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01/29/2014

SEPA: Postponement of a scheduled chaos

The implementation of SEPA by the different players of the payment chain is far from complete. The recent decision of the European Commission to postpone the SEPA deadline only comes as a confirmation of this well-known fact: lots of players will not be SEPA compliant for the 1st of February.

A critical situation at all level

Even though most European SME's face a particularly worrying situation when it comes to SEPA, large corporates as well as banks and public institutions are not facing an ideal situation either.

In fact, on the corporate side, it appears very clearly that a vast majority has taken the bet of migrating towards SEPA (very) late in 2013 or even 2014. This corroborates the hypothesis that this migration has often been perceived as a technical adaptation where it actually impacts numerous parts of an organization, and notably the management of direct debits mandates.

SEPA Credit Transfer: SCT

The situation for credit transfer seems less worrying. Even though numerous transactions must still migrate towards SEPA, the necessary changes are easier to implement than when dealing with direct debit.

Nevertheless, the risk of errors is not to be underestimated. The migration of the current national bank account number towards the IBAN standard is not risk-free and the launch of a new credit transfer file format can equally become a source of errors.

For instance, some large corporates and even banks recently suffered from migration errors. The most striking example arises from Credit Agricole in the distribution of CAP to French farmers. Beneficiaries were surprised to discover they received twice the amount they were supposed to on their bank accounts! The bank had to recover €3.4 billion.

SEPA Direct Debit: SDD

Lately, the emergency to migrate towards SEPA direct debit has clearly been felt and we are witnessing a boom in the number of SDD files processed: this amount has been doubling monthly during the last quarter of 2013.

Nevertheless, players also face potential error in their direct debit migration. For instance, American Express has been subject to the complaints of its French clients after it launched the first part of its migration program in Europe. Indeed, numerous cards were blocked as a consequence of errors in the first direct debit file sent to cover the expenses of the clients.

Considering the late migration of lots of corporates and the bottlenecks arising at the payment service providers' level as well as the software editors' level, the upcoming month we will definitely witness numerous transaction errors related to the SEPA migration and the furious customers resulting from it.

The « R » nightmare

R-transactions - which regroup possible rejection and reimbursement transactions for a SEPA credit transfer or direct debit - offer a reinforced protection to the final consumer. This protection mainly applies to direct debit transactions where the consumer can request the reimbursement without justification of any direct debit until 8 weeks after the transaction. If the consumer has not signed a valid mandate, this contestation period is extended to 13 months.

Nonetheless, these R transactions and their technical particularities (e.g. XML messages, operation code and timeline to respect) are rather new to the payment industry since they haven't been used extensively due to the low SEPA transaction volumes. . Their number is thus going to increase rapidly and the lack of preparation of several players is more than likely to trigger new problems in the treatment of these messages along the payment chain. The forced migration towards SEPA in the light of the urgency of many corporates is likely to trigger numerous R transactions that will also provoke problems, notably linked to the new payment chain that have not been fully proved until today.

The reaction of the European Commission towards this scheduled chaos is judged counter-productive by some players, and notably by banks having to extend their national payment scheme services. The Commission claims that it is a necessary measure to reduce problems that the consumer, corporates and payment service providers will be facing and to avoid a collapse of the Eurozone payment industry and economy. Nonetheless, even though these mitigating actions will not be able to absorb all of the upcoming problems, the extended usage of national files will most likely allow to smooth migrations over time and thus potentially reduce the number of issues faced.

Nevertheless, the emergency is still actual since 60% of direct debit and 30% of credit transfer transactions that have not yet been migrated in Europe. Indeed, it seems highly unlikely that Europe will allow another delay in the SEPA enforcement and the risk of seeing major disruptions occurring on the payment market in Europe on the 1st of August is still well present.

Sia Partners

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