SEPA is an excellent example of a payment scheme that has incorporated many of the information requirements needed for efficient reconciliation. SEPA messages have multiple attributes that were not available in legacy schemes. Some communities, notably Finland, have also implemented a SEPA AOS (additional optional service) to further enhance the amount of remittance information that can be passed with payment, beyond the standard provision of 140 characters.
Transaction ID – Many legacy schemes did not have a transaction ID that was matched. SEPA however, supports an End to End ID field (Initiator assigned) that flows through the whole end-to-end payment chain and will appear on reject / returns. This brings benefits such as it enables straight through reconciliation of reject and returns (R-messages) and hence will reduce exception handling.
Remittance information – Legacy schemes had individual characteristics regarding remittance information and/or a limited number of characters were supported. SEPA offers a standard 140 characters of remittance information for both sending and receiving parties to utilize, supported with options for structured (tagged fields) and unstructured (free text) forms. On the sending side, as more information can be sent to beneficiaries, this can help reduce queries from suppliers etc. On the receiving side, more information can now be received from customers which can help improve reconciliation and cash application rates.
Party Identifier Fields – SEPA introduces distinct new fields covering debtor, creditor, ultimate debtor and ultimate creditor roles. This is critical in supporting POBO (payment-on-behalf-of) and ROBO (receipt-on-behalf-of) scenarios and as these fields are separate to the remittance information field, it leaves more space for true remittance information to be supplied.
As discussed above, SEPA introduces new fields and allows for the transfer of additional information. It is important that organizations familiarize themselves with the these features and determine whether systems and processes need to be adapted in order to take advantage and improve reconciliation rates.
Standardisation – SEPA Credit Transfers have now become the market standard instrument to instruct payroll payments across Euro markets, replacing a multitude of legacy national ACH instruments. SEPA, by design, allows SEPA Credit Transfers be instructed from any SEPA country to any SEPA country, thus reducing the requirement to hold multiple payroll accounts.
Visibility – Traditionally a decentralised process, the migration of payroll payments to SEPA standards has provided organisations with a clear picture of how payroll is conducted across Euro countries. This understanding of processing arrangements – in-house, external providers and payroll bank relationships – is leading many corporates to seek greater process and working capital efficiency in this space.
Opportunities – This visibility allows organisations to assess the current operating model for payroll processing in the region and to determine if there is a desired future state that requires change.
- Should local processing continue or should payroll activities be centralised to a Shared Service Centre environment?
- Should in-house processing of payroll continue or should third party payroll providers be used? Are arrangements optimal with current payroll providers?
- Are existing payroll bank relationships, connectivity and account structures desired in light of the standardisation of payment instructions that SEPA Credit Transfers has introduced, and the ability to instruct SEPA Credit Transfers from any location across SEPA countries?
When reviewing changes to payroll arrangements, organisations should review their current operating model, channel and funding structure, in order to evaluate and define their desired future structure. Engagement with internal partners, such as HR, is important during such an evaluation in order to ensure organisational alignment. Also important is developing a clear understanding of employee/legal entity relationships and third party arrangements.
Payroll Operating Model
- In-house: internally managed payroll, payment processing and bank account ownership
Integrated: outsourced processing but retains bank account ownership
- Outsourced: fully outsourced payment processing and bank relationship
Payroll Payment Channel
- Centralised: operate a single standardised interface to issue payment instructions
- Decentralised: operate multiple systems and multiple formats, due to:
- Multiple payment providers (per entity or country)
- Use of local market systems.
- Decentralised: local currency accounts in multiple countries
- Centralised: fund payroll payments from a single currency account
Optimising payroll processes can enable closer alignment of treasury and operational activities and greater working capital efficiency while streamlined processes can introduce operational simplification and economies of scale. Both during and post migration to SEPA, Citi has worked with many clients to assess their payroll strategies and implement changes to achieve these objectives.
Post ‘SEPA compliance’, many organizations are now seeking to streamline operational and working capital processes between treasury, shared service centers and local entities. Having introduced significant standardization to European cash management, SEPA is a key tool in achieving these objectives. Historically many organizations held multiple bank relationships in order to facilitate local requirements - such as payroll transactions - or due to decentralized management of bank relationships.
SEPA now offers an opportunity to re-evaluate cash management across Europe as the traditional reliance on local accounts and local banks is removed. With limitations removed, organizations can rationalize bank providers, account structures, standardize payment processing and locate financial activity in their financial center of choice. While there are market nuances for corporates to be cognizant of, the fundamentals are in place for organizations to assess a reconfiguration of their cash management structures in order to streamline financial and operational processes and ultimately realize tangible bottom-line benefits.
