SEPA Direct Debits: Opportunity or Opprobrium

by Helen Sanders, Editor

The SEPA Direct Debit (SDD) went live on 2 November 2009, representing the next major step towards payments harmonisation across the Eurozone. But was its arrival feted by floods of keen corporations desperate to leverage the new instrument? Did we see customers queuing up outside their banks waving their new mandates? Well no. The SDD has created more of a flicker than an inferno, and in the five months since its launch, there has still been about as much momentum than is required to power an average electric lightbulb. As Karsten Becker, Product Manager, Deutsche Bank summarises,

“SEPA Direct Debits are now live, so customers are now in a position to use both core and B2B SEPA direct debits. However, the statistics show that the vast majority of companies have not yet chosen to migrate to these schemes.”

So what is the SDD, why haven’t organisations flocked to use it, and has their reticence been misguided?

What is the SEPA Direct Debit?

Lack of reachability is the significant challenge to migrating to the SDD scheme.

Most readers of TMI will now be familiar with the Single Euro Payments Area (SEPA) and its objectives. The SEPA Credit Transfer (SCT) was launched in January 2008, but the SDD was slower off the mark, primarily due to difficulties amongst stakeholders in agreeing how the instrument would work. Direct debits i.e., instruments that involve a creditor requesting funds from a debtor’s bank on the creditor’s authority, are used to varying degrees Europe-wide. Consumers in countries such as Germany and the United Kingdom have a particular preference for direct debits to make utility, telecoms and mortgage payments. The new SDD has been launched as a replacement to existing domestic schemes, so that all direct debits across SEPA will have the same characteristics, and can be transacted cross-border as well as in-country. There are two types of SDD: firstly, a core scheme, that effectively replaces existing schemes, and can be used by any individual or institution to make payments; secondly, a business to business (B2B) scheme that is entirely new, specifically for debiting institutional customers. The features of the SDD are summarised in figure 1.

Challenges to SDD adoption

Raising reachability
There are some features of the new scheme that some companies will not find appealing, depending on the terms that they are accustomed to today. For example, the eight-week right of refund, that the creditor can request for any reason, creates difficulties in revenue recognition and potentially in working capital management. However, the nature of the instrument is less of a problem than the current reachability of the SDD scheme. Reachability refers to the number of payment banks within the Eurozone that can support the new SDD scheme. As Karsten Becker explains, lack of reachability is the significant challenge to migrating to the SDD scheme,

“Today, if a company sends a large file of direct debits to their bank, most of these amounts will be collected, except in the case of e.g. lack of funds. Under the SDD scheme, there is currently only about 70% reachability or 2,600 banks, so in an average file, a company could expect around 30% to be rejected. “

This problem should be relatively shortlived, as Karsten Becker continues,

“By November 2010, banks in the Eurozone that currently support domestic direct debit schemes will be obliged to be reachable for the core SDD, and from November 2014, reachability must extend to banks across the European Economic Area.”

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He goes on to emphasise that,

“Consequently, although the SDD went officially live in 2009, the real start date from a practical perspective is November 2010. However, reachability is only an obligation for the core SDD scheme, and support of the B2B scheme remains voluntary.”

As the B2B scheme is new, as opposed to replacing existing domestic schemes, lack of full reachability is less of a problem; however, any problems with achieving the November 2010 timescales have the potential to disrupt the SEPA migration process and pose a challenge to the final migration end date.

Migrating mandates
One of the new features of the SDD is that electronic (e-mandates) as well as physical mandates can be used to make the initial setup process more efficient and convenient.  However, this new opportunity for direct debit mandates perhaps masks the issue that in theory, every company that uses direct debits would need to establish a new mandate with every one of its customers. Whether on paper or electronically, the scale of such a task would be immense and would certainly deter the vast majority of companies from migration. However, governments and regulators are mostly taking a pragmatic approach, as Karsten Becker explains,

 “It is not feasible for companies to seek replacement of existing mandates on a large scale, so until it is clear that existing mandates are transferable, adoption will be slow. In the majority of countries, this issue has been solved, as legal solutions have been found to use existing mandates for SDD. However, in Germany, for example, which is the largest user of direct debits, new mandates are required. Thus, there is increasing pressure from the European authorities on the German legislator to find a solution, but this is unlikely to happen quickly.”

Once there is clarity over firms’ ability to use existing mandates, adoption of SDD will certainly become feasible, but in the meantime, few companies will be able to see over the parapet towards migration.

