by Jean Diederich, Partner at Kurt Salmon, Payments & Single European market
The Single Euro Payments Area (SEPA) is moving to the next stage. After the introduction of the Euro in 2002 and the Payment Services Directive (PSD) in 2009, the European Institutions have defined 1 February 2014 as the deadline to discontinue national payment instruments, and finalise the implementation of the two major SEPA payment schemes in Europe: SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD).
SCT and SDD are based on the “4-corner model” principle that establishes specific relationships between the debtor and its bank, and the creditor and its bank, in order to allow any buyer and seller (the payment services users (PSU)) to use their chosen Payments Services Providers (PSP) within the 32 SEPA countries.
For SDD, the collection flows are driven by the creditor who manages the original mandate through the creditor mandate flow (CMF). SEPA SDD will offer one mandatory scheme for the debtor, SDD “Core”, and one optional for businesses, SDD “B2B”. SDD “Core” offers an unconditional refund right for all debtors, whether professional or not; whereas the SDD “B2B” can only be proposed to professional/business debtors and does not include the refund option. All current national direct debit schemes (in Luxembourg DOM2009) will have to comply with these schemes by February 2014.
Due to the Regulation (EC) N°260/2012 published on 30 March 2012 in the European “Official Journal”, the SEPA countries have now (end of February 2013) less than 360 days (until February 2014) to introduce the new SEPA payment instruments and to be SEPA compliant. At this stage, it is important to consider the interesting advantages of these new instruments as well as the migration challenges, and discuss the remaining open points.
Creditors, debtors and banks can benefit from SDD
These SDD schemes offer two major advantages to the debtors: 1) flexibility, easy payment through an automated collection process on an agreed due date and from a single bank account in any country in the SEPA zone; 2) protection, through unconditional refund rights aligned with the customer legal protection introduced in 2009 with the Payment Services Directive (PSD).
From the banks’ side, SDD standardizes the collection process. As a result of the uniform timeline applied in the SEPA zone, bankers easily forecast in/out direct debit payments, enhancing their own cash and treasury management. In addition, the standardization of payments also improves the cost structure of banks. By giving to creditors the responsibility of the mandate management based on the CMF, banks will save time and money. Furthermore, common EPC rulebooks, which normalize process and format, prevent banks from spending extra to comply with local/national specificities (a difficult task to achieve as SEPA countries are opposed to this standardized regulatory environment and wish to reintroduce national specificities again). This improvement of the cost structure, along with mutual infrastructures on the entire market, should encourage bankers to prospect beyond local borders.
From the creditors’ side, SDD instruments optimize cost and revenue management. 1) the increasing competition between PSP drives fees down and reduces the price of each payment. 2) where the payment is initiated by the creditor, there is a better visibility on revenue streams. This is even more the case for B2B payments, due to the fact that the creditor does not need to set aside provisions for refunds due to the absence of refund rights in B2B SDD scheme.
Building momentum is one of the key SDD migration challenges
The national migration from DOM2009 to SDD is a relatively complex process and its success relies on the capacity of participants in the SDD schema, i.e. banks, debtors and creditors, to reach compromises on the migration plan (Luxembourg has set-up since July 20012 a standard migration process through the national task force with the banks, the ABBL and Kurt Salmon).
On one hand, banks are the main drivers of the migration plan, specifically main bank institutions with high volume and revenue realised through payment services. However, some banks, called the “followers”, have not actively participating in the definition of the migration plan, but will now have to adapt and rely on what has been decided by the [KS1] national task force.
Therefore, there are sometime conflicts between those banks opting for a first mover position towards the transition to SDD, standing up for specific technical and process requirements to ensure no negative impacts on their business, and “followers” that pursue a way less convenient for their respective business.
On the other hand, some major creditors and important software providers have been lately involved in the definition of the migration plan. However, they could partially influence it through commercial negotiations and additional services. The deadline of 1 February 2014 highlights indeed the importance of reaching an agreement on the migration; the longer the negotiations are, the later the migration project starts.
Another challenge to build momentum is the commitment of the European institutions, such as the European Central Bank, the National Central Banks and the associations of treasurers.
Last but not least, the SEPA countries should monitor the migration to SDD. Market monitoring would provide key inputs regarding the migration status and inform regulators about national perspectives on the 2014 deadline with prospective issues in order to eventually decide on corrective actions.
Today there are still open points in SDD to be solved
Regulation. According to the Regulation (EC) N°260/2012, the conversion services from old direct debit schemes to new ones can be offered by third parties to perform the collection process. A first provision of the Regulation imposes that this type of services is offered till February 2016 at the latest. A second provision of the Regulation has clearly defined that a third party service provider can either be a bank or a niche service provider, but different from the bank in charge of the collection process.
Rulebook open issues. Regarding the collection messages, the rulebooks have only defined specifications for rejecting collections (pain.002), but haven’t defined any for accepted collections. Some banks could use the same type of messages (pain.002) for both needs, in contradiction with the EPC standards. Moreover, the rulebooks do not allow creditors to send SDD collection messages with zero Euros. Considering this, some creditors with one single collection per year can only migrate during one slot before February 2014 or have to sign new SDD mandates. The workaround should be defined at each creditor level. Could these issues counteract the SEPA objectives?
Testing coordination. One of technical challenges to be solved is the implementation of the XML ISO 20022 messages that require projects to specify these new technical standards, implement and test with each involved player in the SDD end-to-end process (creditors to banks and vis-versa). A national testing platform could help creditors to test standard XML messages, based on the latest EPC (European Payments Council) rulebooks through a system certified by the ABBL. The first advantage is the cutback and sharing of testing costs between each player. The second advantage is the guarantee that all IT developments are in line with EPC rulebooks requirements (format, mandatory fields, etc.). Could this testing solution meet commitment of all players and help the community to avoid rule misinterpretations as well as spread of best practices?
In collaboration with the BCEE, the ABBL and the ATEL, Kurt Salmon will organize on April 11th at 6:30PM a conference titled “Corporate treasures get ready for SEPA: Challenges and Opportunities in E-Payments”.
The event will take place at the BCEE premises.
15 January 2013