What benefits can be gained?
Rationalizing bank relationships can enable closer alignment of treasury and operational activities and greater working capital efficiency:
- Streamlining of banking relationships helps to introduce enhanced visibility across Accounts Payable and Accounts Receivables processes, in turn simplifying treasury management and enhancing the risk and control environment.
- Organizations can realize cost benefits through maintaining fewer relationships, accounts and bank connectivity channels.
- From a technology perspective, the standardization of processes and partners supports more efficient utilization of systems and ERP investments.
- Fewer bank relationships allows for greater consistency in bank products, services, documentation and reporting; which in turn can allow for organizations to have clearer view of their supplier spend and customer behavior.
Next Steps and Considerations
In order to evaluate the bank rationalization opportunity, it is important to understand current cash flows, account structures, bank relationships, processes and technology. Most organizations should have captured a clear picture of this during their migration to SEPA. Following this, the next key step is to form a desired future state vision that aligns with your cash management strategy – including bank relationship strategy, process vision (SSC or Payment Factory) and technology strategy. Engaging the right internal stakeholders and external partners can help ensure alignment on strategy and timing.
In light of the changes that SEPA has introduced, we have worked with many clients to realize their bank strategy objectives. In this case study read how Mondelez International embarked on their “One Bank” project to successfully transform Mondelez European treasury and business services into excellence.
- Pre-SEPA, Receivables were traditionally decentralised for a number of reasons, including:
- A lack of centralised regional or global collection instrument types, such as initiated cross-border collections in payment markets (cross-border direct debits did not exist in Western Europe until SEPA Direct Debits). Legacy instruments and mandate management processes were very fragmented.
- The requirement for organisations to hold local residency status for tax and central bank reporting purposes.
- Local restrictions on depositing certain collection instruments (cash, cheques and other paper instruments).
- Local language and customer relationships held with subsidiaries
- SEPA brings new opportunities:
- Cross border EUR direct debits and standardised incoming SEPA credit transfers that can be centralised
- Richer and standardised reconciliation data
- Possibility to centralise accounts
SEPA allows organisations to form one regional AR team, covering Western Europe or beyond. This lays the foundation for a scalable end–to-end AR model. This regional AR team can be managed from a central location through a consistent technology platform that does collection initiation, mandate management for direct debits and cash application reconciliation matching. This creates efficiencies for multinational companies with operations in many countries.
- Next steps and considerations:
Centralised receivables is an important item on an organisation‘s working capital optimisation agenda.
As part of your SEPA migration exercise, we believe that you will already have completed an extensive assessment of your current Euro collection flows, account structures, bank relationships and technology usage. As a next step it is important to define the future AR state of your organisation as well as the roadmap to get there.
There are different operating models to consider, ranging from hybrid centralisation (e.g. centralising where possible, localising where necessary), to fully centralised AR model (e.g. collection factory) as well as Receivables-on-behalf-of (ROBO). Each models sets their unique needs that should be discussed with your banking partner.
On January 9th the European Commission announced a proposal to allow an extra transition period of six months, until 1 August 2014, to allow banks and other payment service providers to continue processing legacy Euro ACH payments and direct debit collections, alongside SEPA Credit Transfers and SEPA Direct Debits.
Citi wish to keep you informed of the progress of the proposal.
The Economic and Monetary Committee (ECON) of the European Parliament has adopted the Commission proposal without amendments. The proposal text will now be tabled to the European Parliament for approval on 3rd February. Should the proposal be passed through the European Parliament, the text will have a retroactive effect as from 31 January 2014.
Since the announcement of the proposal, the market continues to review the text and meetings are being held at national and industry level to discuss the implications and domestic market reaction. Citi wish to highlight a number of discussions and market considerations that should be considered by our clients.
- There is a general market sentiment that the proposed transitional extension period is primarily required to facilitate the migration of SME businesses to SEPA and to enable completion of SEPA Direct Debit migrations.
- The European Central Bank and other Central Banks continue to urge the market to complete migrations by the 1 February.
- A number of markets, seeking to close their SEPA migration projects, are considering means to further drive adoption. Options being considered include limiting the six month extension period within their markets to a shorter period, limiting the ACH /Direct Debit activity that can take place post 1 February (e.g. preventing direct debit collections from new customers in the legacy schemes) and increased clearing costs for legacy transactions.
- Certain markets which have planned major infrastructure changes alongside 1 February are reviewing whether it is possible to support legacy ACH/Direct Debit schemes alongside SEPA processing.
The European Commission has adopted a proposal to allow an extra transition period of six months, until 1 August 2014, to allow banks and other payment service providers to continue processing legacy Euro ACH payments and direct debit collections, alongside SEPA Credit Transfers and SEPA Direct Debits. This proposal will require further ratification through regulatory bodies.
