ARE BANKS P REPARED FOR SEPA DIR EWHAT ARE THE SAFETY RISKS?

PLUS: TEN USEFUL TIPS FOR BANKS

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KS P REPARED IR ECT DEBITS?

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TIPS FOR CREDITOR BANKS TO DETECT

SUSPICIOUS DIRECT DEBITS:

Setup a proper due diligence program for new PSPs and merchants that include such

ongoing monitoring requirements as a transaction profile on volumes and amounts.

Use an automated solution to monitor (cross border) incoming direct debit requests

from known and unknown PSPs and merchants.

Check whether PSP and merchant transactions are typical for their type of business.

Implement dynamic profiles for each PSP/Merchant on refund requests and direct

debit cancellations and watch for any sudden increase or unusual behavior.

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Since August 2014, direct debits will no longer be restricted as a natio-

nal payment method for a large number of European countries but will

turn into a true Euro-denominated solution for making fund transfers

across the entire Euro-zone.

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who are selling their products and services across Europe. For consu-

mers, the new SEPA direct debit is an interesting, and cheaper alter-

native to using credit cards as an “upfront” payment authorization

solution. Consumers can easily authorize an electronic mandate for

single or recurring payment collection for an online purchase, while

merchants are guaranteed payment and can start delivering their

goods to the consumer. Over the years, local direct debit schemes

have become hugely popular in most countries. In the Netherlands

for example, about 45% of all electronic payment transactions are

processed as direct debits.

CROSS BORDER DIRECT DEBITS WILL GAIN GROUND QUICKLY

U���� ��� ��e easy and convenient for both consumers and mer-

chants. Consumers can easily authorize a request to make payment via

a SEPA direct debit and be automatically and legally protected with re-

fund guarantees of up to 13 months after a purchase is made (in case

of unauthorized purchases). Merchants also benefit in that they avoid

hefty credit card fees and simplify the “checkout” process by excluding

additional authorization steps such as PIN and 3D-secure. © I

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SO WHAT WILL CHANGE?

$urrently, if you as a customer want to purchase a pro-

duct online, the merchant would typically ask you to

enter your credit card details. However since it will be

cheaper for a merchant to o;er you a SEPA direct debit,

they will more likely favor promoting this payment me-

thod. All the consumer will need to do is provide their

merchant a “tick in a box” verification to set up a direct

debit.

Besides online merchants, energy companies and other

utility firms are heavily reliant on direct debits. With

the energy market quickly consolidating, it has been be-

come clear that they will consolidate their cash manage-

ment operations and outsource direct debit services to

payment service providers (PSPs) anywhere in Europe to

get their bills paid. From their point of view, this is un-

derstandable because it will be cheaper to hire people in

Eastern Europe compared to a more expensive location

such as a Paris subsidiary. Furthermore, in most cases the

consumer won’t experience any di;erence. So, the like-

lihood that SEPA Direct Debits will become successful is

therefore a very realistic possibility.

BUT ARE THERE RISKS INVOLVED?

M%&' year the banks in the Netherlands lost 25 million

euros in fraud cases due to Internet direct debit requests

from rogue payment service providers and corrupt mer-

chants. This is because there is very little security in the

process of initiating direct bills. Most of the fraud was re-

lated to service providers who submitted unauthorized

direct debits to the collector bank. Unlike banks, many of

these service providers in Europe are not supervised by a

regulator. Any company that wants to become a service

provider to process payments for merchants and utilities

firms can start up without significant security checks.

Only a small number of local requirements need to be

fulfilled to receive a direct debit contract or license.

This raises a serious concern when numerous new PSPs

are going to o;er direct debit requests across the Euro-

zone. How strong are the due diligence controls of the

payee’s bank, and how reliable are the operations of the-

se Foreign Service providers and merchants? It is impor-

tant for all parties involved to be aware of the changes

and risks related to the rollout of the European SEPA di-

rect debit initiative. While it will save money for consu-

mers and merchants on the one hand, it is important to

ensure that it will not lead to bigger losses for the banks.

The reality is that if nothing changes and there aren’t

any systems in place to check for irregularities, then the

success in making a direct debit will still be reliant on

consumers who will need to pro-actively respond to ro-

gue direct debits by reporting them to their own bank.

Banks are the guardians of the customer’s money and re-

sponsible for losses with fraudulent direct debits. With

the continuous threat of phishing attacks on customer

data such as bank account information, there is a strong

likelihood that criminals will capture this information

and fraudulently submit direct debit transactions to the

automated systems of the banks. The banks should deal

with the risks of SEPA Direct Debits and their associated

security challenges as soon as possible.

TIPS FOR BOTH CREDITOR AND

DEBTOR BANKS:

Look for malicious payment descriptions (e.g. dubious or misspelled company

names).

Use your historic transaction information to detect any unusual patterns of your

customers and their accounts.

Use your watch-list tools to filter-out blacklisted companies and beneficiary accounts.

Monitor the number of direct debit rejections by your customers and take action

before the payment is processed.

Watch for o;shore accounts within payment file details.

Avoid being fooled by small individual transactions. It’s the bulk that matters.

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