The success or otherwise of the single euro payments area (SEPA) now seems to be firmly in the hands of politicians. With the expectation thatthe European Parliament will set two dates from which time local credit transfers and direct debits respectively will have to cease in favour of their SEPA equivalent, those involved with payments are starting to reawaken their SEPA projects in anticipation of considerable activity in the months ahead.
In spite of all of the promise of improved efficiencies, reduced costs and new business opportunities, SEPA Credit Transfers (SCTs) have achieved a market share of just over 10%, while SEPA Direct Debits (SDDs) still languish with a market share of well below 1%.
While many sit and discuss who is to blame for the lack of progress, when public authorities seem to be the latest whipping boy, the current position does set the scene for what has to happen over the coming years, as we rapidly approach the magical end dates.
The current belief is that end dates will be set later this year, and thus the industry will be faced with a one-year window to get all credit transfer users over to SEPA and a more leisurely two years for the users of direct debits. In reality, making this happen represents a huge challenge involving many players, but a challenge where the banks involved will have to play a major role.
Businesses large and small will be faced with having to make changes to how they deal with payments, for example the way bank accounts are addressed and the format used to send data to their bank; in addition, the clearing cycles and information received from their bank about payments may also change. With such wholesale change, who can the businesses turn to for guidance on these subjects? Although many players may ultimately be involved, the prime candidate for helping businesses navigate their way through the many hoops involved has to be their banks. After all, banks provide the infrastructure and channels the businesses use for making payments and collecting money.
Impact of SEPA on Banks
For banks themselves, the picture is a little different. The introduction of SEPA presents those businesses that understand the implications with many new options. Bank practices and charges differ considerably from country to country. So, for example, should an organisation collecting money by direct debit, move its collection account to a country where the bank charges for this activity are the lowest? Or should a business operating in more than one country with often more than one bank now move to a position where they consolidate all activity into one bank in one country? Options like this actually formed some of the original thinking behind SEPA, which was intended to introduce more competition between banks and to move to a lower cost base for processing payments.
So banks are faced with having to wear two hats: the one where they are trying to defend their existing business or indeed trying to gain business from other banks, and the other being to help their customers understand and adopt the processes that can actually threaten the bank’s business. Clearly different banks will have different views on these issues and will thus approach the market in differing ways.
Given that banks have an understanding of the processes involved with SEPA, the starting point must be with educating business users. How many corporate treasurers or even treasurers of the local golf club have a good level of knowledge about SEPA at the moment? Clearly some do, but many have only a sketchy understanding, if they have heard of it at all.
There are numerous ways of dispersing knowledge, but with the large number of businesses affected, coupled with the likely short space of time available to convert, only the largest players can expect sustained individual support. For the majority, a more mass-market approach involving for example, workshops, literature and webinars will be the only way of getting sufficient information into the market place. Indeed, a few banks have already started activities along these lines, particularly in those countries where the adoption of SEPA is quite advanced.
What Will it Take to be SEPA-compliant?
The fundamental difference between SEPA and other direct debit schemes is that SEPA operates smoothly across country borders. All direct debit schemes require that the bank account from which money will be collected has to be specified, either directly or indirectly. Each country uses a different numbering system to identify bank accounts, which causes a problem for the scheme designers who need the process to be uniform across all countries. The solution adopted to solve this problem is to use the internationally agreed format of a Bank Identifier Code (BIC) to identify the financial institution involved, along with the International Bank Account Number (IBAN) to specify the individual account.
Unfortunately, it is very unlikely that the BIC and IBAN for all of the customers will be known by the business needing to make or collect payments. Moving to SEPA thus involves an exercise where the customer accounts in the new format are established. For businesses where large numbers of payments are involved, this task can be quite sizeable in its own right.
One way of collecting the new bank account details would be to request the information from each customer. This may work where small numbers of customers are involved but does not provide a viable option for those with large volumes of payments. Fortunately, in the vast majority of cases it is possible to convert the local format of the bank account number to the BIC/IBAN format automatically. Some countries are providing centralised facilities for this conversion, while elsewhere it is down to the business to establish the new account details themselves.
Where there is no centralised facility to establish the customer account details in the new format, some banks are offering a service that can perform this task. Interestingly though, many banks take the view that they are not allowed to generate these numbers for accounts held at other banks. Where banks may be reluctant to offer services in this area, a business can call on any one of a number of third party companies that can also perform this conversion for them – help is available from one party or another.
