The European Union’s migration to SEPA for domestic and cross-border payments poses both challenges and opportunities for US e-commerce firms with operations in Europe. Robin Arnfield looks at the impact of Europe’s “big idea” on the other side of the Atlantic.
Earlier this year, the European Parliament announced that from February 2014 virtually all direct debit and credit transfer schemes in the 32 countries that have agreed to implement it, must meet the standards set out for the Single Euro Payments Area (SEPA). Niche legacy schemes, defined as those with less than 10% of a country’s direct debit or credit transfer market, have until February 2016 to migrate to SEPA.
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The countries implementing SEPA comprise 27 European Union member states, plus Switzerland, Monaco and the three members of the European Free Trade Association (EFTA), Iceland, Liechtenstein and Norway.
To comply with SEPA, direct debits and credit transfers will have to use the ISO 20022 XML messaging standard, with the customer’s bank account information being presented in the BIC (bank identifier code) and IBAN (international bank account number) formats.
A key requirement for SEPA direct debits is that companies have mandate management systems in place that can verify whether a valid debit agreement is in place between the customer and the corporation. In addition to paper mandates, SEPA includes a provision for companies to offer e-mandates for direct debits set up via the customer’s online banking service.
Given the popularity of non-card online payment methods in methods in Europe, e-commerce firms need to take action to ensure SEPA compliance, or risk being unable to offer the payment methods their customers want.
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By GlobalData“To avoid payments ‘drop-off’, US e-commerce sites need to offer local payment methods European consumers are familiar with, such as direct debits and credit transfers, so they can pay for online purchases out of their bank accounts,” says Mark Hale, head of payments and transaction banking at KPMG.
But, while SEPA is complex, it is not insurmountable, especially if e-commerce firms enlist the help of payments software firms and processors specialising in SEPA migration.
“SEPA compliance has been causing a lot of angst among firms outside the EU due to a lack of familiarity with what the rules signify,” says Robert McKay, managing director of BankersAccuity, a US-based firm which offers tools for converting bank account numbers to BIC-IBAN. “But what we’ve found is that SEPA shouldn’t be seen as a barrier for US e-commerce companies that want to enter the European market, but as a consideration they need to take into account.”
Benefits
“Migrating the different direct debit and credit transfer schemes that exist across Europe to SEPA will make it easier for US e-commerce companies to operate in Europe,” says Annick Moes, head of communications at the EBA Group (Euro Banking Association). “Currently, there are a plethora of schemes in the various European countries, and for an e-commerce firm to operate cross-border in Europe may mean having bank accounts in each country and supporting each local scheme. But, once SEPA is fully in place, they should only need a single Euro-denominated bank account and they will be able to use one set of direct debit and credit transfer schemes for all their European payment operations.”
“I recommend that US e-commerce firms sign up with a pan-European payment processor such as Equens or SIA-SSB,” says Nancy Atkinson, a senior analyst with Aite Group. “This means that they won’t have to build connections to the ACHs in individual European countries, which will lower their costs. Some countries such as France and Spain have multiple ACHs, which adds to the complexity of clearing payments in Europe.”
“The adoption of a single payment message for direct debit will enable e-merchants to expand their direct debit offering to additional countries,” says Phil Levy, vice president, e-commerce solutions, at First Data. “E-merchants will be able to take advantage of the common payment message and reduce complexity in their back-end payment systems.”
For e-merchants that are now just beginning to offer direct debits in the EU, the current country-by-country approach, with different schemes having to be integrated in individual countries, is complex, time-consuming, and expensive, Levy says. “The country-by-country approach makes it very difficult to achieve economies of scale, and it’s even more challenging to ensure compliance with each country’s unique regulations,” he notes.
Confusion
However, while in the long run SEPA will lead to lower processing costs, in the run-up to the 2014 deadline, the situation remains somewhat confused. “The migration to SEPA is going to be complicated, as currently there are different national implementations of the SEPA credit transfer format,” says Hale. “For example, one payments firm I am aware of is dealing with 250 technical variations of SEPA credit transfers.”
