Direct debits fail to cross borders

While banks have made it easier to make direct-debit payments within the EU, consumers are sticking to national schemes.

Six months ago, Europe’s banks entered a new era, as legislation came into force requiring them to accept cross-border direct debits. The directive stipulates that all banks in the eurozone must be ready to handle direct-debit payments from other countries by November 2009 at the latest. For banks outside the eurozone the deadline is November 2014. Direct-debit payments are those where someone gives prior authorisation to a company to take regular payments from their bank account – for example, to pay energy bills or magazine subscriptions.

The legislation is one of the building blocks of the Single Euro Payments Area (SEPA), an initiative driven by the banking sector, the European Commission, and the European Central Bank. SEPA would be an internal market for payments, with common procedures and charges for transactions both within and between member states. The Commission estimates that SEPA could bring €123 billion of benefits to the single market.

Struggling scheme

The European Payments Council (EPC), an organisation set up by the banking sector to draw up technical rules for SEPA, has developed a common direct-debit scheme (SDD) to be applied throughout the EU, replacing national schemes. SDD is based on the use of international bank account numbers (IBANs) and bank identifier codes (BICs).

The SEPA revolution, however, is struggling to get off the ground. Although 2,692 banks have so far made the adjustments necessary to offer SDD, it is only being used for 0.5% of transactions, not least because national schemes remain popular and people feel little incentive to switch.

Germany, the eurozone’s largest economy, has yet to introduce SDD at all and there is little indication that it will do so soon. The country has yet to find a legal solution that would allow companies to use existing direct-debit authorisation forms (mandates) to collect money using SEPA direct-debit services. Unless a solution is found, companies would have to ask their clients to fill out new mandates. There are currently 600 million valid forms in Germany, and the business community (which overall is far less enthusiastic about SEPA than the banks) has balked at the administrative costs.

The slow uptake of SDD has led to calls by MEPs and finance ministers for a binding end-date for ending national direct-debit schemes. MEPs have called for a binding end-date of no later than the end of 2012. Michel Barnier, the European commissioner for internal market and services, plans to present a proposal in September for an end-date, and his staff are currently mulling over whether to go for a legally binding approach – something a minority of member states oppose.

Barnier said this week (26 April) that he believes “binding end-dates are important” for the future of SEPA, which he says needs “a renewed momentum”.

‘Tender to fraudsters’

There are other concerns about SDD that would be aggravated rather than assuaged by setting an end-date. Monique Goyens, the director-general of BEUC, the European consumers’ organisation, has described SDD as “practically a call for tender to fraudsters”. She is concerned that the scheme lacks safeguards to prevent criminals from getting hold of someone’s bank details, name and address and then setting up a direct-debit in their name.

Gertrude Tempel-Gugerell, a member of the executive board of the European Central Bank, and Jörgen Holmquist, the director-general of the Commission’s internal market department, wrote to Gerard Hartsink, chairman of the EPC, in March, calling for action to reassure consumers that the scheme is safe.

“[It is] essential that users in general, and consumers and SMEs in particular, have trust in payment instruments,” they wrote. “In our opinion there is an urgent need to improve the core SDD scheme,” they added.

The EPC adopted some changes to the scheme at its last plenary session on 24 March, notably that banks should be able to offer a ‘dummy run’ service in which a creditor bank gets access to the debtor’s bank account, but does not take any money. The hope is that this would provide an early warning of any illegality.

Unconvinced consumers’ group

The changes have pleased the Commission and the ECB. But BEUC remains unconvinced and wants the EPC to allow consumers to provide their banks with an exhaustive list of approved creditors for direct debits.

Hartsink told European Voice that SEPA direct debit “ensures complete consumer protection”. “There exist no factual security issues which would prevent migration [to the scheme],” he said.

Retailers are concerned that the roll-out of SEPA direct-debit services could lead to the eradication of “niche” servicess that exist in individual member states– such as Germany’s ELV card, which is a combination of a pre-paid card and a direct-debit service. The EPC has yet to rule on which niche services should be allowed to continue in the SEPA direct-debit era.

The Commission and the ECB have said that they will create a SEPA Council that will bring together different parties to discuss the project’s teething problems. It will hold a first meeting in June. It is likely to have a packed agenda.

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