Industry indifference
Reachability, lack of clarity over mandate coverage and in some cases, concerns over SDD features are all significant reasons why there has not yet been widespread migration to SEPA, and for the purposes of this article, the SDD in particular. Overriding these issues, however, is that few organisations really see the point. Karsten Becker emphasises,

“A general reason for the lack of adoption of SEPA is that for the majority of organisations, there seems to be no clear business case yet for migration. Although there are clear macro-economic benefits to having a single, Europe-wide scheme for credit transfers and direct debits, these benefits appear to currently be specific to individual organisations.”

Assuming that the mandate and reachability issues are resolved, there are undoubtedly benefits for some organisations, which could include:

• The ability to set up cross-border schemes ensures that multinational firms using direct debits can rationalise their direct debit activities into a single scheme, lowering costs, enabling the number of bank relationships and accounts to be reduced, and ensuring that consistent information is available for all debits to ease reconciliation.

• A single scheme across the Eurozone, using a single XML-based format, will make it easier for multinational companies to centralise collections processing into a collections factory or shared service centre, as opposed to managing collections in-country. This permits standardised processes, a single technology platform and enhanced, consolidated reporting.

• The addition of an e-mandate capability means that new or amended customer mandates can be established more quickly and efficiently as an integrated element of a customer engagement process, and can enable mandate data to be held and used electronically.

• The ability for non-bank payment providers, known as payment institutions, to enter the market will potentially increase competition and push down costs.

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Driver or driven

Depending on the volumes of direct debits, the geographic spread of direct debit requirements and the potential processing efficiencies that could be achieved, SDD will be advantageous for many companies, particularly multinational companies, but at present, apathy would seem to swamp any glimmer of advantage. But what does this mean for the ultimate success of SEPA? Initially, the European Payments Council had hoped that progress towards complete migration to SEPA instruments would be market-driven. However, the lack of momentum so far makes this view untenable. Karsten Becker explains,

“It is clear that it is not market demand that is pushing migration to SEPA. While SEPA has clear benefits, it is essentially a European Union integration project; therefore the push towards migration needs to be regulator-driven. There are still barriers to be overcome: the incorporation of the PSD into national legislation; full reachability; the extension of validity of existing direct debit mandates; and the potential need for some additions to the SDD product. It is likely that solutions to these issues will be found; however, the lack of a strong business case for many organisations remains a hurdle, which can only be addressed by regulatory pressure to migrate.”

Save the date

Regulatory pressure is one issue, but a fixed date is another. With most companies having a three-year investment plan, it is essential that they can establish a clear time scale, and budget, for migration. A regulatory obligation to migrate is quite an advantage for a corporate treasurer or finance manager. Without a clear business case, and therefore return on investment calculation, treasurers and finance managers are not likely to donate their hard-earned budgets to SEPA migration to the detriment of other priorities. However, if it is a regulatory requirement, it is often easier to secure additional budget and resources, without compromising other investment priorities. But what date should we be looking at? Karsten Becker concludes,

“The end-date for SEPA migration suggested by the European Parliament is December 2012. The European Commission is currently assessing whether a mandatory end-date is required, and if so, whether this should be market or regulatory driven. The conclusions to this exercise could be finalised mid-year 2010. If they include a suggested end-date, it remains to be seen if this end-date will be December 2012 or some time after that. ”

A mandatory end-date would seem to be essential to create the neccessary momentum towards migration.

As we have established, a mandatory end-date would seem to be essential to create the necessary momentum towards migration. Furthermore, if the European Commission were to conclude that this date should be December 2012, many corporations will not have budgeted for this, and in some cases, will already have missed this deadline, bearing in mind the scale of the migration project for some organisations. Banks too will struggle to migrate all of their customers within such a short time, which is realistically only two years from end 2010 once reachability is assured. A more appropriate date would seem to be 2014 or so, giving both banks and their customers sufficient time for the final hurdles towards migration to be removed, and to put in place the necessary resources.

The lack of momentum towards SEPA does not mean the process has been derailed, but it is certainly driving with the handbrake on at present. As anyone who has done this many times knows, this can be damaging, but does not necessarily mark the death knoll of the process. SEPA can, and should succeed, but there are still challenges to resolve and stronger regulatory support will undoubtedly be required. Whether the final date is 2012 or 2014, however, treasurers and finance managers need to be planning for SEPA now, to secure their banks’ processing and advisory resources, to budget internally and to ensure the necessary technical, integration and process resources.