With concerns over the ability of the wider market to meet the 1 February 2014 deadline, the proposal aims to limit payment disruption by allowing the market an additional 6 months to complete migration activities.
The key points of the proposal are as follows:
- The proposal will amend Regulation (EU) No. 260/2012 and is being introduced in view of the current market adoption of SEPA Credit Transfers (64% Nov 2013) and SEPA Direct Debits (26% Nov 2013).
- The end-date of 1 February itself is not amended, however the extra transition period of six months (until 1 August 2014) is introduced to allow banks and other payment service providers to continue processing of noncompliant payments through legacy Euro ACH and Direct Debit payment schemes alongside SEPA Credit Transfers and SEPA Direct Debits.
- The proposal covers both legacy Euro ACH payments and direct debit collections.
- The proposal does not impose new obligations on businesses.
- The European Parliament and Council will now need to formally approve this proposal. Citi will continue to provide updates and advise accordingly.
- Further details of the proposal can be found on the European Union website.
It is important that the market migrates in an efficient and smooth manner to SEPA and the proposed transitional period will help certain banks and payment service providers to complete outstanding activities.
Citi itself is fully SEPA compliant and has a plan to migrate all clients to SEPA by 1 February 2014. Under this proposal, Citi will have the ability to process legacy transactions post 1 February 2014, however we recommend to all our clients to continue scheduled activities and complete your migration by 1 February 2014 and to use the additional six month period to facilitate exceptional transactions.
- During 2012, the European Parliament enacted into law a Regulation that set 1 February 2014 as the end date, within the Euro Member States, for the migration of Euro credit transfers and direct debits to SEPA standards.
- Under the regulation, Member States were permitted to categorise certain domestic credit transfer and direct debit schemes as “niche” schemes. Niche schemes would be granted an extended timeline until 1 February 2016 in order to become SEPA compliant.
- Possible niche schemes were those credit transfer and direct debit schemes that represented less than 10% of domestic payment activity. Member States had until 1 February 2013 to announce their niche schemes.
- In addition, Member States could also notify of extended timelines to implement sections of the SEPA Regulation relating to consumer payments, ISO 20022 XML and the usage of BIC information in SEPA payments and collections.
- The European Commission compiles information on niche schemes that have been announced by Member States. To date, only 18 out of 30 countries have announced their niche scheme plans. Of the Euro zone countries, 13 out of 17 countries have announced their niche schemes.
- Please see the following document which provides details of the relevant regulation, Member State options and announced niches schemes on a country-by-country basis. Citi has chosen to provide this update to you as it is uncertain when the remaining countries will announce their plans. Citi will continue to monitor country announcements and keep you informed.
- Document: Global Regulatory Bulletin: SEPA Niche Schemes
Factoring niche schemes into your SEPA plan
- Assess if your organization uses niche schemes today.
- Be aware that niche schemes will require the use of local accounts.
- Decide whether to continue using niche schemes or migrate to SEPA Direct Debit or SEPA Credit Transfer.
- Ensure your systems can cater for parallel SEPA scheme and niche scheme processing.
- Continue to stay abreast of changes before the 1 February 2016 timeline for niche schemes to move to SEPA standards.
With just over 6 weeks until the SEPA migration deadline, many organizations will have completed, or are in the process of closing their SEPA migration projects. Below are some key areas we recommend to review as you complete remaining migration activities.
SEPA Credit Transfers
- IBAN & BIC readiness / processes in place to collect information going forward
- File format changes completed
- Alignment with third parties (e.g. payroll providers)
- Test payments have been successfully completed
- Confirm flow of payment information and reconciliation
- Migration of all legacy Euro ACH payments is completed / underway
SEPA Direct Debits
- Existing mandates have been reconciled / new mandates obtained if necessary
- Collection processes have been updated covering SEPA timings and R messages
- Technical and processing changes completed
- File format changes completed
- First (FRST) SEPA Direct Debit transactions have been successfully completed
- Confirm flow of receivables information and reconciliation
- Migration of all legacy Euro ACH direct debit is completed / underway
The SEPA deadline of 1st February 2014 is now just over 8 weeks away and regulatory bodies continue to re-iterate that the deadline will not move and that "there is no Plan B."
Companies operating in the Euro zone that are not SEPA compliant by the 1st February could experience significant payment & collection failures after that date should these flows not be SEPA compliant (including payroll & tax payments).
Citi's clients are already fully converted to SEPA or are on target to achieve full compliance by the deadline. However should your organization feel at risk of not completing before 1st Feb 2014, consideration should be given not only to your own organizational readiness but also to your counterparts.
