The SEPA Direct Debit Scheme and the Payment Services Directive Pose Challenges and Opportunities

New European payments directives will require banks to invest in new infrastructures or partnerships, but they also provide opportunities to offer value-added services, writes Bernd Waizenhoefer, Head of FI Markets - Global Payments Product Management, Global Transaction Banking, Deutsche Bank.

In November 2009 several payments milestones will be reached: The Payment Services Directive (PSD), which aims to establish a comprehensive set of rules for payments in the European Union, is expected to be transposed into national law in nearly all EU/European Economic Area countries; and the Single Euro Payments Area (SEPA) Direct Debit (SDD) schemes (Core and B2B) for making cross-border and national euro direct debits will be launched as well.

In contrast to the SDD scheme, the PSD will have an immediate impact on banks. Banks must be able to process PSD-applicable payments in line with local legislation beginning Day 1, abiding by the regulations' full requirements, such as maximum execution timeline, value dating provisions, and full-amount obligations for originating and intermediary banks. The financial impact on banks -- in particular, the decline of fee and float income -- will be noticeable straight away.

The SDD schemes will not have such a direct effect. Although a new European Commission (EC) regulation (also effective November 2009) includes a mandatory reachability obligation for the payment service provider (PSP), this obligation will have a transition period until November 2010 for PSPs that are already active in national euro direct debit schemes. For PSPs outside the eurozone, the transition period will run until November 2014. Accordingly, fewer banks will offer SDD to clients on Day 1, and volumes are expected to be low in the first year. The success of the SDD will depend largely on the reachability of banks and a solution to migrate legacy direct debit mandates to the SDD schemes, as well as agreeing to an end date for existing euro ACH systems within Europe.

Both the PSD and SDD will change the payments landscape in Europe. In many cases banks are looking for partners rather than upgrading their own infrastructures to comply with the different requirements. This approach may range from correspondent banking to complex outsourcing structures.

For processing of commercial payments in line with the PSD, ordering banks must ensure that any intermediary does not deduct charges from the transaction. Explicitly outlined in national laws, the "no-deduct" service should become standard for PSD transactions.

But there is more that a correspondent partner can do for its financial institution clients. Deutsche Bank, for example, provides a value-added service on request to convert the charge codes in SWIFT instructions to accommodate all involved parties.

In addition SEPA creates opportunities to leverage partners. Since January 2008 Deutsche Bank has provided full clearing services for SEPA credit transfers via a dedicated pan-European platform. Its solutions for SEPA direct debits are built on the same platform and thus are perfectly aligned to complement our existing SEPA Connect service.

The SEPA Direct Debit scheme is more complex than the SEPA Credit Transfer scheme in regard to its content and the message flows involved. New internal processes need to be built from scratch and old infrastructures can be used only in limited ways. Therefore, participating banks are focusing on the new XML messages for SDD processing, rather than on alternative formats.

The XML messages form the basis of Deutsche Bank's SDD services. However, to support several stages of the client's SDD implementation, the bank also provides conversion services based on other file formats, like CSV, for transaction initiation and transaction receipts as well as SEPA-compliant returns and reversals.