New Possibilities in Cross-border Payments
With the introduction of the single euro payments area (SEPA) Direct Debit (SDD) on 2 November 2009, a new payment method in Europe was launched: the cross-border direct debit. The SDD scheme – comprised of two instruments: SEPA Core Direct Debit and SEPA Business-to-business (B2B) Direct Debit – enables bank customers to make and receive direct debits within and across 32 European countries.
The European Payments Council (EPC) has called on businesses and public administrations to assess their current payment architecture and consider taking advantage of the new payment and collection method. Bank customers can achieve significant efficiency by standardised processes resulting in improvement of cash flows, liquidity pooling and cost reductions.
On the launch date, Gerard Hartsink, chair of the EPC, said: “From today, banks across SEPA countries start to roll out SDD services to customers. By 1 November 2010 there will be full reach for the Core SDD in the euro area as mandated by EU regulation. This presents European businesses with a prime opportunity to benefit from harmonised standards and streamlined processes when making and receiving payments across 32 countries – consisting of the 27 EU member states, Iceland, Liechtenstein, Norway, Switzerland and Monaco.”
Corporates have the advantage that they can use both types of direct debits, whereas consumers can only use Core SDDs. For high volume transactions, corporates should use the Core SDD because the administrative expense for collecting B2B SDDs is potentially higher than for the Core instrument. Nevertheless, it is important for corporates to understand the differences between the two direct debit payment instruments.
The introduction of the SDD is a key milestone in the creation of an integrated euro payments market across SEPA, according to the EPC. The SDD scheme will facilitate the expansion of businesses across national borders, by introducing a standardised payment infrastructure. End-to-end SEPA solutions based on global International Organisation for Standardisation (ISO) standards will also lead to streamlined back office functions and simplified reconciliation, for example.
The benefits of SEPA will apply equally to both consumer and corporate customers. The advantage for corporate customers operating on a Europe-wide basis is the ability to make payments under the same terms and conditions throughout the SEPA zone. Furthermore, a standard data format and data quality allows core data to be centralised onto a single platform, providing easier processing of all payment data. Therefore, these new instruments will help multinational companies manage transactions in various countries more easily, without the need to have knowledge of individual market-specific system requirements in each country.
Nevertheless, corporates need to pay attention to the market to get a clear understanding as to how and when banks will provide new services to their customers via SEPA standards.
Although the official launch has occurred, many banks across Europe have not yet signed the adherence agreement for the SDD scheme. Therefore, at present, not all banks in the SEPA zone are reachable. This is a serious situation because it means that a corporate attempting to debit a client’s account may not be successful because the debtor’s bank may not accept SDD mandates.
At the end of 2010, however, the market will achieve a higher reachability rate because of Regulation (EC) 924/2009. This regulation eliminates the differences in charges for cross-border and national payments in euro, and applies to payments in euro – up to the value of €50,000 – in all EU Member States. The basic principle is that the charges for payment transactions offered by a payment service provider (PSP) must be the same whether the payment is national or cross-border.
The regulation applies to all electronically processed payments, e.g. credit transfers, direct debits, etc. Some conditions may apply depending on the type of a payment transaction. For example, for credit transfers and direct debits, the use of International Bank Account Number (IBAN) and Bank Identifier Codes (BIC) when ordering the payment, is obligatory. Depending on the decisions of the Member States, this regulation may be extended to payments in national non-euro currencies.
This will encourage banks that have not yet moved to SEPA instruments to switch over. The PSP of a payer reachable for a national direct debit transaction denominated in euro on the payment account of that payer shall be reachable, in accordance with the SDD scheme, for direct debit transactions denominated in euro initiated by a payee through a PSP located in any Member State. This will be in effect from 1 November 2010.
Despite the regulatory pressure on PSPs, most small and medium enterprises (SMEs) and large multinational corporates, as well as public administrations, will only upgrade their technology and move all their euro payments to the new SEPA standards if it is mandatory. Therefore, it is very unlikely that a full migration to the SEPA schemes, whether SDD or SEPA Credit Transfer (SCT), will happen without an end date, even if the banks and PSPs commit to migrate themselves.
Furthermore, in order to standardise the European payments market, which is the main objective of SEPA, it will be necessary to phase out national payment methods and develop systems for cross-border payments across Europe. Therefore, parallel systems for domestic, European and even pan-European payments cannot continue indefinitely – various national systems must be abolished over the next decade. Nevertheless, the market should regulate the migration automatically on its own, rather than a forced migration by legislative means.
The European Commission (EC) launched a public consultation on a possible end date for a mandatory migration of legacy payment systems and instruments to SEPA in June 2009. The results published in September showed that a large majority of respondents (including corporates) support the idea of setting an end date to stimulate migration to SCTs and SDDs.
However, some questions remain:
In any case, an end date has to be put in place in a careful manner and take into account such things as, for example, investment cycles at both banks and corporates.
As debits require considerable preconditions, such as a legal mandate, which are not completely settled in all countries as of yet, Commerzbank recommends different end dates for legacy payment instruments.
The date should be set by the EC, as its effective reach is wider than a regulation set by the ECB, which only targets the interbank space. An end date will only have the expected and necessary impact if it targets the full end-to-end value chain, i.e. also the customer side. A regulation only deemed to satisfy the interbank space is not sufficient as all burden will remain with the banks and their customers will not migrate.
In any case, the formal preconditions, such as the relevant data formats, are set. Preferably an end date should be equal for all countries for the different types of payments. A single end date will avoid competitive distortions in Europe.
The SDD scheme will offer new business opportunities and should potentially lead to account concentration and better liquidity pooling for companies. However, to achieve the full benefit of – and to be able to use – the new transaction instruments, it is absolutely necessary for corporates to prepare themselves.
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