Developments in SEPA Direct Debits
The single euro payments area (SEPA) project, which will implement a level playing field for payments across the eurozone, has seen two important developments during the first half of this year.
First, on 31 March, the European Payments Council (EPC) formally confirmed 2 November 2009 as the launch date of the SEPA Direct Debit (SDD) scheme. This is significant as there had been an element of uncertainty concerning the November deadline, mainly due to the lack of clarity as to what approach the European regulator would take with regards to multilateral interchange fees for direct debits.
Similar to the adherence process of the SCT scheme, which was implemented on 28 January 2008, each bank can adhere to the SEPA direct debit, on a voluntary basis, through an adherence process that started on 1 May 2009. In parallel, the industry-testing programme of the pan-European clearing house Euro Banking Association (EBA) for SEPA direct debits was launched and the first participants have successfully passed these tests.
Second, the European Parliament has updated an existing EU regulation from 2001 – Regulation 2560/2001 – that at the time introduced uniform charges for cross-border and local payments. The newly updated regulation was adopted on 24 April 2009 and extends the scope of the regulation to include direct debits, which means that the principle of uniform charges equally applies; second, and more importantly, it sets a mandatory reachability deadline – so banks operating in the eurozone must be reachable for the core SEPA direct debit by 1 November 2010. For banks outside the eurozone, the deadline is 1 November 2014.
Lastly, the updated 2560 regulation also sets the rules for multilateral interchange fees. These rules lay out an interim period until November 2012, during which countries can maintain the existing multinational interchange fee arrangements for national direct debit transactions. Also until 2012, there will be a maximum interchange fee of 8.8 eurocents for cross-border direct debits. From 2012, the interchange fee will cease to exist and the banking community will have to come up with a common long-term business model that is in line with European Commission (EC) competition rules.
Spotlight on France
On 29 April, less than one month after the EPC’s decision on the launch date, the French National SEPA Committee announced that, as a banking community, it will be ready for SEPA by 1 November 2010. However, that does not mean that individual banks will be blocked from moving forward with their own SDD projects.
Deutsche Bank, for example, will be ready to accept SDDs as of 2 November this year, as will our branch in Paris. Some other French banks are also continuing with their programmes. The National SEPA Committee, which is jointly chaired by the Banque de France and the French Banking Federation, made the point that the French banking community as a whole needs more time to prepare, which is why they have commonly set the official launch of SDDs in France to November next year. One of the reasons for the delay in France is the reassessment of the business case based on the EC’s decision on interchange fees.
For the SEPA adherence process, we initially expect mainly the larger banks – the cash management banks or the big players in the payment arena – to adhere to the SDD, but not all will be ready for this year’s launch. Once reachability becomes mandatory a year later, corporates will be able to collect money from across the eurozone with this new pan-European collection instrument. We do not expect a mass migration of direct debits in the course of 2010 before that reachability deadline.
What we do, however, expect to see, from November 2009 until November 2010, are selected direct debit pilot projects, mainly in the business-to-business (B2B) area, simply because transaction numbers are usually lower in this space and on both sides there are corporates and banks who are likely to be ahead of the curve.
SEPA Direct Debits: B2B versus Core
November will see the launch of both the SEPA core direct debit scheme and the B2B scheme. The core and B2B schemes are two distinct collection instruments that are described in separate rulebooks. Although they work on identical technical and operational principles, they differ in a number of business-related aspects. The fundamental difference between the two schemes relates to the finality of the payments.
Whereas the core direct debit can be returned by the debtor up until eight weeks after the debit, the B2B is non-refundable by the debtor. To ensure protection of corporates against unauthorised debits, the B2B scheme provides for a mandatory control of the debit authorisation by the debtor bank. This is not the case for the core scheme, where a mandate check by the debtor bank is optional (as the debtor himself has the possibility to claim a refund). The B2B SEPA direct debit is an optional service offering for banks, both on the creditor and debtor side.
According to the SEPA indicators compiled by the European Central Bank (ECB), in February 2009 the share of SCTs as a percentage of the total volume of credit transfers generated by bank customers amounted to approximately 1.9%. This jumped in March to 2.9%, mainly due to Slovenia moving all its credit transfers to SCTs, and as of April this figure stands at 3.1%. Slovenia and Luxembourg made the transition to SCTs very quickly because both have the international bank account number (IBAN) and bank identifier code (BIC) as their national standards for account numbers.
