Indeed, a major milestone has just been achieved: in the 18 euro countries in Europe retail payments in euro have been harmonised and standardised. This might not sound terribly noteworthy and exciting, or worth much fanfare. Nonetheless, the fact is that the vision of a single euro payments area (SEPA) where cross-border payments can be processed as efficiently and safely and at the same price as domestic euro payments from one single euro bank account has now been realised.
Good things take time – and a little push
SEPA was a project long in gestation. Its inception was in 2002 and only now, some 12 years later, has it become reality in the 18 euro countries. In addition, non-euro countries – where the euro is used for payments as well – have a deadline of October 2016. Once that timeline has been met, a total of 34 European countries comprising approximately 500m citizens and 20m businesses can use a single euro bank account for all euro credit transfers and direct debits in Europe.
One reason why SEPA took so long was inertia. Originally, the banking industry thought it could achieve SEPA solely through voluntary effort. Banks and businesses were supposed to migrate to SEPA standards and rules voluntarily, with the majority of payments being SEPA-compliant by 2010. That didn’t happen. Corporates saw no reason to incur the cost of changing to SEPA standards when the domestic payments market functioned smoothly and efficiently.
So a push was needed. The European Union (EU) provided this in the 2012 SEPA regulation. It set a deadline of 1 February 2014 for banks and corporates to migrate to the new standards. This certainty in the market induced banks and corporates to speed up their efforts. In April 2013 Germany complemented the EU SEPA regulation with a national law (SEPA-Begleitgesetz). This assured that the new SEPA standard would become the only standard while the German legacy format would be decommissioned. In addition, the SEPA-Begleitgesetz stipulated specific transitional rules that Germany would follow.
The challenges of migrating a complex market
Some countries had an easier time migrating to SEPA than others: smaller countries with fewer banks and businesses, and markets where relatively few payment instruments were used, were able to accomplish SEPA migration more easily.
In Germany the SEPA project met with many challenges. Generally, size, complexity, national characteristics and the requirements of the payments market were among the reasons. In terms of size, Germany is a large country with a population of 82m. Its individuals and businesses make approximately 18bn electronic euro payments per year, representing the largest share of the 87bn electronic euro payments market in Europe. It is saddled with an enormous number of banks: over 2,000 credit institutions provide payment services. There are an estimated 3.6m businesses in Germany, among them many small to medium enterprises (SMEs). Add to these public authorities, charities and approximately 600, 000 associations, ranging from the knitting club to the choir to the tennis club, and it becomes clear that SEPA affected an enormous number of stakeholders.
The complexity of the German payments market posed challenges; over many years a multitude of payment instruments in the German Datenträgeraustauschverfahren (DTA) format had been used. With SEPA, the DTA format had to disappear. Additionally, many DTA-based support processes such as account bridges (Kontobrücken), automatic re-direction (automatische Weiterleitungen) and settlement instructions (Leitwegsteuerungen) had to be redeveloped. In 2013 the German Bundesbank estimated that of 60m credits and debits per day, about 30,000 cases per day would need repair as a result of moving to the new SEPA format.
One characteristic of Germany is the heavy usage of direct debits: 39% of all direct debit transactions in the EU are made in Germany, corresponding to 74% of all the money debited directly in the EU. Consumers use direct debits in daily life to pay for utilities; insurance companies collect premiums, and telecoms collect their bills via direct debit. The German Lastschrift, Einzugsermächtigungsverfahren and Abbuchungsverfahren worked efficiently and well. No surprise then that there was much resistance to the idea of having to change. Why change if it isn´t broken? In particular, the new SEPA direct debit (SDD) – which is a complex product that requires pre-notification, creditor identifier numbers, additional account information, a valid written mandate, etc – was met with great reluctance.
But the intent of a uniform pan-European SDD was to introduce an instrument that could be used domestically as well as cross-border. It would benefit consumers as well as businesses; for example, a Belgian insurer would be able to sell to German consumers who could have their insurance premiums debited from their German bank account. This would expand the market for insurers, and it would provide consumers with a wider choice of providers.
The SEPA regulation allows for specific national requirements. Germany decided to introduce an additional SEPA variation, the so-called COR-1 SEPA direct debit, which has a shorter processing cycle than the ‘standard’ SDD and most closely resembles the legacy Einzugsermächtigungsverfahren. It was agreed that this would be offered by German banks from November 2013. Unfortunately this meant that many German businesses decided to wait until after November 2013 to move to SEPA. This ‘last minute’ approach slowed down migration.
The run-up to August 2014
While preparations for migrating to SEPA accelerated in 2013, it became apparent that businesses, especially SMEs, were lagging behind. Just a few days before the mandatory migration date of February 2014, the European Commission (EC) proposed to provide transition period of six months up until 1 August 2014. This did not mean the deadline of 1 February 2014 was rescinded; rather, it meant that non-SEPA compliant payment instructions would still be accepted by banks for a further six months. This concession minimised the risk that might have resulted, had banks rejected payments which were not in SEPA format.
In Germany, the introduction of the transition period received enormous attention yet mixed reactions. Germany decided to leave it up to its individual banks whether or not they would accept payment instructions in legacy format during the transition period. With hindsight, the transition period was declared “useful but not needed” in Germany.
Strenuous efforts were made during the transition period to catch up and meet the new 1 August deadline. In mid-July, a survey of SMEs in Germany showed that 89% declared themselves ‘fit for SEPA’ although their enthusiasm was limited. Less than 2% said they might not be able to meet the deadline. Official July data by the German Banking Industry Committee (Deutsche Kreditwirtschaft) showed a similar picture: nearly 94% of all credit transfers and 86% of direct debits were already SEPA-compliant*. European Payments Council (EPC) data reveals that in July 2014, over 1,800 banks in Germany were offering SEPA payments; the majority were also providing SDDs. By 1 August all had accomplished what they needed to do.
Where do we go from here?
The final 1 August 2014 deadline came and went in Germany, without a problem or noticeable disruption. In a press release the Bundesbank stated that the SEPA implementation had taken place without a hitch. SEPA achieved much positive media attention with every newspaper, online media, TV-stations and even tabloids reporting on the arrival of the new single euro payments area.
But 1 August is not the end of the SEPA story. The SEPA area itself will become larger with additional countries joining. Moreover, there is still much SEPA-related work that needs to take place:
- In Germany, the popular Elektronisches Lastschriftverfahren (ELV) product must be phased out and replaced by a SEPA-compliant variation by February 2016. ELV is basically a payment card used at the point of sale (PoS). The consumer generates a direct debit (Einzugsermächtigung) via his or her signature.
- Secondly, some of the SEPA rules still result in cumbersome handling and manual repair. Mostly these are caused by SDDs, and include issues around mandate confirmation and the handling of rejects and returns. The EPC has recognised the need for clarification, amendment and simplification and started a consultation period which ended in mid-August. The changes to SEPA rules will be reflected in the next versions of the SEPA Rulebooks.
- Thirdly, Germany will contribute to the work of the European Retail Payments Board (ERPB), which was established in late 2013. It will focus on post-SDDs. To do so, the ERPB will identify, address and provide solutions to counter existing obstacles.
- With harmonisation of euro credit transfers and direct debits mostly achieved, attention is now focused on additional payment types which fell outside the SEPA efforts, such as cards, internet and mobile payments. We are therefore likely to see a continuation of the efforts which have kept the German market busy in recent years.
So in conclusion, the critics, sceptics, doomsayers and naysayers around SEPA have become remarkably quiet over the last few months. Ultimately, SEPA has made a good start despite all the negative press it received in earlier years. We can look forward to further progress.
*August data was not yet available at the time of writing