SEPA Direct Debit and the Centralisation of Euro Receivables Management
The SEPA DD is based on a four-corner model involving the creditor (the SEPA DD issuer), the debtor (the SEPA DD payer) and their respective banks. In the context of the SEPA DD scheme, these parties are bound together by a Mandate and, as far as the interbank activities are concerned, by scheme rules as indicated in the Rulebook. And it is only those elements that are included within the scope of the scheme. The commercial relationship between creditor and debtor, which gives rise to the need for a SEPA DD is a matter between those two parties only and, crucially, the product features offered by banks to their customers are left, quite deliberately, in the competitive space.
In essence, the Rulebook is concerned with the correct application of message standards and adherence to strict timelines for the processing of mandates, collections, amendments and ‘R’ transactions (rejects, returns and refunds). It is on this foundation that the end-to-end customer experience will be built by those banks and other service providers who choose to provide a range of optional services. While the Rulebook makes clear the responsibilities of the various participants in the SEPA DD scheme, there is ample opportunity for operational activities to be outsourced to third parties or incorporated by banks into an enhanced service proposition.
From a bank’s perspective, the key question is whether it aims simply to comply with the minimum standards demanded by the Rulebook or whether it should seek to add value? If it wishes to add value, how and in which areas? Given the pressures presented by the SEPA timeline, what should it look to offer from January 2008 and what could be phased in over time? This should cause the customer to ask its bank various questions.
Not all banks, by any means, will be looking to support the large corporate clients who will be the major creditors in SEPA DD, the case with the national DD schemes today. But those who do wish to attract the business of the large SEPA DD originators will need to come up with ways of differentiating their proposition. For example, the SEPA payment schemes are based on ISO 20022 XML messaging. While mandatory in the bank-to-bank space, these new and unfamiliar formats are only recommended for bank-to-customer messaging. So, will the bank seek to push out the obligation to comply with the new standard or will they offer data mapping services to shield the customer from needing to change their back-office or ERP platform?
Of course, the advent of XML-based messaging in this area may well herald a great push to utilising open standards across the supply chain, with the resultant benefits, which have been sought by many chief financial officers (CFOs), but to what extent will this have taken shape by January 2008?
From the creditor side, which input channels are banks looking to utilise for SEPA DD? Does this mean change for the customer or are they again being shielded by their bank? Or have banks made arrangements with service providers, perhaps a clearing and settlement mechanism, to allow creditors to submit their SEPA DD files directly into a centralised processing platform? Whichever the approach, what is the level of reporting service being provided to the creditor, particularly in respect of ‘R’ transactions, which could make reconciliation and business management more difficult?
The debtor side of SEPA DD is more far-reaching, potentially affecting all banks in Europe. But, when it comes to paying DDs, the experience of customers varies from country to country. In some, it is common for the debtor’s bank to exercise a degree of control around the presentation of mandates and the processing of subsequent collections. Equally, in others, collections are simply charged to the debtor’s account. These variations in approach have existed happily within the scope of national DD schemes, but will banks be looking to change their approach under SEPA DD? Remember, the Rulebook does not prescribe that the debtor bank provides value-added service to their customer, but it does ensure that they will have the necessary information available to them and in good time should they wish to do so.
For the user of SEPA DD, it won’t be a case of ‘one size fits all’ from the banks. Expect to see differentiation between those who seek to do the minimum to comply and those who seek to add value by including features, which serve to insulate the customer from many of the changes taking place in the interbank arena. Expect also that the banks’ propositions will continue to develop beyond 1 January 2008, as new features are brought within the scope of the SEPA DD Rulebook, such as a business-to-business sub-scheme, and as the market begins to mature.
SEPA DD will become an increasingly important tool for the corporate treasurer and will remove many of the uncertainties associated with cross-border funds collection. A standardised, pan-European set of conditions concerning debtors’ refund rights will provide comfort that collections may be considered final on a common timescale of six weeks after debit date. But, that’s not the end of the story.
For those businesses receiving high cheque volumes (and there are still a number of countries across Europe where the cheque will remain a major payment instrument for some time), local collection through an in-country account may be required, although regional lockbox solutions may help with a centralisation push. Also, there are the non-banking reasons why multiple accounts may continue to be used across Europe, such as the need for in-country tax accounts. Not to mention that a corporate may need to maintain accounts with a number of relationship banks in order to retain a pipeline of liquidity and longer term facilities.
SEPA DD, with the other SEPA instruments, represents a major step towards the goal of fully centralised payables and receivables management in Europe. It is certainly a subject which those companies trading across Europe should be raising with their banks and factoring in to their plans as we look towards 2008 and beyond. It is also a topic to raise with their ERP vendor, to see what plans they have for making their applications SEPA compliant. Companies should look to see how they could make SEPA DD a strategic weapon in their receivables armoury. But, do not expect it to answer all of a treasurer’s prayers in 2008.