In the current climate, corporates have indicated several reasons for delaying taking actions on what could potentially be a costly migration project to the single euro payments area (SEPA) Direct Debit (SDD) Scheme. They include the absence of a legal end-date, the lack of a decision on niche products, and the financial crisis that is forcing them to prioritise liquidity and risk management.
One of the challenges faced by corporates is the uncertainty that surrounds their specific migration planning, caused by the time difference between the SEPA migration end-date of February 2014, and the country specific migration plans, including confirmation of niche products, due in February 2013. Decisions on whether to immediately schedule migration of Italian ricevuta bancaria (RIBAs) or French lettre de change relevé (LCRs) by February 2014 or February 2016 make it difficult to develop a concrete migration strategy.
Unlike payments, legacy direct debit processing is widely different among the various countries involved in the scheme. Differences range from processing cycles, data requirements and validation to mandate management – making consolidation into a single processing standard difficult. There are definite efficiency and liquidity gains to be achieved from wholesale adoption of SEPA, in terms of standardisation of processes within the accounts receivable (A/R) and accounts payable (A/P) functions; transaction submission across multiple banking providers; and enhanced reconciliation to improve cash application.
Key Elements of a Migration Plan
Our experience shows that the following elements are key to a successful implementation of a pan-regional receivables strategy, including SDD migration:
- Enterprise resource planning (ERP) upgrades or release note to support SEPA and/or ISO 20022 pain.008: planning and executing a regional or global upgrade could take over 10 months for a multinational corporation (MNC).
- Validity of current mandates: reviewing internal controls and systems to find what mandate related information they already possess, and whether this is sufficient for the chosen scheme.
- Data validation: ensuring that all Bank Identifier Code (BIC)/International Bank Account Number (IBAN) data and additional mandate-related information (MRI) are incorporated.
- Client-base risk profile: assessment of credit and risk quality of debtors will drive the decision on whether to use the SDD Business-to-business (B2B) or Core Scheme; procedures for handling unauthorised refunds. This could form the basis of a new risk policy for corporate governance and compliance.
- Mandate re-papering: corporates need to look at existing mandates. If issued in a non-paper format, they need to review local requirements, and assess the risk of not having physical copies against the cost of re-papering. While most euro countries have agreed to accept existing mandates for the Core Scheme, there are still open questions over the medium of storage (paper, electronic, virtual, telephonic) to be resolved in the final country migration plans.
- Cash flow forecasting and liquidity management: key decision on whether to use the Core or B2B Scheme, which has a significant impact on forecasting and investment activities, given the difference in revocability and refund rights (eight weeks versus non-revocability, respectively) between both schemes.
- Mandate language needs to be reviewed by corporates that have plans to consolidate SDD collections into a single country. Corporates need to be ready to provide mandate documents in multiple languages as regulation on what languages are accepted is defined by debtor-country regulation.
Two mandate management methods are used within Europe in legacy direct debit processing, the creditor-driven mandate flow and the debtor-driven mandate flow.
In the creditor-driven flow, mandate management is done by the creditor (biller), who is responsible for collecting and managing all the debtor-signed mandates. No bank involvement is required in this process. This method is used in most countries in scope and is the prescribed model for the SDD Core Scheme.
Under the debtor-driven flow, debtor banks maintain mandates on behalf of their account holders, and validate direct debit requests prior to processing. This method is used in Belgium, France, Italy, and Portugal, and is similar to the model followed in the SDD B2B Scheme.
Mandate conversion and enrichment is the service wherein existing paper mandates are converted to electronic formats and enriched with SEPA-required data. Enrichment would include the new data such as unique mandate id, date of mandate signing and other details. The completed data would then be uploaded into an ERP and used when needed.
While the European Payments Council (EPC) has declared that existing mandates for legacy direct debits can be re-used in the SDD Core Scheme, they have allowed country regulators to decide on whether existing mandates need to be re-papered. The National Bank of Belgium, for example, has devised a process whereby creditor banks retrieve mandate related information from a central database, leaving the paper-based mandates alone at the debtor banks.
For the SEPA B2B Scheme, a new physical SDD mandate must be populated and authorised by the debtor. Corporates will need to resource a project team to identify all potential B2B debtors:
- MRI data: such as creditor scheme identification and unique mandate reference.
- Debtor bank information: check evidence of reachability in the B2B scheme.
Mandate Management Tooling
Combining this conversion service with mandate management tooling gives corporates the ability to support the full mandate lifecycle, involving addition, amendment, deletion, and archiving of mandate information. ERP vendors may offer upgrades and service packs to support basic mandate management that cover creation, amendment, and cancellation. Specialised mandate management packages would add printing of standard scan-able forms, mailing, scanning and archiving capabilities. Corporates may choose to manage mandates in-house or through a third party solution provider, balancing volume, cost and capability.
The Future is E-mandates
The solutions and services mentioned above still involve paper and ‘wet’ signatures. There is still physical transfer and dematerialisation (conversion from paper to electronic format) required. These processes are inherently inefficient, time consuming and open to error.
The EPC aims to eliminate these inefficiencies with the development of the e-mandatee-operating model. This model provides a recommended standard to facilitate secure paperless processing of mandates. This process is comparable to the Automated Direct Debit Instruction Service (AUDDIS) solution in use for years in the UK, that allows creditors to electronically request lodgement of mandates through BACS, the domestic low-value clearing channel in the UK.
The e-mandate model introduces new components into the ‘four-corner business model’ to cover security, routing and validation services, and features the exchange of standard XML messages between creditors and debtors through bank connections and internet portals.
Debtors would be able to approve mandate requests through their existing internet banking connections using existing security tokens, thereby eliminating the need for wet signatures. The benefits to corporates in adopting the e-mandate include increased speed to lodge mandates, allowing them to collect funds faster, reducing risk and increasing working capital. An additional benefit of e-mandate management is the fact that only data is passed between participants.
Current regulation makes the e-mandate proposition optional for banks to offer; however there is still no legal infrastructure supporting a pan-regional e-mandate solution. As with the SEPA SDD B2B scheme, the fact that this is an optional service from a bank perspective does not ensure wholesale adoption.
SDD provides an excellent opportunity for corporates to standardise and consolidate collections via a single instrument for the euro and should be seen as a catalyst for removing inefficient paper instruments such as cheques, pagares, RIBAs and LCRs.
Under the EU’s Digital Agenda there is a stated continuum of development of a harmonised, efficient pan-European payments market, which began with SEPA and progresses towards e-services. This agenda requires legislators to accelerate the legislative support for pan European standardisation to match the pace of new payments technology including e- and m-payments and other e-commerce initiatives such as the expansion of the Netherlands’ iDEAL model under the EBA Clearing ‘MyBank’ initiative, which was recently piloted in Italy. The requirement of interoperability from both a legal and technology perspective will continue to be a key factor in the development of single European payments landscape.
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