Etienne Goosse, secretary-general of the European Payments Council, suggests that companies act now in readiness for the new SEPA regulation taking effect from 1 February 2014.
In February 2012, the European legislator adopted regulation (EU) 260/2012 establishing technical and business requirements for credit transfers and direct debits in euros and amending regulation (EC) 924/2009. This legislative act is commonly referenced as the Single Euro Payments Area (SEPA) regulation.
It defines 1 February 2014 as the deadline in the eurozone for compliance with the regulation's core provisions; in non-euro countries that deadline will be 31 October 2016. Effectively, this means that, as of these dates, existing national euro credit transfer and direct debit schemes will be replaced by SEPA credit transfer (SCT) and SEPA direct debit (SDD).
It is important to note that SEPA affects not only payment service providers (PSPs), but also payment service users (PSUs) such as corporates, small and medium-sized enterprises (SMEs), public administrations and government agencies. Consequently, market participants in the euro area need to ensure compliance with the 1 February 2014 deadline for the migration to harmonised SEPA payment schemes established with this European Union (EU) regulation.
Article 16 of the SEPA Regulation permits individual EU member states to extend the deadline for compliance with some of its provisions until 1 February 2016. It is, however, recommended that PSUs analyse the impact of the SEPA regulation on their day-to-day operations now, even if EU member states opt to make use of the derogations permissible under Article 16.
The experience of early movers handling major payment volumes on the demand side indicates that migration to SEPA schemes and technical standards is beneficial, but requires careful planning. The relevant actions and resources should be identified as soon as possible. Banks and other service providers are making available the tools required to facilitate the transition.
Potential challenges to SEPA
SEPA project managers representing early movers on the demand side that have successfully concluded migration to SCT and SDD identified challenges in the following areas:
Conversion of customer account data to the international bank account number (IBAN) and the business identifier code (BIC). The SEPA regulation mandates PSUs to provide the IBAN of the account that should be credited or debited and, where necessary, the BIC of the account-holding PSP.
The SEPA regulation stipulates that PSUs will not have to provide the BIC for national transactions after February 2014. The EU member states, however, have the option to extend this deadline to February 2016. This 'IBAN only' rule will apply for cross-border transactions after February 2016.
Implementation of the ISO 20022 message standards. The SEPA regulation states that PSPs "must ensure that where a PSU, which is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or direct debits that are not transmitted individually, but are bundled together for transmission, the ISO 20022 XML message standards are used". PSUs will therefore have to make arrangements to adapt to the usage of ISO 20022 XML message standards in the customer-to-bank space in relation to files of payment transactions.
These challenges are the same with regard to both the SCT and SDD schemes. Some of the specific requirements to be observed with regard to SDD implementation relate to, for example, mandate management, the time cycle and exception handling.
SEPA regulation (Article 7)
The SEPA regulation (Article 7) states that any "valid payee authorisation to collect recurring direct debits in a legacy scheme prior to 1 February 2014 shall continue to remain valid after that date and shall be considered as representing the consent to the payer's PSP to execute the recurring direct debits collected by that payee in compliance with this regulation in the absence of national law or customer agreements continuing the validity of direct debit mandates".
This provision therefore ensures that existing mandates under the SDD core scheme continue to remain legally valid, thereby greatly contributing to facilitating the migration by bank customers to the SDD scheme.
Article 5(3)(d) of the SEPA regulation empowers a payer to be able to instruct its PSP to take the following actions in respect of direct debit collections:
- limit a direct debit collection to a certain amount and/or periodicity
- verify each direct debit transaction, and check whether the amount and periodicity of the submitted direct debit transaction is equal to the amount and periodicity agreed in the mandate (where the mandate under the relevant payment scheme does not provide the right to a refund) before debiting their payment account, based on the mandate-related information
- block any direct debits to the payer's payment account, or to block or authorise any direct debits initiated by one or more specified payees.