The IBAN and BIC requirement is one of the reasons why the transition process of local payments in other countries is much slower. As most of the legacy payment formats are based on local account number formats rather than IBAN/BIC, this data is not readily available in corporates’ databases. Many countries have recently – in the second half of 2008 – developed services that help corporates migrate entire databases of account numbers and bank codes into IBAN and BIC. These services will significantly ease the transition effort to the new account identifiers for corporates. However, the technical implementation, i.e. the enablement of corporates’ systems to hold IBAN and BIC data for local transactions, still needs to be completed.
Another reason for the reluctant update of the SCT is that many corporates using both credit transfers and direct debits are waiting until all SEPA instruments are available so that they can approach the migration as one project. Once the SDD is launched and full reachability is gained, we believe there will be a push from the corporate side for both SDDs and SCTs.
Lastly, the end date for the co-existence of SEPA and legacy schemes will play a major role for the SEPA migration pace. Such an end date will provide the much-demanded planning certainty for all involved parties – users, service providers and banks alike. For certain users a firm end date will be the only incentive to move to SEPA. This is the case particularly for the large number of companies who are active only at national level and who have adapted their processes to their local payment schemes that are generally functioning well. Naturally, their benefits in moving to SEPA are less obvious than for corporates active throughout Europe.
Consultation on Possible End Date(s) for SEPA Migration Open until 3 August 2009
On 8 June 2009, the EC launched a formal consultation process on possible end dates for the migration of SEPA transactions. The Commission stipulates that the SEPA project holds much promise in terms of improved efficiency, dynamism and competitiveness of the European economy. Significant progress has been made since 2002, but migration to SEPA remains slow. It is therefore necessary to analyse whether some deadline(s) should be defined for the migration of corresponding legacy payment products to the new SEPA Credit Transfers (SCTs) and Direct Debits (SDDs). Setting (a) clear deadline(s) for the migration of legacy products to SEPA products would provide certainty so that stakeholders can adopt a SEPA strategy, an adequate migration planning and allocate the necessary budgets for SEPA in the next few years. Concerns have, however, been expressed that more time might be needed to see how the market develops spontaneously before assessing whether there is a market failure or not.
The objective of this consultation is to get a more comprehensive view of stakeholders’ positions on this issue. The consultation paper presents all the options available today regarding the definition of such an end-date and regarding its potential practical modalities, e.g. if an end-date is seen as needed, there could be one common end-date for SCT and SDD migration or two separate end-dates; an end-date could be set at national level and/or at European level; it could be left to self-regulation or could be set by regulation.
To contribute to the consulation process, please go to the European Commission’s website.
Spotlight on Germany
In Germany, there is one issue of particular importance for the SDD that has, unfortunately, not yet been resolved: mandate migration. More than most other countries, Germany has the issue that the mandates that were signed for the legacy direct debit schemes (the so-called ‘Einzugsermächtigungen’) cannot simply be used for SDDs as they are too different from a legal perspective.
There was hope that with the transposition of the Payment Services Directive (PSD), which provides a legal framework for SEPA, the German regulator would introduce clauses to help mandate migration. This has not yet happened and currently the German industry, which includes banks and some large users of direct debits, are commonly discussing whether there are practical concepts that can be used to overcome the issue without users being forced to exchange the mandates.
The reasons that corporates should be interested in SEPA have not changed. It is clear that it brings most benefits for corporates who are active in many European countries and are struggling with the different formats, processes and legal environments existing today. SEPA will really help them to harmonise, standardise and centralise.
The SDD is important beyond this group of mainly large multinational corporates because, for the first time, collections can be done on a cross-border basis. This could also be interesting for smaller corporates who have selective activities in other European countries and for whom today’s lack of a pan-European collection instrument represents a hurdle to conducting business. The SDD will give these corporates an instrument to easily extend business or improve their collection processes within the eurozone.
For all corporates it is important to be aware of SEPA and its implications due to the launch of the end-date discussion by the EC. Even if the potential end date remains three or four years away, a corporate needs to have a clear view on the preparation needed for its changeover. The challenge will be to plan the SEPA migration project in such a way that the project end date is no later than the (yet to be determined) end date for the legacy schemes. To achieve this, the analysis phase should be completed as soon as possible, so that the required timelines for each of the implementation project steps can be determined. In this way, it will be possible to estimate the full project duration, and to easily determine the latest starting point once end dates are set.
It would be a wasted opportunity, especially for large corporates, if they ‘just’ carried out a regulatory SEPA project without leveraging the benefits to harmonise, streamline their processes and gain from the benefits SEPA brings them. It is one thing to say ‘let’s be ready’, but another to say ‘let’s make the best of SEPA and leverage it to improve our business processes’.
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