The deadline is approaching, but there are hurdles that are likely to persist beyond the SEPA migration deadline. SEPA Direct Debits is proving to be one of the biggest challenges for corporates and banks, says Duygu Tavan
Go deeper with GlobalData
With the migration to SEPA standards comes the issue of upgrading or replacing legacy mandate and exception management formats, a key challenge in the implementation of SDDs. These issues will have to be ironed out before Europe can really claim that it operates a single payments area.
Compared to SEPA Credit Transfers (SCTs), the implementation of SDDs is more complex and difficult, say industry participants, because a credit transfer is a straightforward – whereas debit schemes vary from country to country. This difference causes more complexity in the migration to SDD and thus, SDD requires more technical engineering, explains Simon Newstead, head of FI market & business strategy at Royal Bank of Scotland (RBS).
“At a technical level, the challenge is the same – it still involves moving to systems that can handle the XML ISO20022 standards, but the operational processes are more complex for SDDs,” Newstead says.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataSEPA rules and guideline interpretations
According to the new EPC chairman Javier Santamaria, SEPA project managers who shared their migration experience in the EPC Newsletter identified the conversion of customer account data to the International Bank Account Number (IBAN) and the Business Identifier Code (BIC) as one of two main challenges. The other challenge was identified as the implementation of the ISO 20022 message standards.
Payment service users (PSUs) have to provide the IBAN of the account that should be credited or debited and, where necessary, the BIC of the account-holding payment service provider – a challenge for corporates who will have to collect this data.
In addition, the SEPA rules demand payment service providers (PSPs) “must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which 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, says Santamaria.
“These challenges are the same with regard to both the SCT and SDD Schemes. Implementation of each of the schemes requires specific steps. Some of the specific requirements to be observed with regard to SDD implementation relate to, for example, SDD mandate management, the SDD time cycle and SDD exception handling.”
RBS’s Newstead counts another three challenges of SEPA:
The lack of “complete certainty or commonality of understanding of what all the rules and regulations are”.
“There are a number of choices that countries can make on smaller legacy schemes that they would like to carry on past the deadline. They have until February 2013 to decide which schemes they choose. This means we won’t know until February 2013 which countries have gone for which options. So if you are trying to do a SEPA project plan, you need to realise there will be areas where you won’t have full information and understanding for a number of months.”
“There are many different flavours in the market of subtly different interpretations of what is meant to be harmonised technical standards. Equens for instance says it currently supports over 300 different variants of the SEPA message standard right now.
RBS is one of a number of banks participating in the working group of the European Banking Federation, which Newstead says has gone through all provisions in the Regulation and which is working on drafting interpretative guidance. One draft has already been shared with the European Commission, and a further draft will be shared again shortly, prior to publication into the market for corporates and banks.
“This will probably happen at the beginning of September and will hopefully ease the challenge in interpreting the provisions under the rules,” Newstead says.
Legacy formats
The European Commission explains that SDDs are meant to “be fully automatable and based on the use of open standard and the best practices of straight-through-processing (STP) without manual intervention” – but herein lies another challenge.
“A major part of migration to SEPA is the conversion of legacy data to SEPA standards. This exercise is complicated by the fact that everyone is starting with a different legacy data set and each country has a slightly different approach to the conversion. To avoid errors it is important to work with a provider that has experience performing migrations,” says Brian Hanrahan, executive vice-president for sales, marketing and partnerships at Sentenial, a technology provider for SEPA payment solutions.
To help with the conversion, the EPC has released implementation guidelines for SCTs and SDDs in addition to the rulebooks.
“The EPC implementation guidelines are based on the global ISO 20022 message standards. In the ISO process, business requirements are defined for all global markets. Different markets have different data needs. Thus, they may need to define their own version within the global standard, specific to its own situation,” says the EPC’s Santamaria.
Santamaria admits that “multiple interpretations of the ISO 20022 message standards exist” but says that the EPC has not taken a position on the argument by some industry stakeholders that multiple interpretations of the ISO 20022 message standards – and therefore domestic variations of SEPA formats threaten to undermine key objectives of the SEPA initiative.
