achieved is a seamless migration from CREDEURO payments to the new SCT.
While the main SEPA deadline of 2010 has remained unchanged, the SDD deadline has, as predicted, moved out to November 2009. This is because the SDD requires harmonisation of all EU members legal framework for payments through the adoption of the Payment Service Directive (PSD). Consultations on the PSD between countries this year will be essential if a truly harmonised SEPA is to be achieved. However, such harmonisation will require countries to set aside the local differences that currently exist.
One example is the ability to reject incorrect direct debit transactions, which in the UK is an unlimited Direct Debit Guarantee whereas German consumers can complain about invalid debits for up to 30 days only. The PSD, however, now requires this capability to be available for at least eight weeks. Although crucial to the success of the SDD, it is certain that these terms will vary significantly across the EU if consensus is not established between the member states.
SEPA Priorities and Challenges for Corporates
One of the considerations for corporates as well as banks is the issue of conversion from old to new data formats. Due to the lack of a regulator overseeing the conversion, some banks interpret international bank account number (IBAN) and bank identifier code (BIC) formats in different ways within a given country and have different processes to convert their own, domestic accounts into the required form.
BIC and IBAN together comprise the unique identifier to concisely and accurately identify the location of a specific account and as such represent the key information required in enabling a payment to benefit from straight-through processing (STP). While the number of banks using different formats represents a relatively small percentage of accounts, it does mean that a 100% reliable conversion of the IBAN and BIC cannot currently be achieved. Furthermore, it is the corporate’s responsibility to get the BIC and IBAN details of their customers to effect the payment and they should be aware that they will be charged a repair fee by their bank if the details on the payments messages are non-compliant with the requirements of SEPA and Interbank Convention on Payments (ICP) requirements.
Another issue for corporates is the fact that for a single account there may be more than one valid BIC. In addition, it is often the case that the BIC used to route SEPA payments is different from the one published to customers with the account number. This problem was clearly highlighted last year when a large company with 120 million customers across Europe was asked to provide BIC and IBAN data instead of the domestic formats it currently holds in order to meet SEPA requirements. To obtain what were, in effect, completely new bank details from all of its customers, the company was asked to contact each customer individually. At an estimated cost of €10 per customer, it would have totalled a staggering €1.2bn – something unaffordable for most corporates in Europe and painful for the rest.
In the coming months, the financial services industry and corporates will need to end the confusion surrounding which data formats are acceptable and which need to be changed. For corporates, this means increased support from their bank and technology vendors to reliably migrate their data and make the necessary changes to their data capture systems.
Another key consideration around SEPA for corporates this year will be the potential to consolidate banking relationships. In anticipation, some banks are already making a strategic bid to win business by offering very attractive transaction rates, with the most strategically ambitious viewing SEPA as a real opportunity for growth. If corporates start to move their business to more attractive rates a price war could follow, but, in truth, transaction price is only a small part of the overall cost of working with a bank. Equally, if they follow the wrong approach, then banks could see their market share fall. As a result, many smaller banks will need to pursue strategic partnerships with larger banks or other payment service providers to succeed and to continue to thrive in the new single euro payments area.
The Price of SDD and SCT: Look Out for Hidden Obstacles
Banks and their customers are well aware that banking systems are open to fraudulent abuse and, due to the industry’s current focus on minimising card fraud, fraudsters are migrating to non-card instruments such as direct debit. As SEPA allows money to be transferred with the same ease, speed and cost as domestic transfers, fraudsters will almost certainly turn their attention to target the SCT and SDD. In order for corporates to ensure that criminals are not given the chance to fraudulently abuse banking customer’s payment details, bank account details must be validated at the beginning of the transaction process to ensure they match the individual setting up the payment. While existing direct debit schemes currently are vulnerable to this threat, we have almost 18 months to get it right for SDD.
SEPA Outside the Eurozone Borders
Non-European banks that are looking to expand or set up business operations in Europe will have to take SEPA into account. For major global banks, the SEPA changes are less extreme than for smaller banks, as they will almost certainly already have branches located within the eurozone.
The smaller international banks without a European branch will have to use service providers or European clearing banks and to ensure straight through processing, convert their payment data into valid BIC and IBAN form. Any bank planning to do business in the EU must therefore have a SEPA plan-of-action in place to be able to apply to SEPA regulations.
How Ready are European Banks and Corporates for the SEPA Deadline?
With over 4000 adherents to SEPA recognised by the EPC, almost all banks have made the migration to SEPA, but many have done the minimum possible as late as possible. The banks that have taken a more proactive stance and developed services for corporate customers are already in a position to capture additional market share.
While some multinational companies have already set out SEPA terms with their banks, most corporates are still questioning the virtues of investing in SEPA-compliant infrastructure due to the high cost involved and the lack of clear guidelines from the banks and the EU. Once corporates take full advantage of the opportunities SEPA creates, however, such as reduced cost through efficiency savings and reduction of the number of banks accounts, they will be able to benefit from a more standardised approach to Europe’s payment systems and potentially grow their international customer base.