5 things you need to know about SEPA Direct Debit
With the announcement last week that the UK will remain part of the Single European Payments Area, or SEPA, there is no need for UK businesses to feel nervous about the future of collecting recurring payments in euros. If your organisation wishes to start using SEPA Direct Debit, you may wish to start by understanding 5 things about SEPA which differ to the UK Direct Debit collection process thanks to our SEPA partner SlimPay.
What is SEPA Direct Debit?
SEPA is an excellent opportunity to do international business across the largest unified market in the world. It represents a market comprising 34 European countries, over 4000 banks and 210 million households, and it is currently valued at 11,000 billion euros.
The benefits of Direct Debit for the collection of recurring payments are well known. Thanks to its reliability as a payment method, Direct Debit helps businesses to reduce churn and improve their cashflow. Direct Debit also reduces the cost and complexity of payment handling and, since it is heavily regulated, payers trust Direct Debit as a payment method which helps to increase sign-ups and generate confidence.
Any UK business accepting payments in euros is obliged to comply with SEPA regulations. SlimPay, together with SmartDebit, are happy to share with you some basic differences you need to know and understand before considering collecting payments using SEPA Direct Debit.
1. The SEPA Direct Debit scheme is relatively new compared to UK Direct Debit.
Bacs has been operational in the UK since 1968, and while other European countries have been operating the equivalent form of Direct Debit in their own countries for similarly long periods, the SEPA Direct Debit was only fully operational across all Eurozone countries from January 2014. The SEPA Direct Debit (SDD) Core Rulebook is available on the European Payments Council website, and is regularly updated.
2. SEPA creates a zone in which all euro payments are treated as domestic.
By removing the differences between national and cross-border payments in the SEPA area, efficiency is improved and the cost of making payments is standardised and reduced.
3. Mandates are common, but the responsibility is not.
It’s common across both SDD and Bacs rules that in order to collect payments the customer must have signed a valid mandate or Direct Debit Instruction (DDI). In the UK direct debit system, DDIs are verified by the service user, or the organisation processing the Direct Debit collections. The DDI is then lodged and stored by the debtor’s bank. In the SDD scheme, mandates are stored by the creditor. Stringent rules apply to both the content of the mandate, and the process of validating it across both schemes. Under SEPA, there is an extra layer of authentication for e-mandates with a SMS one time password (OTP) sent to the payer.
4. Organisations need to be prepared for further administrative tasks, and to be aware of differences in timing for processing collections and claims for refunds.
To make SEPA payments, bank account data must be presented in a specific format known as the International Bank Account Number (IBAN). For many organisations this means converting data from the current domestic or Basic Bank Account Number (BBAN).
Under SDD rules the payment instructions are submitted one day prior to the payment date. However under Bacs rules, the process is that Day 1 is the Input date (or submission date to mimic the SDD rules), day 2 is processing, and day 3 is Entry (or D-day as per SDD terminology). So, when using SDD, organisations receive their payments more quickly from submission date to payment date.
There are also differences in how indemnity claims are processed, and the timeframes permitted for payers to raise a claim. Under SDD the payer can obtain a refund 8 weeks from the payment date without any justification, and can then claim by disputing the mandate signature with justification up to 13 months after the payment date. Under Bacs scheme rules, there is no limit in time under the Direct Debit guarantee for an indemnity claim to be honoured if the service user has made an error in making the collection. There are however specific criteria and rules.
SEPA Direct Debit process timeline (Image courtesy of SlimPay)
5. There’s a whole new lot of reporting codes to understand.
Those familiar with Bacs reporting will be aware of the various reports Bacs can return and the importance of understanding each report code. SEPA Direct Debit has its own reporting code book, though it may appear a little simpler with four types of R-transactions codes employed – Reject, Refusal, Return or Refund.
Want to know more about Direct Debit, in the UK or cross border? Feel free to contact us.
Founded in 2009, SlimPay is the European leader in payments for the subscription economy, offering a payment mix of card and Direct Debit payments. This way merchants have the ability to address different scenarios: recurring payments with fixed and variable amounts and also one-off payments.
For a helpful overview, download the SlimPay guide.