- Challenges can appear in data gathering, technology delivery, mandate process change or otherwise, and impact SEPA Credit Transfers, SEPA Direct Debits, or both. Contingency options based on in-house solutions, bank capabilities or third party providers may be alternatives.
- Citi does offer an number of contingency options to support clients that are at risk of missing the deadline, these include:
- Our award winning CitiDirect online banking platform which can support automated payments services and direct debit options
- Mandate management services
- BIC & IBAN data conversion support
- If you believe you are at risk of missing the SEPA deadline, please engage with your Citi relationship team immediately and we will work with you to review migration options and implement a suitable migration plan.
- Suppliers: If you currently pay via Euro direct debit and have not been informed to date by your suppliers of their planned migration date to SEPA Direct Debits, you may wish to contact key suppliers to check their plans. You may also wish to prepare to pay these suppliers directly via SEPA Credit Transfers as a contingency option.
- Customers: To mitigate the risk of incoming funds being disrupted, you can proactively notify customers of your IBAN/BIC details while also raising awareness of SEPA requirements and timeline amongst your customer base. For high value paying customers, it may be advisable to check directly with these customers and enquire about their SEPA migration plans.
Under SEPA, changes to mandates are driven by the collecting entity - in this case, your vendor - who should initiate any needed changes. You should seek to understand 1) under which SEPA Direct Debit scheme your vendor is planning to collect funds from you, 2) whether you need to lodge a mandate with your bank and 3) if there are changes with the bank where you hold your accounts.
1. Be aware of the direct debit scheme your vendor is collecting under
- There are two SEPA direct debit schemes in SEPA with differing attributes:
- SEPA Direct Debit Core Scheme
- Can be used to collect funds from both consumers and businesses
- Longer refund period for debtors (i.e. your organization, when you are paying by direct debit)
- Creditor mandate responsibilities only
- Existing mandates held by your vendor are valid for SEPA collections. Thus, if you have previously signed a mandate and are currently paying via direct debit, then you will not have to sign a new mandate.
- If your vendor is collecting under the Core scheme, then you should receive a notification from your vendor in advance of their first collection via SEPA.
- Some vendors may ask you to sign a new mandate. For example - if they cannot locate your old mandate or are changing the legal entity they will use to collect funds from you.
- SEPA Direct Debit Business-to-Business (B2B) Scheme
- Can be used to collect funds from businesses only
- Irrevocable collections (your organization will not have a right of refund if your vendor has a valid mandate in place)
- Creditor & Debtor mandate responsibilities
- New mandates required. Thus, if your vendor wishes to collect under the Business-to-Business scheme (B2B), you will need to sign a new mandate
- SEPA Direct Debit Core Scheme
2. You may need to lodge a mandate with your bank
- If your vendor is collecting funds from you under:
- Core Scheme: you do not need to lodge a mandate with your bank.
- B2B Scheme: you will need to lodge a mandate with your bank. If your Citi accounts are being debited, you can lodge your B2B mandates via our CitiDirect Electronic Banking system. Please contact your Citi representative for more details.
3. You may need to check with you bank
- Account Blocking – some banks may place an automatic block on your account to restrict direct debits from your account. You may wish to speak with your bank to confirm whether this is in place and unblock as necessary.
- Statement information – regarding your SEPA Direct Debit payment, additional information may appear on your account statement which can assist reconciliation processes (e.g. Creditor ID).
SEPA provides the basis for account centralization, enabling organizations to hold an account in any of the 33 SEPA countries from which payments can be made to, and collections received from.
Cash management setups will vary depending on multiple factors which include business operations, customer base, trading model, legal entities and currencies etc. Therefore the considerations will depend on an organizations existing cash management setup and desired future state. Some of the key areas to investigate include:
- Ongoing local account requirements - certain payment/collection instruments will continue to require a local account, e.g. cash, cheques and SEPA Niche Schemes.
- Legal and regulatory aspects - e.g. the impact of residency status on central bank reporting or ability to trade without resident status.
- Tax, accounting and intercompany treatment – e.g. should processing be centralized to a certain legal entity or POBO / ROBO (Receivables on behalf of / Payments on behalf of) structures be adopted, internal partners should be engaged regarding tax, reconciliation, process and wider internal impact.
- Technical and ERP – Where changes in processes take place (e.g. multiple entities / countries in the single account solution), technology systems need to be able to map and use the information on the SEPA transactions to align transactions with relevant business / entity etc.
AOS are optional services that may be provided by either individual or a community of banks/ payment service providers (PSP). Banks' customers are at free to choose whether they wish to utilise such services.