Once an organisation has converted its data it is faced with the problem of where and how to store the information. This task may well fall to the supplier of the computer systems used by the organisation to control the payment process. Here many package suppliers either have made or are in the process of making changes to their systems to facilitate the handling of this new data with varying degrees of sophistication. It must be remembered, though, that the vast majority of the organisations collecting by direct debit are either themselves small or their use of direct debits is small. Such organisations may well be using quite basic or homegrown systems that are unlikely to be updated. All is not lost, though, even for these smaller users, as a number of banks are starting to provide systems that can store the converted data and use these values dynamically when a payment request is constructed.
The introduction of new data can only mean one thing: the format of the records sent to the bank has to change as well. Here the change has been quite substantial, in that not only the fields within a data record have changed to accommodate the new requirements. Also, and perhaps more significantly, the complete structure of the file has changed compared to the majority of the existing local file structures. SEPA uses a file structure known as eXtensible Markup Language (XML). XML is used extensively now as it offers great flexibility and can usually be read and understood by eye. Updating a computer system from the file types currently used in most of the euro countries to XML does require a considerable amount of work. Banks are unlikely to help with any system upgrades required, but a number of banks will be offering services where payment data can be submitted to the bank in the current format, where it will be automatically translated into the required XML formats.
Needless to say, if data goes into the system in a new format then the data returned in the way of reject and error messages will also change. In the case of a comprehensive new range of error and return codes, the information is again delivered in an XML structure by default. Here the banks are generally taking a more pragmatic view by delivering the data in the existing structures. The logic behind this is that banks generally deliver such information in a single stream combined with data for all other areas of banking. Providing a separate stream for SEPA-related data just makes life unnecessarily complicated for those organisations that process such data electronically. In spite of this, there is still some political pressure to make the delivery of the XML version mandatory.
Many of the items discussed above apply to both credit transfers and direct debits. Additional vairables appear where direct debits are concerned. With any direct debit scheme there is a need for the payer to give his bank permission to make the payments whenever a debit request is received.
The mechanism for this is the mandate. As we travel round the euro countries, we find huge differences in the way mandates are constructed and processed. With such wide variance in both the form and processing of mandates, it is not surprising that handling the mandates in SEPA represents one of the major issues for those organisations moving to SEPA. Under SEPA the mandate has to include bank account numbers in the new BIC and IBAN format, an identifier given to the creditor when they contract to join SEPA and some form of reference that is unique to that particular mandate. Apart from the content on the mandate, the way they are handled also changes from the way they are currently used in many countries. With SEPA the user of the debit scheme now has responsibility for retaining the mandate with the banks now play little part in the process. As the banks no longer hold the mandate details, each collection request now has to include much of the information from the mandate. Adding this information exasperates the impact of the change to the data that needs to be sent to the bank with each collection request as discussed above.
From the above it can be seen that in many cases the procedures required to deal with the new mandates change significantly, both in terms of the data required and in the process flow. Generally changes of this scale would be beyond what one would expect a bank to provide any form of assistance with. However, a number of banks are now starting to offer mandate management solutions that can fill in any gaps in the process.
Finally on mandates, many current national schemes support the concept of electronic mandates. SEPA does allow this functionality to be offered but in a fairly complicated way, which has not yet been adopted on any scale by the banks. For many direct debit users this is a critical issue as resorting to paper is too expensive. Currently it looks like a number of localised schemes will ultimately be adopted, possibly at a national level and possibly with varying degrees of sophistication, dependant on the level of risk involved with the particular business operation using direct debits.
While writing this article, I was asked by a French banker “How will the St Tropez Boules and Pétanque Club be able to continue to collect their subscriptions under SEPA?”. In many respects this raises some of the fundamental issues in the move towards SEPA in that it is often forgotten that well over half of those using direct debits collect very few items each month. The big players are able to put teams together to handle the migration to SEPA, the hundreds of thousands of smaller users do not have this luxury and will have to rely on help from a variety of sources including their bank.
Fortunately, a number of banks recognise that it can be to their benefit to offer help and support to migrate users of all sizes to SEPA. To this end, banks are steadily starting to deploy systems that will indeed enable the St Tropez Boules and Pétanque Club to carry on collecting their subscriptions with minimal disruption to the processes currently being used. A number of leading banks are already offering considerable value-added services to help their customers as described above, so corporates should enquire now to discover and influence what their primary bank plans to do to help them.
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