Following the launch of the single euro payments area (SEPA) Direct Debit (SDD) scheme and the Payment Services Directive (PSD) at the beginning of November, an increasing number of small banks have started to consider implementing SEPA-compliant solutions. Large banks have moved into this space to offer services to these banks to allow them to offer SDD services to their clients while avoiding the investment expense. It also allows others, who are keen ultimately to join SEPA, to reach a volume at which offering the service becomes financially viable. The process of migrating to SEPA can also be simplified for corporate bank clients by their bank, who may also offer other third-party, white label solutions such as mandate management and validation, allowing the companies in question to focus on their core business.
Life Before SEPA
Banks’ wholesale clients and their customers are benefiting from the introduction of the SDD scheme in a number of ways. It allows maximum optimisation of cash flow by centralising accounts, minimising the number of bank relationships required, and reducing the cost of cross-border payment traffic. Before the existence of the SDD scheme, banks made use of remote direct debits, which required local accounts and the use of local formats. With SDDs, companies can now operate from one account in any SEPA country, collecting or paying from within the entire cross-border area that encompasses SEPA. Although it is difficult to predict how the scheme will develop, it is encouraging companies, especially those who have internet sales, to pitch for cross-border business.
Of course, some countries will benefit from SDDs sooner than others because their local clearing systems are less sophisticated. The vast majority of payments are still locally originated, so there needs to be a strong case made within countries to migrate from local networks to SEPA. In some countries, such as Holland and Belgium, local payments are cheap and fast – if a company there has purely local payments, it needs to be convinced of how it can further benefit from SEPA. However, in other countries, such as Italy, where local charges are higher, the benefits may be more readily discernable in terms of costs.
Development of the Scheme
Banks have started by targeting their public sector and corporate clients they become accustomed to the SDD scheme. The first group to benefit from SDD, spurred on by the European Commission (EC), are those needing to make multinational payments and collections, while a section of the debtor side – predominately small and medium firms (SMEs) – are still considering how SEPA will work for them.
The scheme has been slowed by the EC’s revision of regulation 2560, which has pushed mandatory SEPA reachability for euro countries back to November 2010, from the initially anticipated date of November 2009 by the European Payments Council (EPC). Although many banks, such as ING, are already reachable, the number of participating banks has not yet reached critical mass, due to the year-long ramp-up to SEPA.
The benefits of offering SDDs earlier are dependent on the country concerned – if the entire country has moved to SEPA, it eases the transition. For Holland, July 2010 is the predicted deadline for the transition. Although ING already accepts SDD – and with 50% market share in the country, this is a significant step – this does not guarantee that other Dutch banks are reachable. Therefore, ING also passes payments in local formats through the local clearing system. However, this is not necessarily true of other banks.
The long-term benefits of payment harmonisation across SEPA will ultimately outweigh the short-term investments needed for SEPA as, in principle, the rules and the regulations for SEPA are now clearly defined. The time for a payment to move between the debtor bank and the creditor bank is standardised throughout the scheme.
Previously, every country had its own local payment formats and regulations. For direct debit refund times, for example, large companies needed to know the rules for all the countries they operated in, and adjust their payment times accordingly – as well as planning for when the payment would be finalised – which could be any time between a few days and several weeks. These difficulties are now in the process of being eliminated. This simplification of the planning of payment times is, in turn, helping companies manage their cash more effectively.
Technological standardisation is occurring in tandem with harmonisation. Despite the initial investment required to offer SDDs, SEPA-driven standardisation will ultimately decrease companies’ overall IT costs. Companies will no longer have to invest in, and allow for, changes in multiple systems. Standardised data formats facilitate reconciliation, as they carry end-to-end references throughout the payment chain.
SDDs for Corporates
Companies want to be able to choose their own SDD migration pace. Their investment cycle, for example the implementation of a new debtor database or enterprise resource planning (ERP) system, is often the trigger for such a move. This, in turn, requires a closer relationship with their bank. But corporates’ main concern in pursuing these migration facilities is for their own clients, whom they are trying to prevent having to undergo any inconvenience, and also avoid additional contact, if possible. As well as the logistical challenge of contacting thousands of customers, some firms fear that reminding customers of the mandate in the course of migrating to SDDs will cause them to re-evaluate, and possibly cancel, the payment. This is clearly more of a concern for firms not offering essential services such as utilities.
Moving to SDDs carries certain additional investment costs. For example, companies will need to make the distinction within their debtor database of new and existing clients – something that has not previously been necessary. Within SEPA, the first collection must arrive at the debtor bank five days before the payment is due. For subsequent payments, it needs to arrive two days before the due date. Therefore, the distinction must be made within the company’s system – something that most companies do not currently do. One solution is to send all payments on D – five. However, this could cause the debtor bank to reject the payment if they are aware that the first payment has already been sent once. Although it is a small practical issue, problems could occur if it is not addressed.
The timing of migration is dependent on external factors – when are the company’s client’s suppliers and the other market participants moving to SEPA? Will they be ready for the fixed end date for the SDDscheme? Internal factors, such as the strategy employed by the customer ( to be an early or late adopter of SDD, for example), IT strategy and budget constraints are also highly relevant.
Because of the massive investment required to participate in SEPA, some smaller banks are currently opting for indirect access through larger banks. Unlike the Euro Banking Association (EBA) arrangement for true international payments, which offered country access points, SEPA only allows indirect or direct participants – with the direct participants liable for the indirect participants’ client payments. This obviously demands that banks closely examine the creditworthiness of the indirect participants’ debtors. Some smaller banks are also choosing to take advantage of extra services provided by larger banks.
There is also considerable potential for banks to offer additional services around SEPA and the SDD scheme to corporate clients. Some offer mandate management, which consists of collecting the local mandates from corporate clients and enriching them. For example, in Holland, there are some data fields that are not used in the local schemes but which are obligatory in SEPA, such as creditor identification and signing date. Since the onus for proving the signing of mandates is on the corporate, keeping the evidence and providing it to the creditor is another such service.
Banks also offer mandate conversion and enrichment services, dematerialising and enriching companies’ mandate database from paper or, if paper mandates are lost, from ERP system data. Once enriched with the relevant mandate related information (MRI) data, it can then be printed and sent to the debtor for signing to legalise it once more as a proper mandate. Mandate archiving services, as well as providing copies, are also available. Clients can also send collections MRI in the old format for conversion to extensible markup language (XML) to enrich this data with the required MRI data for the collection file. All this helps clients to control the timeframe when migrating their back office to SEPA standards.
There has been a recent increased demand for SEPA services, partly attributable to the considerable risk-reassessment caused by the credit crisis. The issue of bank liability has caused many banks to place a much higher emphasis on implementing much stronger controls than previously. However, many companies are still wary of SEPA, seeking more detailed information about the function and the benefits of the scheme, and their ultimate role in it. In the meantime, banks hope to ease the transition by offering a variety of solutions to clients who are not yet willing or able to comply with the SEPA requirements, in order for them to reap the potential benefits of SEPA without its immediate burdens.
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