“Currently less than 1% of European direct debits are SEPA-compliant, so the migration to SEPA direct debit is at a very early stage,” says Gene Neyer, senior vice president of product management at US-based banking software firm Fundtech. In 2011, 10% of European credit transfers were SEPA-compliant, according to SWIFT.
Neyer notes that the fact that niche legacy schemes are being given until 2016 to migrate to SEPA adds to the challenge that cross-border e-commerce firms will face.
However, Hale stresses the benefits of SEPA. “It will reduce costs and make payments across the Euro zone more open and efficient,” he says. “Europe is now much more open for business.”
“SEPA will help spur the growth of e-commerce, which is one of Europe’s fastest growing industries,” says Moes.
The European Union announced an action plan in January 2012 to double the volume of e-commerce in Europe by 2015. Measures included in the plan include making it easier to carry out cross-border online and mobile payments, a single set of rights for European consumers, and improved Internet security. According to European Commission vice-president Neelie Kroes, in 2011 e-commerce accounted for just 3.4% of total EU retail trade.
Consumer rights will be strengthened as a result of SEPA. While SEPA credit transfers and SEPA business-to-business direct debits will only offer very limited possibilities for customers to claim refunds, SEPA business-to-consumer direct debits will include the right for a consumer to claim a refund within eight weeks of the transaction. “In the event of a fraudulent direct debit, consumers will have 13 months to request a refund of the payment,” says Moes.
Challenges
“US e-merchants will face challenges in updating their existing core payment systems to SEPA, and must fully evaluate the changes required in other systems needed to support day-to-day operations and business reporting,” says Levy. “Firms should avoid looking at the SEPA changes as merely ‘data sent in a new format or lay-out’ and understand that SEPA is a new payment framework. Any existing operational and account procedures and rules need to be compared to SEPA rules and regulations to ensure system controls remain adequate.”
Systems impacted by the move to SEPA include customer service, order tracking and invoicing, and reporting, Levy adds.
“E-commerce firms need to understand how SEPA will affect their supply chain,” says Hale. He recommends that firms keep a careful watch on the evolution of SEPA migration and regulations in the various markets where they operate or plan to enter. “E-commerce companies should also take time to evaluate their banks to identify those whose SEPA collections and payments propositions add the most value,” he says. “There is an opportunity for banks to create distinct brands for themselves by communicating high-quality information and advice about SEPA to their clients.”
“Adyen currently offers support for 85 different local online payment methods,” says Peter Caparso, president of Netherlands-based payment service provider Adyen’s North America operation. “We will be staying on top of developments in SEPA, and will be able to help e-commerce firms migrate to SEPA.”
Because of a lack of clarity in the information being reported about SEPA, many US e-commerce merchants operating in Europe have simply continued to do business as usual, says Levy. “Only 1 in 20 of the US e-commerce firms I speak to has had questions about SEPA,” admits Caparso, whose job involves helping US e-commerce firms set up foreign operations.
“I can understand why US firms would have been hesitating about SEPA, because originally SEPA was conceived as a self-regulatory initiative, without any mandate for compliance,” says Moes. “But the European Commission has now made SEPA compliance compulsory, both for payment service providers and their customers, and there is a hard deadline of February 2014. So there is now longer any reason for e-commerce firms to hesitate about migrating to SEPA.”
“Now that the SEPA end date has officially been communicated by the European Parliament, e-merchants have taken notice and are asking ‘what does this mean?’ and ‘how will this impact my current processes?’” says Levy.
BIC-IBAN
“E-commerce firms will need to ensure that the legacy bank account information they hold for customers with recurring direct debits is updated to BIC-IBAN,” says BankersAccuity’s McKay. “Also, they need to update their websites’ payments graphical user interface (GUI) so that it accepts BIC-IBAN data for online payments from bank accounts.”