Although these mandate-checking obligations do not apply where neither the payer nor the payee are consumers, they may nevertheless affect on PSUs. A consumer may instruct its PSP to block all direct debits to its account or to 'blacklist' a specified biller by blocking direct debits initiated by it. Similarly, under Article 5(3)(d) a payer may instruct its PSP to only allow collections from a biller identified in a 'whitelist'. In the event that the biller is included on the 'blacklist', or excluded from the 'white list', the payment will fail. Billers should proactively advise customers paying by direct debit to unblock accounts.
Customers who make use of the option to specify creditors authorised to collect payments from their account should ensure that all properly authorised creditors are included on this 'whitelist'. Customers, who chose to create a 'blacklist' naming creditors not authorised to collect payments from their account, should ensure that those creditors authorised to collect payments are not erroneously included on such a 'blacklist'.
Keeping in mind that the process of collecting a payment by direct debit is initiated by the biller, the biller (and, in consequence, the biller's bank) must respect the timelines defined in the SDD Core and the SDD B2B Schemes for the execution of a direct debit collection. When migrating to the SDD Schemes, PSUs therefore have to align processes and operations accordingly. The timelines of the SDD B2B Scheme differ from those of the SDD Core Scheme.
One of the main benefits of the SDD Schemes is that the scheme rules streamline exception-handling, both at the process level and the dataset level. This allows straight-through processing and automated exception handling end-to-end. Possible exceptions to the normal execution of a direct debit collection include refunds, returns, rejects, reversals, revocations and requests for cancellation (commonly referenced as R-transactions).
Factors that may trigger an R-transaction include technical reasons or may be related to the financial status of the account of the payer. An R-transaction may also be triggered when the payer exercises its right to a refund. The SDD Core Scheme goes beyond the requirements of the Payment Services Directive (PSD) by granting consumers a 'no-questions-asked' refund during the eight weeks following the debiting of a consumer's account. This means that during this time, any funds collected by SDD will be credited back to the consumer's account on request.
In the event of unauthorised direct debit collections, the consumer's right to a refund extends to 13 months as stipulated in the PSD. The EPC Newsletter published quarterly by the European Payments Council (EPC) features a series of articles supporting billers migrating to SDD.
Smoother account reconciliation
Early movers on the customer side who reported on their migration experience in the EPC Newsletter concur that migration to SEPA pays off. The insurance company UNIQA Group Austria, which services approximately 7.5 million customers in 21 regional markets, completed migration to SCT and SDD by 2011.
As Thomas Weissmann, project manager with the group, says: "SEPA is an excellent and necessary idea. Firstly, migrating to the harmonised SEPA payment schemes allows for more efficient account reconciliation. Secondly, being able to collect direct debits throughout Europe using the harmonised SDD Schemes is also a principal advantage for us."
The ceramics manufacturing company Villeroy & Boch is headquartered in Germany and represented in 125 countries around the world. It is also a true SEPA pioneer. In 2007, the group decided to implement SCT as the first step in the process, and this project was concluded in 2008. The SDD Core and the SDD B2B Schemes were implemented in the second stage.
This project was launched in 2010 and completed in 2011. Villeroy & Boch processes roughly 175,000 credit transfers (with a volume of €310m) and 25,000 direct debits (with a volume of €75m) annually. Dr Warncke, group financial controller at Villeroy & Boch, says: "Our figures demonstrate that the benefits resulting from migration to the SEPA Schemes and standards exceeded the investment in the first year alone.
"In line with our expectations, we were able to streamline internal processes, lower IT costs, reduce costs based on bank charges, and consolidate the number of bank accounts and cash management systems. In addition, we could further centralise our cash management.
"The fact that there is now one harmonised SDD Scheme, which allows collecting payments throughout Europe, is also a major advantage," Warncke continues. "We realised significant efficiency gains from the implementation of the ISO 20022 message standards.
"The reality is that the benefits of an integrated euro payments market outweigh the short-term efforts to get there. The earlier you start, the better."