The are two types of AOS:
- AOS provided by banks / PSPs to their customers as value-added SEPA services.
- AOS provided by local, national and pan-European communities of banks / PSPs. This may include, for example, the use of additional data elements in the ISO 20022 XML Standards, or be relating to community-provided delivery channels for customers, e.g. Finland introduced two AOS during the Finnish market migration to SEPA Credit Transfers in 2011.
Banks and / or PSPs may only offer AOS in accordance with the following principles:
- SEPA regulation and rulebook states that interoperability between all banks / PSPs shall prevail. All AOS must not compromise this requirement of the SEPA Scheme nor create barriers to competition.
- AOS are part of the market space and should be established and evolve based on market needs. Based on these market needs, the European Payment Council (EPC) may incorporate commonly used AOS features into the SEPA Scheme(s).
- There should be transparency in relation to community AOS. In particular, details of community AOS relating to the use of data elements present in the ISO 20022 XML Standards (including any community usage rules for the SEPA core mandatory subset) should be disclosed on a publicly available website (in both local language(s) and English).
For more detailed information on AOS and a list of operational AOS that have been advised to EPC, please visit the following links: SEPA Credit Transfers and SEPA Direct Debit Core and SEPA Direct Debit B2B.
SEPA collections that cannot be processed will require exception handling through the use of R-transactions. In SEPA rulebooks and in ISO XML 20022 there are seven defined exception messages, the so-called R-transactions, because their names all start with an R:
- Request for cancellation
All of these seven types of R-transactions existed to a degree in most legacy ACH and direct debit schemes, however their treatments were not standardized in each country.
Reason codes are closely related to R-transactions, and if used correctly, they will provide all counterparties with more information on why a particular transaction requires exception handling.
Currently in the market, however, accurate reason codes are not used everywhere and the reason code ‘Not specified reason’ is commonly used. In a number of European countries, appropriate reason codes are sometimes not used because of legal restrictions (e.g. data protection laws) or due to local business practices.
Currently the main reasons for SEPA Credit Transfers observed in the market for reject/returns are:
- Account identifier invalid (i.e. invalid IBAN or account number does not exist or wrong BIC)
- Account closed
And the main reasons for SEPA Direct Debits observed in the market today for reject/returns are:
- Insufficient funds
- Not specified reason (by debtor bank)
- This code does not provide sufficient information to creditors to enable them to take remedial actions.
- Countries such as Austria, Belgium and Germany have data and/or consumer protection laws that restrict banks from providing certain reason codes concerning the financial or alive/deceased status of an account holder.
- In other markets, bank readiness and ability to differentiate and provide the correct reason code could play a role.
If your organization is looking to adopt ISO 20022 XML for SEPA Credit Transfers and Direct Debits, the technical discussion quickly revolves around several abbreviations including pain, camt messages and different versions. This guide is intended to simplify some of this language and provide a guidance in terms of the different versions of ISO 20022 XML that exist today.
The SEPA data formats are based on the global ISO 20022 message standards developed by the International Organization for Standardization (ISO). XML stands for eXtensible Markup Language which is defined as a set of rules for modelling documents in machine-readable form.
The ISO 20022 XML message naming convention follows the following format:
where the fields respectively refer to:
- aaaa: Business Area (pain stands for payment initiation, camt stands for cash management),
- xxx: Message Type (for pain, 001 identifies Credit Transfers, 008 identifies Direct Debits),
- yyy: Variant (001 is the standard default variant, and is supported by Citi)
- zz: Version
For example, pain.001.001.03 is version 3 of the credit transfer initiation message.
Credit Transfers: Currently the two most widely used versions of the credit transfer initiation message are version 2 (published by ISO in 2006), and version 3 (2009). Citi can support both of these versions for SEPA Credit Transfers, as well as global payments in general. Version 2 has been supported for three years longer, and currently represents the majority of the ISO 20022 XML credit transfer transactions that Citi receives. Version 3 is the most recent version that banks in general are supporting today, and is also the version around which the guidelines of the Common Global Implementation group have been created. If you are planning to adopt ISO 20022 XML for the first time to send payments, we recommend you initially look at using pain.001.001.03 (version 3).
NB. ISO published version 4 of the credit transfer initiation message in 2012, with only minor changes over version 3. This newest version does not yet appear to have been much adopted by the international banking community.
Direct Debits: Citi supports two versions of the direct debit initiation message; version 1 (published by ISO in 2006), and version 2 (2009). Both versions can be used to implement SEPA Direct Debits, as well as other direct debit schemes offered by Citi around the world. If you are planning to adopt ISO 20022 XML for the first time to collect direct debits, we recommend you initially look at using pain.008.001.02 (version 2).
