In February 2012 the Council of the EU, representing 27 member states and the European Parliament, adopted Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euros (the SEPA regulation). Article 6 (1) and (2) of the regulation mandate that SEPA credit transfers (SCT) and direct debits (SDD) shall be carried out in accordance with the relevant requirements set out in Article 5 and in the annex to the regulation by 1 February 2014, subject to a limited number of exemptions. That means we are one year away from the migration end date, so corporate treasurers, banks and other handlers of European cross-border payments must be prepared.
Effectively, as of this date existing national euro credit transfer and direct debit schemes in the euro area will be replaced by SCT and SDD harmonised payment instruments. It must be emphasised that, despite speculation from some commentators, the 1 February 2014 deadline will not go away.
The only party empowered to change Article 6 of the SEPA regulation – the provision defining the compliance date for the euro area – is the EU legislator, which has never given any indication of doing. Ergo there is only Plan A: market participants in the euro area must achieve compliance with the SEPA regulation within the next 12 months. Failure to comply with its core provisions by this deadline risks infringing EU law.
The SEPA regulation affects not only payment service providers (PSPs) but also payment service users (PSUs) such as corporates so the treasuries handling corporations’ payments across the supply chain must be ready. Since the EU lawmaker adopted the regulation the focus has been on raising awareness among PSUs, particularly those handling major payment volumes, on the need to achieve compliance. Since October, the European Payments Council (EPC) has alerted market participants that this is no longer a recommendation but an imperative: there is no time to procrastinate. The experience of early movers on the demand side, who reported on their successfully completed SEPA migration projects in the EPC Newsletter confirms that migration to SEPA schemes and technical standards is beneficial, but requires careful planning. PSUs must implement significant changes to their operational models and invest in system upgrades, testing and staff training. The scope of the changes is extensive.
Case Study: Electrabel GDF Suez
The January 2013 issue of EPC Newsletter reports on the SEPA migration project of Belgian energy company Electrabel GDF Suez, which processes some 1.8m credit transfers and some 18m direct debits annually. These figures exclude additional transactions with vendors and other business partners. Electrabel GDF Suez implemented SCTs in a step-by-step process concluded in 2012. It migrated to SDD core in 2011. Luc Waterlot, financial systems and interfaces manager at Electrabel GDF Suez Market and Sales and responsible for SDD implementation, commented: “Migration to SCT and SDD is feasible, manageable and beneficial. Preparation, however, is everything and time is of the essence.”
On organisations yet to initiate the migration project, Waterlot comments: “At this point, it also needs to be taken into consideration that the migration approach adopted by Electrabel GDF Suez – i.e. migration to SCT first followed by migration to SDD later – is no longer an option. Organisations which use credit transfers and direct debits will have to manage migration to both SCT and SDD in parallel within the next 12 months. In January 2013, the message is: any organisation which still needs to achieve SEPA compliance should act now at the very latest or risk missing the 1 February 2014 deadline.”
Survey data indicates significant progress has been achieved to create awareness among corporates on the legal obligation to comply with the SEPA regulation’s core provisions by 1 February 2014 in the euro area. Efforts must now continue to engage late movers in the process and educate on how to adapt systems and operations in line with the regulation. PSPs and other service providers are making available the tools required to facilitate transition.
Preparing for SEPA Compliance
SEPA project managers, representing early movers on the demand side who successfully concluded migration to SCT and SDD, identified the following main challenges:
- Conversion of customer account data to the International Bank Account Number (IBAN) and the Business Identifier Code (BIC). The SEPA regulation mandates PSUs to provide the IBAN of the account to be credited or debited and, where necessary, the BIC of the account-holding PSP. The regulation stipulates that PSUs will not have to provide the BIC for national transactions after February 2014. EU member states however have the option to extend this deadline to February 2016. This ‘IBAN only’ rule will apply for cross-border transactions after February 2016.
