SEPA Compliant: To Be Or Not To Be?


By Anita Hawser

To be or not to be? Compliant, that is. Apparently, the answer is it doesn’t matter—at least not yet. Just a few weeks before the February 1 SEPA deadline came to pass, the European Commission in January proposed a six-month transition period.

06a-sepa-compliance Finally, the SEPA (Single Euro Payments Area) is here. Or perhaps not. In one of many setbacks that have plagued the project from the very beginning, with just over three weeks to go before the February 1 deadline for existing national euro credit transfer and direct debit schemes in the euro area to be replaced by SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD), the European Commission on January 9 proposed an additional transition period of six months. The European Central Bank (ECB), however, reiterated that the SEPA migration end date of February 1, 2014, remained and urged market participants to complete the transition by this date.

The European Parliament and the Council of the EU will need to ratify the EC’s proposal for an additional transition period. The Commission has urged member states to ensure that, should the proposal still be in the process of adoption come February 1, banks and payment services providers not be penalized for continuing to process legacy payments in parallel with SEPA payments.

“The EC’s proposal to allow a six-month grace period will come as welcome news to those companies that have been struggling to meet the February 1 deadline,” commented Steve Everett, global head of cash management, RBS International Banking. “Given that overall SEPA market volumes were well below the 100%-set target (64.1% for SCT and 26% for SDD), the extra time will allow companies to minimize any negative impact on their businesses.”

Yet, Micah Willbrand, director, payments and risk, EMEA, at Accuity, says the EC’s last-minute intervention came as a bit of a surprise as it was always felt that the Commission was holding tight on the deadline to force the change. “This extension will help ensure a smoother transition for SCT and SDD payments, though it is unsure what barrier now the European Commission has to fully implement the change,” says Willbrand. “Does the European Commission require [SEPA] payments to be at 100% prior to shifting over? This event now will cause an undercurrent of thought that will allow companies to continue to push off implementation.”

SEPA has been more than a decade in the making since the EC first called for cross-border payments in the eurozone to be priced the same as domestic payments. “What we can see from countries where there are very high [SEPA] migration levels is that the initiative works; thus it will be business as usual for those who have successfully migrated,” remarks Javier Santamaria, chair of the European Payments Council (EPC), which created the rulebooks for the new SEPA payment formats. “Those who looked toward compliance early and took the initiative seriously, have managed to make the migration seamless.” However, he acknowledges that migrating to SDDs requires more effort than credit transfers.


Santamaria, EPC: Those who looked toward compliance early have managed to make the migration seamlessly

Santamaria says last-minute preparations could leave insufficient time for end-to-end testing between users and payment service providers. Yet the experiences of stakeholders that had already completed migration showed that there was a real need for a fine-tuning period after changeover, he added.

In its second SEPA migration report, published in October, the ECB stated that only 6.84% of direct debits had been executed under the SDD scheme in European infrastructures in September 2013. By early January, that number had risen to 26%, according to the ECB’s website, but it still significantly lagged SEPA credit transfers.

Marcus Hughes, business development director at Bottomline Technologies, says some new direct debit mandates under the SEPA B2B Scheme are unlikely to be finalized by February 1. “Some corporates are disappointed by the response they’ve had from debtors in terms of signing new mandates,” he explains.

Another problem with SDD that has largely been ignored, according to Willbrand at Accuity, which provides reference data and conversion services for SEPA compliance, is the eight-week right of refund under the SDD Core Scheme. Payers are entitled to receive a no-questions-asked refund up to eight weeks following the debiting of their account. “That means companies will have to hold an eight-week reserve of cash in case they need to make a refund,” he explains. “That can wreak havoc with your cash management.” The Core Scheme is different from the SDD B2B Scheme, which can only be used by businesses. But Willbrand says most financial organizations haven’t built out their systems yet to process payments through the B2B Scheme.

In its October report, the ECB highlighted particular concerns about the lack of SEPA readiness among small and medium-size enterprises (SMEs), which it stated were at risk of missing the February 1 deadline for both SCT and SDD. Willbrand says most smaller companies don’t have the resources to handle the migration to SEPA and will be reliant on their banks to ensure that their payments go through in the correct format. Willbrand says it is SMEs who will mostly benefit from the additional six-month transition period to August 1 as they were going to bear the brunt of charges and fees post SEPA implementation due to the fact they were waiting to implement changes.

Under SEPA, euro credit transfers that do not contain the correct BIC (Bank Identifier Code) and IBAN (International Bank Account Number) may incur a higher charge from banks. That could mean SMEs will see increased costs, says Willbrand. But he believes the banks will help SMEs sort it out as they won’t want to lose the business. Hughes adds that banks will be reluctant to charge extra for noncompliant SEPA payments in the initial period following the February 1 deadline. “Most banks have been unwilling to comment about this,” he adds. “They want to wait and see what other banks do.”


Tino Kam, EMEA product director, global cash management, RBS International Banking, says its focus has been on helping its clients migrate in time and ensuring that their key AP (accounts payable) and AR (accounts receivable) processes function within the SEPA framework. “This includes full end-to-end testing and monitoring of production flows to minimize any negative business impact, such as lower reconciliation rates due to a number of rejects and return messages impacting either our clients’ commercial payments or collection cycle. We even expect that for some clients the full migration of all of their SEPA flows will happen after February 1.” Banks also offer SEPA conversion tools—including enrichment of BIC and IBAN in the ERP vendor databases, conversion of legacy file formats into the SEPA ISO XML format, and SDD mandate enrichment through a mandate management service.


Willbrand, Accuity: The extension will help ensure a smoother transition for SCT and SDD payments

For conversion services, Hughes says banks haven’t been able to help corporates as much as was expected. “There was a lack of clarity,” he explains, “about SEPA conversion services and whether banks could provide them or not.” According to ECB’s SEPA migration report, notes Hughes, the only circumstances where conversion services comply with SEPA’s legal requirements is when those services are clearly separate from a payment service provider’s normal payment activities.

Whether they are provided by a third party or a wholly owned subsidiary of a bank, SEPA conversion services are likely to remain in place for some time, says Hughes, particularly for SMEs. However, Santamaria of the EPC says conversion services should be a transitional solution only for a limited period of time. “The focus must remain on the migration because conversion services will prevent users from reaping the benefits associated with implementation of the harmonized SEPA payment schemes and technical standards.”

Ultimately, migration has been anything but a Big Bang, with countries and companies moving at different paces and with the EC weighing in at the last minute to grant a six-month grace period. Some legacy payment instruments, says Hughes, are also likely to persist for some time—including Italy’s RIBA and France’s LCR electronic bill of exchange or promissory note system. “There are some local requirements to keep some instruments that are important to them,” he explains.

And full migration to SEPA for some countries hasn’t even begun. Non-euro countries like the UK, Sweden, and Switzerland have until October 31, 2016, to comply.

Santamaria’s advice for companies that have not yet converted: “Focus on achieving basic compliance, then seek further efficiencies to be generated with the implementation of the harmonized SEPA payment schemes and technical standards.”