NB. ISO published version 3 of the direct debit initiation message in 2012, with only minor changes over version 2. This newest version does not yet appear to have been much adopted by the international banking community.
Citi is fully ISO 20022 XML compliant and is ready to support clients in their transition to SEPA.. As an XML market leader, we have the experience, technology and coverage (90+ countries) to enable you to use XML as your SEPA and global payment format, supporting your transition to XML every step of the way. However Citi also provides the flexibility to allow clients to continue utilising several existing file formats to initiate SEPA transactions.
For further information on whether your organization is required to adopt ISO 20022 XML or not, please see our earlier newsletter here.
- For reconciliation of SEPA transactions the following data points shall be available for your reconciliation processes and reported back to you in a non-truncated manner.
- Initiated SEPA transactions – For SEPA Credit Transfer payments and SEPA Direct Debit collections, there will be differences in reference points available depending on whether you have requested these transactions to be booked as bulk or itemized entries.
- Where transactions are reported as a bulk entry on the statement, a batch reference can be shown and used to support reconciliation, providing the initiating party with an associated reference for a batch.
- Itemized initiated transactions contain a field for a unique End to End ID reference which is assigned at a transaction level. Additionally there are data points such as transaction code, creditor ID or unique mandate reference which can be also reported on an itemized basis.
- Uninitiated SEPA transactions – For incoming SEPA Credit Transfers and SEPA Direct Debit payments, the data points counterparty name, counterparty bank and transaction amount are available from your counterparty via clearing.
- In addition with SEPA, further information - such as the unique mandate reference - can be displayed for SEPA Direct Debit payments, while for incoming SEPA Credit Transfers payment details can contain up to 140 characters of remittance information allowing for richer payment information to be supplied by your payers.
- As with other electronic cash transactions, SEPA is to a degree reliant on the information being made available from the counterparty and the counterparty bank.
- A CSID is a unique reference that identifies a collector in the SEPA Direct Debit (SDD) schemes. It is determined on a legal entity basis, however a business can have multiple CSIDs.
- A valid CSID from any SEPA country can be used to collect from and into any of the SEPA countries.
- The CSID must be quoted on each SEPA Direct Debit mandate and must also be included in the SDD transaction initiated/sent to the collecting bank
- Each country has different rules on how the CSID can be generated – Citi has included country level CSID information in our Citi Direct Debit Country Guide and Citi can assist you to generate a CSID during the implementation process.
- Some countries enable auto generation of the CSID, but others require a formal application and documentation process, similar to that in place for local Direct Debit schemes. It is important to factor this in project timelines
- What is a SEPA Direct Debit B2B Mandate?
- The SEPA Direct Debit Business-to-Business (B2B) scheme is one of two direct debit schemes in SEPA - this scheme can only be used to collect funds from businesses.
- When the SEPA B2B scheme is being used, the debtor (payer) must lodge a mandate with their bank before payments can be made. This is unlike the SEPA Direct Debit Core scheme, where no mandate needs to be lodged with the paying bank.
- As a payer, how do I recognize a SEPA Direct Debit B2B mandate?
- You can recognize this type of mandate as "SEPA B2B" or "SEPA Business-to-Business" must be indicated clearly on the mandate. Your creditor will supply you with the mandate.
- As a payer, what should I do with a SEPA Direct Debit B2B mandate?
- You should sign and authorize the SEPA Direct Debit (DD) B2B mandate.
- You must confirm the authorization of this mandate with your bank (Paying Bank) by following your bank's mandate lodgement process. Citi supports SEPA DD B2B mandate lodgement through our award-winning platform, CitiDirect. Please click here for more details or contact your Citi representative for more details.
- You should return a signed mandate to your creditor (e.g. a vendor).
- Note: If a SEPA Direct Debit B2B transaction fails validation due to incorrect setup or no mandate lodgement, then the transaction will be rejected and the payment will not be made. You may face penalties for certain missed payments (for instance - late tax payments).
- Should you wish to amend or cancel mandates, you should advise these changes promptly to both your creditor and your paying bank.
- Micro-enterprises - The definition of Micro-enterprises as per EC Recommendation (2003/361/EC Article 2(1) and (3) of the Annex) is: an enterprise which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed EUR 2 million.
- SEPA rules - In the SEPA B2B rulebook it states that the B2B scheme can only be used to collect from businesses, and specifically parties who have opted out from refund rights, as defined by Applicable National Law. According to Payment Services Directive (PSD), a customer is defined as consumer or business at a practical level according to account set up at the customer’s bank.
