SEPA

How is Your Bank Handling SEPA Direct Debit? Corporates are beginning to review their direct debit strategies and consider best practice collections procedures which leverage the bank’s SDD capabilities. As the deadline looms closer, for those who have yet to take any major steps, the time to act is now...

How is Your Bank Handling SEPA Direct Debit?

by Chris Winter, Region Product Executive, J.P. Morgan Treasury Services

Have corporates thought through how they will work with their banks to take advantage of SEPA Direct Debit (SDD), the world’s first pan-regional cross-border direct debit instrument that debuts in November, 2009?

SDD products and processes will completely transform direct debits in Europe, and banks will find themselves in an ideal position to offer accurate, timely and practical advice to clients. Corporates are facing the dilemma of whether to keep an in-country bank solely for domestic direct debits and use a separate cross-border bank, or migrate to a single international bank that can offer a holistic solution.

At its heart, SDD is ultimately about benefiting the consumer as well as the corporate by helping to simplify their cross-border transactions. It may be the best mechanism currently available to give a corporate greater control over the collections process as well as providing plenty of opportunities to automate it. For business to consumer direct debit payments, the new regulation will enforce banks in the Eurozone to offer payment services in euro via this new instrument from November 2010.

Adherence to SEPA standards puts the direct debit issuer back in control of receipts, providing greater visibility, which in turn assists with cash flow forecasting.

SDD provides a set of inter-bank rules, practices and standards that will allow automated domestic and cross-border collections. It comprises two schemes, SDD Core (B2C, business-to-consumer) and SDD B2B (business-to-business), both of which J.P. Morgan will support. The schemes will see major providers within industries across Europe, such as telecom, media and insurance, seek to optimise efficiency by reducing costs and gaining more transparency across the broadest possible markets.

In more general terms, adherence to SEPA standards puts the direct debit issuer back in control of receipts, providing greater visibility, which in turn assists with cash flow forecasting. As a result, liquidity management can be enhanced and any onward investment of incoming receipts can be more accurately planned for.

There are challenges that corporates will need to overcome with SDD: migrating legacy direct debit mandates to the SDD schemes and BIC and IBAN data collection, for example, present potential hurdles to the uptake and success of the scheme. However there are multiple benefits for corporates which justify early efforts to address these challenges.

SDD will provide corporates with benefits in terms of lower cost, higher straight-through processing rates and reduced risk by centralising their collections from the SEPA countries to one account based in Frankfurt, London or Paris, for example. It will give them a simple and cost-efficient way both to pay bills and collect funds throughout the 32 countries which will improve both cash flow and treasury management.

Creditors will be able to determine the exact date of collection and have certainty of payment completion within a pre-determined time-cycle. SDD will also enable straightforward reconciliation of received payments and will automate exception handling of returned, rejected or refunded items. The capacity within each message for richer payment narrative, the use of the XML format, and BIC and IBAN, will enable treasurers to automate the reconciliation process.

Offering such a standardised collection model across so many countries, the SDD will give corporates the ability to respond quickly to decisions to enter new markets with greater agility. This mirrors the same way that the internet has enabled retailers to respond quickly to demand in untapped markets.

Additionally, corporates will have a greater choice of institutions with which to do business which will likely lower the cost of services provided.

SDD will be a reality by November 2009. It is essential that corporates challenge their banks to provide them with the information they need to plan a successful transition. Having helped to design the SDD scheme and as facilitators of its implementation, banks are in an ideal position to offer accurate, timely and practical advice to corporates. They can also ease transition woes by integrating SDD products and processes into existing payment platforms, which can help to minimise the impact of change on corporates while also embedding SDD in existing processes.

A bank with a global network is more likely to have the broadest expertise in payment systems across regions and this should be regarded as a distinct advantage in implementing SEPA solutions while minimising the impact on customers.

J.P. Morgan’s pan-European SEPA platform is fully functional and implementation of its SDD solution is scheduled for completion in September 2009. Importantly, it will continue to support corporates’ existing practices and systems throughout the transition phase.

Some corporate treasurers remain sceptical about the true value that SEPA can bring to their organisation and this should be addressed in open and honest dialogue. SDD will increase control over the collections process and J.P. Morgan anticipates that this will promote interest in SEPA, resulting in greater confidence and new commitment to its payment and collections solutions.

Corporates are beginning to review their direct debit strategies and consider best practice collections procedures which leverage the bank’s SDD capabilities. As the deadline looms closer, for those who have yet to take any major steps, the time to act is now.

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