“It is almost certain there will still be a substantial number of message variations in the market by that stage. But having got to 2014 and having achieved the hurdle of migration, then will come a second phase which will start to rationalise some of the remaining variations of approaches of things like message standards,” RBS’s Newstead says.
Mandate management
There are currently two ways of managing mandates, says Majid Moujane, payments specialist at Callatay & Wouters.
“One is creditor mandate flow and the other is debtor mandate flow. For the debtor mandate flow, it is the bank of the debtor that manages the mandate. Then there are some countries where the creditor mandate flow is more dominant. In this case, it is the corporates that manage the mandates and the debtor banks are not obliged to check the mandates.”
Under the SEPA core scheme, corporates will have to use the creditor mandate flow.
“So in countries where corporates are used to debtor mandate flow, they will have to adjust to the creditor mandate flow,” Moujane says.
Sentenial’s Hanragan says that because it will be the creditor’s responsibility to manage and maintain SDD mandate flows, each creditor will have to have an ID number in SEPA, as will each mandate.
“This contributes to making mandate management one of the most complex parts of SDDs. Corporates will need a software solution from a vendor to use for their database. If there is a change in the SEPA Rulebooks, these SDD mandate management solutions will need to be flexible for changes.”
RBS’s Newstead agrees and highlights that large corporates may have millions of mandates.
“A big concern and preoccupation among corporates has been how to make that migration from legacy schemes to SEPA possible in a legal sense – so that corporates don’t need to go out to every consumer and business and get them to re-sign new mandates. A number of countries, when they implemented the PSD, saw this problem coming and took the opportunity to make a small legal change to allow existing mandates to be valid in the SEPA schemes.”
However, not all countries implemented such a legal clause, which is why, Newstead says, there is provision in the SEPA regulation that explicitly allows mandates that exist today to be valid in SEPA.
The SEPA regulation has a caveat, which according to Newstead is “often misunderstood”. He explains: “It isn’t a caveat that says this only works for consumer mandates. It still applies to B2B as well, but it does say that any existing protection to the payer under the old scheme can’t be diluted or removed when SEPA comes in.
“This means that if the legacy mandate was within a scheme that had a lot of protective refund rights, then you can only migrate it to the SDD Core Scheme (consumer scheme), which has similar full refund rights. If it is a legacy business mandate that doesn’t have that level of protection, then corporates can only migrate to the SEPA business-to-business scheme.”
Another challenge is that in the B2B scheme, SDD is defined as a non-refundable transaction – whereas in the B2C scheme, consumers can demand a payment back within eight weeks. Consumers also have 13 months to demand back a payment if it can be proved that the payment was unauthorised or not legitimate. In B2B SDD transactions, a debtor bank has to ensure that its client agrees to pay and therefore has to verify the consent and the availability of funds.
Such a disparity among B2B and B2C mandates demands that corporates understand which mandates will map across to SEPA automatically – because they are covered by either by pre-existing local law provisions or by the relevant provision under Article 7 in the SEPA regulation. In the case of mandates that cannot be mapped to SEPA automatically, mandates will need to be re-signed.
“For corporates that rely heavily on the on the direct debit as an instrument, working through that will be a big task. Corporates do not want to go through a messy process of resigning more mandates than is absolutely necessary,” he says.
Narinda You, secretary general of Credit Agricole Global Payments, says that mandate management is to be examined from different perspectives.
“The creditor’s bank could offer services to authenticate the mandates received by its client while the debtor’s bank could develop controls and alerts to its own clients (ref to “end date” regulation),” You says and adds that there is no “issue as such – but a total dematerialisation of the mandate management will become efficient when the mandate will be electronically signed by the debtor, which is not the case today.”
R-transactions
R-transactions – returns, refunds, reversals and rejections – are exceptions to payments. Obviously, the market wants the number of R-transactions to be as near to nothing as possible.