- National Laws - A Debtor Bank can only offer the B2B Scheme to a Debtor who is a ‘business’ under the national law of the place where that Debtor Bank is providing the payment service. A Customer may only use the Scheme as a Debtor, when he/she is authorised by national law to opt-out from the refund right.
The PSD contains a Member State derogation that allows Member States to require that Micro-enterprises should be treated as consumers.
- Countries where Micro-enterprises are treated as businesses, meaning that the SDD B2B scheme can be used to collect funds from these small businesses - Austria, Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Slovakia, Spain
- Countries where Micro-enterprises are treated as consumers, meaning that the SDD B2B scheme cannot be used to collect funds from these small businesses - Ireland, Portugal, UK
- Acceptance – The vast majority of banks within the SEPA regions are ready to send and receive SEPA Credit Transfers, and as per regulation, banks within the EUR member states should today already be reachable for SEPA transactions. Prior to implementation, Citi recommends running a reachability check on your beneficiary banks.
- Account portability – In the short term, certain local requirements for making domestic salary or third party salary related payments (e.g. payroll tax to authorities) might require local accounts.
- Confidentiality – In order to protect sensitive salary information, SEPA Credit Transfer bulk debit is an important payment functionality that can enable protection by resulting in a single posting on bank account statements.
- Payment instructions – Within SEPA ISO XML 20022 standards there is a field entitled “Category Purpose” that can be populated with the pre-defined code “SALA” (to refer to salary payments). While at this point not all banks are recognising the code word, usage and recognition will increase as SEPA matures. It is advisable to use “SALA” where possible to allow for the beneficiary bank to apply special conditions regarding the incoming payment (e.g. mortgage payment deduction etc). General BIC and IBAN requirement also applies to SEPA Credit Transfer payroll payments.
- Timing – The payment execution cycle for SEPA Credit Transfers is D+1 maximum cycle time.
- Amount – With SEPA Credit Transfer payments beneficiaries receive full value, with beneficiary bank charges applied separately. Those bank charges will have to be agreed with the beneficiary and also they must be priced the same as for receiving a domestic SEPA payment as for a cross border SEPA payment.
- Third party payroll provider – if you are using third parties to create your payroll payment files, then it is advisable to engage them as soon as possible to ensure that they are actively managing SEPA migration of your payroll files and will be completed in time.
- Creditor chooses to migrate to SEPA DD Core scheme where allowed.
- Obtain valid legacy data: Creditors need to obtain legacy mandate data and this is particularly important in DMF countries. Belgium, for example, is one such country and to assist the move to SEPA the Belgian Central Bank have set up a database of their own of all legacy mandate data to assist migration. Belgian banks (including Citi) can request the information in electronic format and share with their clients.
- Complement information with data gathering (in order to convert into SEPA DD compliant mandates): Gap analysis is required to be conducted on legacy mandates versus SEPA DD core mandate to understand what information is required to be further obtained and stored in the mandate database. Common data points to be gathered are: unique mandate reference, BIC and IBAN.
- Creditor chooses to migrate to SEPA DD B2B scheme where allowed or chooses to implement new SEPA DD Core scheme.
SEPA and XML
- The key aim of the SEPA Regulation is to ensure that the European payments markets move from legacy domestic formats and standards for credit transfers and direct debits in the low value payment space to the harmonized SEPA standards. As such, the regulation included a number of points to drive further adoption of SEPA and harmonisation of the SEPA schemes.
Bank to Bank
- The SEPA schemes have been designed to be standardized on basis of ISO 20022 XML, with banks being required to send and receive ISO 20022 XML when exchanging SEPA messages. While the infrastructure of most banks is ready to process ISO 20022 XML, there are still some banks that are not yet fully ready. The Regulation reaffirms that for payments that fall under its scope, all banks should use the ISO 20022 XML message formats when transmitting payments on behalf of customers, by the migration date of 1 February 2014. Citi itself is already fully ISO 20022 XML compliant.
Customer to Bank
- As certain legacy domestic formats are unable to fully support the SEPA schemes and also to encourage the general use of ISO 20022 XML, the legislation states that banks need to be ready to accept ISO 20022 XML from their clients by latest 1st February 2014. Should a client wish to initiate SEPA payments using ISO 20022 XML, all SEPA adherent banks will need to be ready to accept ISO 20022 XML by this date.
- Regarding the mandatory use of ISO 20022 XML by organizations (e.g. corporates), a provision was included stating ISO 20022 XML should be utilised when file based SEPA payments are sent or received by clients. Of course, clients who wish to do so are free to adopt the use of ISO 20022 XML in respect of their SEPA payments.
- Importantly, the rules of the SEPA Regulation apply directly to Payment Service Providers (PSPs), e.g. banks, and only indirectly to users, including corporates.
