Despite the launch of the single euro payments area (SEPA) Direct Debit (SDD) scheme in November 2009, adoption by corporates is only now beginning. For the time being most corporates are continuing to use domestic legacy schemes to process direct debit transactions. However, the European Commission (EC) has been exploring the possibility of setting a date beyond which SEPA must be used in preference to the current local schemes. To prepare for the eventuality of an end date, corporates of all sizes need to start to understand the requirements of SDD now.
There are many differences between SDD and current national schemes, not only in terms of the data required to make a collection, but also with the business processes involved.
Broadly speaking, SDD adoption can be broken down into three distinct stages:
- Mandate and data migration.
- Mandate management.
- Transaction handling.
This article provides an overview of the issues raised in coping with all stages of the process.
The Legal Context
SDD launched in November 2009 and since that time has been available on an optional basis. From 1 November 2010, under EC Regulation 924/2009, banks that currently process domestic collections in euros must be able to receive and process SDDs. Organisations collecting money by way of direct debit are not bound by that obligation, but the European Parliament has asked the EC to set a date when existing payment services will be decommissioned in favour of SEPA. If agreed, this end date could be as early as 2012. To avoid a rushed approach to adoption, it is recommended that debit users commence their preparations now.
In the majority of EU countries, the Payment Services Directive (PSD) has been interpreted to allow use of mandates for domestic direct debit schemes in SDD. This has removed the obligation on the creditor to obtain new mandates from their debtor but does not change the fact that many creditors will have to migrate data and modify their mandate storage and management processes.
SEPA contains two direct debit schemes: a core scheme used to collect funds from consumers and a business-to-business (B2B) scheme covering collections from non-consumers. The schemes are defined by rule books and implementation guides published by the European Payments Council (EPC).
From a business process standpoint, SDD places the responsibility of maintaining mandate information with the organisation generating the debt requests, i.e. the creditor. None of the banks involved have any responsibility for holding this data, but they have the right to request a copy of each mandate in the event of a dispute. The data that needs to be sent to the banks to effect a collection is quite different to that used in the various legacy schemes. This data has to be supplied in ISO 20022 standard XML format. Also, much of the data held on the mandate has to be provided with each collection request, as this information is not held by any of the banks involved.
The first stage of the process of adopting SEPA is to convert the current mandate information into SEPA format. A major component of this activity is to change the way bank accounts are addressed, away from the local format to one using the international standards, bank identifier code (BIC) and international bank account number (IBAN). Additional items, such as a unique mandate reference, and the debtors address, will also have to be added.
Where a core debit scheme is being used, there is an additional need to inform the debtor that they have been migrated to the new scheme. In this case there is no need to generate a new paper mandate and have it signed, as in all countries, except Germany, the existence of a legacy mandate is considered sufficient to meet the legal needs of SEPA.
In contrast, a B2B scheme requires that new mandates are printed and sent to the debtor for re-signing, in those countries where B2B implies a significant change to the debtor’s rights. Once the mandate data has been converted and the necessary confirmation given, or new mandates signed, it is possible to start debiting using the SEPA processes. This, however, raises two more issues that need attention. The first is managing the newly-created mandate information. This will periodically need to be amended – new debtors can be added and existing mandates cancelled. Where new debtors are added, the process requires a new mandate be printed, sent to the debtor for signature and then returned to the creditor. Some form of mandate management system is required to carry out these activities.
Finally, we have the issue of sending collection requests to the user’s bank and receiving notification from the bank of any failures. As mentioned above, the challenge here is to generate the data in an appropriate format for SEPA and to enrich basic collection requests with much of the information held for each mandate. Any failures resulting from the debit request will be available for collection from the bank, again in a SEPA format.
The SEPA Mandate
The main differences between current domestic mandates and those of SDD lie in the conversion of accounts from domestic format to international format, and the addition of new data elements, e.g. unique mandate reference (UMR) as shown in Figure 1.
Figure 2 shows the principle fields of a SEPA mandate, along with the likely source for this information.
Figure 3 covers a number of the key issues that have to be addressed by any business contemplating a project to adopt SEPA. As no two businesses operate in exactly the same way and in exactly the same markets, the list can only provide a starting point for a business launching a project to adopt SEPA. The list is, however, based on the experienced gained from having carried out projects for a number of businesses and should thus provide a solid starting point for moving forwards.
2: Only applicable for those schemes where the creditor is obliged to retain a copy of the mandate
Weighing the options
The adoption checklist is daunting and may encourage many corporates to delay. However, corporates should begin to examine their options now, so that when they are ready to adopt SEPA they will be well-placed to select the best option and execute a smooth migration.
Getting a complete solution:
There are many vendors on the market selling a range of products aimed at providing solutions for SDD. What is key in selecting a solution is ensuring that it plugs any gaps in the entire process and is therefore an end-to-end solution.
As outlined above, there are three key stages to SEPA: the one-off migration, ongoing mandate management and transaction handling. Many vendors offer a solution that covers only one or two of these stages. In order to ease the process of adopting SEPA, corporates should look for a solution that covers all of these stages rather than accepting the risk and overheads associated with piecemeal solutions.
There are a variety of solutions available, from fully-outsourced to fully-integrated options. For smaller businesses which process lower numbers of transactions and don’t need to integrate with enterprise resource planning (ERP) or customer relationship management (CRM) systems, an outsourced solution may be the best option. For businesses who processes large volumes of transactions on a monthly basis, there is a greater need for integration with existing systems. In this case, fully-installed systems may be the best choice. Even in this case though, with modern technology there may be opportunities and benefits available from using an outsourced solution option.
Adopting SEPA payment mechanisms will present a considerable challenge for all European businesses over the next few years. Major differences in need arise from the variety in the size of businesses using direct debits, as well as in the customs and practices currently in place within their existing local market.
In spite of the size of the challenge, help is available, to the point that any business should not shy away from the benefits that can be derived from the use of SEPA. In recent months, strong pockets of demand for SEPA solutions have emerged in particular countries such as Belgium and France. Banks, reacting to approaches from early-adopter corporates, are putting offerings in place to meet that need and thereby position themselves as the corporates’ primary SEPA provider for the future. Banks who have decided to assist their clients have evaluated the market’s existing product vendors and are now proposing these third-party solutions to their clients (under a variety of partnership and white-labeled models).
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