- Implementation of ISO 20022 message standards. The SEPA regulation states that PSPs “must ensure that where a PSU that is not a consumer or a microenterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission,” the ISO 20022 XML message standards are used. PSUs will therefore have to make arrangements to adapt to the usage of ISO 20022 XML message standards in the customer-to-bank space in relation to files of payment transactions.
These challenges are the same for both SCT and SDD schemes. Among specific requirements to be observed with regard to SDD implementation relate to, for example, mandate management, the time cycle and exception handling, which could present a challenge to treasurers and others. The EPC offers detailed information supporting, in particular, billers’ migration to SDD. This information is available on the EPC website.
Article 7 of the SEPA regulation states that any “valid payee authorisation to collect recurring direct debits in a legacy scheme prior to 1 February 2014 shall continue to remain valid after that date and shall be considered as representing the consent to the payer’s PSP to execute the recurring direct debits collected by that payee in compliance with this regulation in the absence of national law or customer agreements continuing the validity of direct debit mandates.” This provision therefore ensures that existing mandates under the SDD core scheme are still legally valid, thus greatly contributing to facilitating the migration by bank customers to the SDD Scheme.
Article 5 (3) (d) of the regulation empowers a payer to be able to instruct its PSP to take the following actions in respect of direct debit collections:
- To limit a direct debit collection to a certain amount, periodicity, or both.
- To verify each direct debit transaction and to check whether the amount and periodicity of the submitted direct debit transaction is equal to the amount and periodicity agreed in the mandate (where the mandate under the relevant payment scheme does not provide for the right to a refund) before debiting their payment account, based on the mandate-related information.
- To block any direct debits to the payer’s payment account, or to block or authorise any direct debits initiated by one or more specified payees.
Although these mandate-checking obligations do not apply where neither the payer nor the payee is a consumer, they may nevertheless impact on PSUs. A consumer may instruct its PSP to block all direct debits to its account or to ‘black-list’ a specified biller by blocking direct debits initiated by it. Similarly, under Article 5 (3) (d) a payer may instruct its PSP to only allow collections from a biller identified in a ‘white-list’. In the event that the biller is included on the black-list, or excluded from the ‘white-list’, the payment will fail. Billers should proactively advise customers paying by direct debit to unblock accounts. Customers who make use of the option to specify creditors authorised to collect payments from their account, should ensure that all properly authorised creditors are included on this white-list. Those who chose to create a black-list, naming creditors not authorised to collect payments from their account, should ensure that those creditors authorised to collect payments are not erroneously included.
The ‘EPC Migration Tool Kit’ also includes various articles published in the EPC Newsletter offering detailed further information on specific steps to be taken by individual companies to achieve SEPA compliance.
Migration to SEPA Pays off: Villeroy & Boch Case Study
Early movers on the customer side, who report on their migration experience in the EPC Newsletter, agree that migration to SEPA pays off.
As an example: ceramics manufacturing company Villeroy & Boch (V&B) – headquartered in Germany and operating in 125 countries – is a true pioneer, embracing the SEPA vision early on. In 2007, V&B decided to implement SCT as the first step in the process, the project concluding in 2008. The SDD core and the SDD business-to-business (B2B) schemes were implemented in the second stage. This project launched in 2010 and completed in 2011.V&B processes approximately 175,000 credit transfers with a volume of €310m and 25,000 direct debits with a volume of €75m annually.
Dr Warncke, V&B’s group financial controller, comments: “Our figures demonstrate that the benefits resulting from migration to the SEPA schemes and standards exceeded the investment in the first year alone. In line with our expectations, we were able to streamline internal processes, lower IT costs, reduce costs based on bank charges and consolidate the number of bank accounts and cash management systems. In addition, we could further centralise our cash management.
“The fact that there is now one harmonised SDD scheme, which allows collecting payments throughout Europe, is also a major advantage. We realised significant efficiency gains from the implementation of the ISO 20022 message standards. The reality is that the benefits of an integrated euro payments market outweigh the short-term efforts to get there.”
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