- After the publication of the Regulation, the European Banking Federation in coordination with the European Payments Council – and following close negotiation with the European Commission itself - published implementation guidance for PSPs relating to SEPA message (file) formats and a number of other points in the regulation, clarifying that the use of conversion services could be employed to meet the requirements of the SEPA regulation coming into force on 1 February 2014.
- This guidance clarified that Payment Service Providers (e.g. Banks) or other third parties can provide conversion services to Payment Service Users (e.g. clients) to support the processing of SEPA payments utilising certain existing file formats. Here it has to be noted that clients are required to provide the mandatory SEPA data set (in line with the SEPA Regulation), when submitting their payment file instructions to their bank. There was no end date set for the provision of conversion services, however conversion services should take place prior to processing through a bank’s payment processor.
- Further details of this industry guidance can be found on the European Payments Council website: http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=580
- Citi itself is fully ISO 20022 XML compliant and is ready to support clients in their transition to SEPA. Regardless of legislation, Citi recommends clients consider utilising ISO 20022 XML as a global messaging format given its richness and flexibility. As an XML market leader, we have the experience, technology and coverage (90+ countries) to enable you to use XML as your SEPA and global payment format. Utilising an engaging and consultative approach, Citi can ease your transition to XML. However Citi also provides the flexibility to allow clients to continue utilising certain existing file formats to initiate SEPA transactions.
Understanding your existing Euro ACH and Direct Debit transactions is an important step in migrating to the SEPA Credit Transfer and SEPA Direct Debit schemes. Below are some important key activities to cover:
- Document current payment and collection activity: It is important to identify and categorise the payments and collections you initiate today. On the payment side, typical categories include vendor, payroll and tax payments; however certain organizations may initiate payments to customers and other third parties. Additionally, your organization may be paying invoices today by direct debit and may be asked by your suppliers to move to the SEPA Direct Debit B2B scheme. On the collections side, understand your customer base (Consumer vs. Business) and how you receive payments today – via a direct debit collection or incoming transfer. This information will give you a picture of your activities today and enable you to make decisions on which SEPA schemes to utilise.
- Identify accounts in scope: List the accounts you use today to manage your Euro payments and collections. You should consider the location and ownership of these accounts, while also identifying how these accounts are used today – i.e. whether accounts are used for both payments and collections, or are sole usage.
- Understand local activity: Paper based instruments, cash and a number of local instruments are outside the scope of the SEPA however it is important to understand your usage of these instruments should you consider moving account locations.
- Assess systems: Identify which systems, connectivity and file formats are used today to initiate your Euro payments and collections. You may use a single ERP, a number of ERP instances or utilise local systems. Having this view will allow you to assess technology changes and schedule resources. It is important to also look at systems which hold account information such as HR and customer data systems that may also need to be updated.
- Bring it together: Create an overall picture of impacted payment and collection flows, systems, accounts and processes. Including volumes, file formats and connectivity will give you a consolidated view which can be used to discuss your SEPA project internally and with your partner bank.
With SEPA Direct Debits there are two schemes that organizations can look to adopt – SEPA Direct Debit Core (Core) and SEPA Direct Debit B2B (B2B). When deciding on which scheme to adopt, the following are some of the criteria that should be considered in order to select the scheme that best suits your needs:
- Scheme Purpose: The Core scheme is designed to be adopted for both consumer flows (C2B) and business flows (B2B). The B2B scheme is however expected to handle high value DD collections and is only permitted to collect DD’s from business accounts, as per national definitions.
- Reachability: For banks within the Euro zone that currently offer domestic Euro DD services, the Core scheme is mandatory. However the B2B scheme is an optional scheme, meaning that not all banks must participate in the scheme. We recommend that creditor organizations check reachability for each counterparty that your debtors are banking with.
- Revocability / Claims: Importantly, the Core scheme permits debtors to claim a refund within 8 weeks of the collection date, whereas within the B2B scheme the debtor explicitly waives this right to refund, subject to a valid mandate being in place. For both schemes debtors have up to 13 months to request a refund if the DD transaction was unauthorized, i.e. done without a valid mandate.
- Mandates: For the SEPA Direct Debit Core scheme, existing local direct debit mandates obtained before 1st Feb 2014 are valid to be used, albeit they might be missing mandatory information before they can be used in SEPA DD transactions, such as unique mandate reference numbers, BIC and IBAN. However the B2B scheme requires that new mandates be obtained while also requiring that a mandate be lodged with the debtor bank.
- Value dating: For recurring direct debits, the standard Core scheme has an execution cycle of D-2. The corresponding execution cycle for the B2B scheme is D-1.