BankersAccuity’s IBAN Complete software draws on the company’s database of national bank account data across the European Union. “We are also the official provider of the SEPA adherence database on behalf of the European Payments Council, ensuring the accuracy of BIC-IBAN conversions,” says McKay.
IBAN Complete converts national bank account details to IBANs; validates these IBANs; and supplies valid routing BICs for all IBAN-compliant countries. Clients have the option of accessing IBAN Complete over the internet, integrating it with their own systems, or using an outsourcing service provided by BankersAccuity.
BankersAccuity has had a large number of enquiries from US e-commerce firms and banks during the first half of 2012 about IBAN Complete. “A number of Tier 1 banks are white-labelling our technology and offering it to their multinational clients,” says McKay. “However, other banks may have different priorities, because their resources are limited by the demands placed on them, and be unwilling to help their clients with BIC-IBAN conversion. Fundamentally, it is the e-commerce firm which has the problem of converting its customers’ account numbers, since these customers are not clients of the e-commerce firm’s bank. BIC-IBAN conversion is not part of a bank’s core business.”
McKay says that, by using an automated BIC-IBAN conversion system, an e-commerce firm can facilitate the payment process for its customers. “It’s important not to impede a direct debit or credit transfer transaction by making it too complex for a customer, so that they either abandon the payment or switch to a more expensive method such as credit cards,” he says. “By using IBAN Complete, you can convert the customer’s legacy national bank account details to BIC-IBAN, instead of asking them to input their BIC and IBAN numbers. They may, after all not know their BIC-IBAN.”
Lower costs
McKay says that the fixed fees for European online direct debits and credit transfers are considerably cheaper than the ad valorem-based pricing structure of credit card payments. “We are already seeing the European subsidiaries of large US e-commerce firms prompting their customers to use a local bank account payment method as a cheaper alternative to online card payments,” he says. “It costs five Euro cents to accept payment via a SEPA credit transfer.”
Alternative online payment methods are very popular in Europe, notes Caparso. “In the Netherlands, iDeal, an online direct debit scheme offered by most Dutch banks, is used by over half of all Dutch online shoppers,” he says. “The further South and East you go in Europe, the more consumers prefer to use non-card-based methods of online payments.”
“Direct debits are very popular in a number of European countries for making one-off online payments, as well as for recurring payments,” Moes says.
MyBank
EBA Clearing, the clearing and settlement subsidiary of the EBA Group, has developed MyBank, a pan-European SEPA-compliant direct debit and credit transfer system that enables consumers to make online purchases from their bank’s portal. Since June 2012, banks in Austria, France, Greece, Italy and Luxembourg have been conducting domestic and cross-border pilots of MyBank.
MyBank has received the endorsement of Ecommerce Europe, an association of national European e-commerce groups. “The only potentially successful pan-European initiative in the online banking-enabled payments field seems to be MyBank,” Ecommerce Europe says in a report. “Web merchants have great expectations for MyBank, as it will unlock e-payments for all European countries, through familiar and trusted online banking portals in combination with SEPA direct debit and direct credit payment instruments.”
“MyBank is a very smart idea,” concurs Fundtech’s Neyer.
“MyBank will go live in March 2013,” says Moes. “We are very confident that the close to 50 banks that have already declared their support for the MyBank platform will start offering MyBank services to e-merchants and consumers over the next two years. This list also includes large US banks that do business in Europe, such as Bank of America Merrill Lynch and J.P. Morgan.”
Moes says that MyBank will be highly secure as it will use two-factor authentication to authorise a payment, such as a mobile phone or a passcode calculator. “There are a huge number of people in Europe, especially older consumers, who don’t shop online today because they are worried about the security of their payment information,” she says. “Many potential e-shoppers, for example, simply don’t want to share their payment data with a third party. But we think they could be persuaded to shop online using a service such as MyBank, which is provided by their bank – an organisation that already helps them to securely manage their existing payments transactions.”