That, however, is aspirational and may take a while to get there, he says. As every country has a different debit scheme, exception handling currently varies from country to country. Standardising this under SEPA is a “huge step” for corporates says Sentenial’s Hanrahan.
In addition to this, there is a second layer of complication that Newstead highlights: interchange fees for R-transactions.
“In countries like Germany, there is a standard interchange fee that the debtor bank is allowed to charge the creditor bank in the event of an R-transaction. It is a type of cost recovery. This type of interchange is in use in a few countries and not in others,” he says.
“In France by contrast, they today have per-transaction interchange fees for direct debits in general. Every direct debit transaction involves an interchange fee paid by the creditor bank to the debtor bank. What SEPA has done is to remove the possibility for this second type of per-transaction multilateral interchange fees for direct debits.
The only ones that the regulation allows for the future is interchange fees for R-transactions. What’s not been worked through yet – and this is particularly important for countries that use R-transactions interchange fees today – is how they will continue to do that in a way that is fully compliant with the regulation, which does set some strict conditions for R-transaction interchange fees.”
There is only the possibility to charge R-transaction interchange fees, but no obligation and strict conditions to meet. But the priority should not be finding an efficient way to deal with R-transactions, rather says Newstead, to focus on raising efficiency so as to have as few R-transactions as possible.
Credit Agricole’s You highlights that the SEPA end date regulation stipulates that R-transaction handling costs should be charged to the party that has caused them.
“The definition of these conditions should be set very clearly: when a transaction cannot be debited, is it the responsibility of the debtor because funds are not available or the responsibility of the creditor who presented the payment at a moment when funds were not available.
“In a direct debit scheme, debtors’ banks have to invest significantly for the benefit of a rather small number of creditors. Debtors’ banks should get a fair remuneration for the service. The most efficient existing mechanism is the interbank fees system. This system will be phased out for the payment flow but it is still in use for the R transactions. It is not satisfactory to build a business model for a payment scheme when there are clearly certain flaws in the system.”
“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.”
Benefits
Despite the challenges, SEPA is ultimately meant to bring consistency, transparency and business efficiency into the European payments market.
George Stein, Sentenial’s senior relationship manager, says that for corporates with subsidiaries across Europe, SEPA will be an opportunity to centralise their payment systems. Now they can create collection hubs: “A corporate will be able to use any bank in Europe for direct debit collections.”
Newstead agrees, saying that a SEPA environment will provide corporates will more freedom on where they hold their account and can consolidate their banking relationships – thus driving competition among banks and SEPA technology providers.
“The way you execute products and services, the way you manage exceptions, the quality of your broader relationship, things like information services, intraday reporting – there are many other things banks can offer beyond the vanilla payments service. That is becoming the differentiator,” Newstead says.
The EPC’s Santamaria, too, argues that the SDD Schemes offer businesses significant efficiency gains through the automation of payment processing and the ability of businesses to optimise the cash management process.
“The latter can be achieved by businesses consolidating accounts currently maintained in different European countries to handle local payments into one single account and subsequently centralising liquidity. The SDD Schemes facilitate the expansion of businesses across national borders by introducing a standardised payment infrastructure. The SDD Schemes therefore support and facilitate trade across the European Union internal market. Innovative end-to-end SEPA solutions, based on global ISO standards, will also lead to decreased IT costs, streamline back office functions and simplified reconciliation.”
Although SEPA effectively means that a corporate or consumer could bank with any provider and get the same services anywhere within SEPA, Santamaria highlights that proximity banking is still common:
“Merchants prefer to bank with an institution they can contact easily; consumers still open accounts based on closeness to their home or work. Even large corporations make similar considerations when searching for solutions that best meet their needs. Cross-border competition in SEPA will take time to materialise, even once migration to the single set of SEPA payment schemes is completed.
“Banks compete within the national payment markets, which is logical because the vast majority of payments are made domestically. It is difficult to compete in a ‘domestic’ euro payments market made up of 32 countries, which today exists only in theory. The removal of national barriers in the payments market will bring value, but not as much as expected and as quickly as desired.”
