SEPA report

SEPA:will European businesses be ready for the transformation?

è www.steria.com

A Steria Report

Prepared in collaboration with

ContentsIntroduction 05

Methodology 07

ExecutiveSummary 09

WhoisaffectedbySEPA? 14

DoEuropeancorporatesunderstandSEPADirectDebit? 21

ImpactofthemigrationtoSEPADirectDebit 30

HowwillEuropeancorporatesmigratetoSEPADirectDebit? 39

Nextstepsforthemigration 45

Conclusion 47

Appendix 48

Companyprofiles 50

è www.steria.com02 | SEPA : will European businesses be ready for the transformation?

Payments are undergoing major changes in Europe

Following the creation of the euro currency, the European Union initiated the Single Euro Payments Area (SEPA) initiative in the Lisbon Agenda in 2000 to create a single payments market in the euro zone. SEPA encompasses card payments with the SEPA Card Framework, as well as direct debit and credit transfer transactions by creating the SEPA Direct Debit and SEPA Credit Transfer schemes. SEPA currently includes the 27 EU Member States plus Iceland, Norway, Liechtenstein, Switzerland and Monaco. Within SEPA, bank customers can make electronic euro payments across 32 countries under the same basic rights and obligations.

On 14th February 2012, the European Parliament voted Regulation 260/2012 that introduced key changes including end dates of 1st February 2014: existing domestic euro credit transfers and direct debits will have to be replaced by SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD).

SEPA is part of a broader regulatory trend to harmonise payments in Europe and remove any hurdles limiting payments integration. Alongside SEPA, the Payment Services Directive (PSD) was transposed into national laws in late 2009 in order to provide a common legal framework for payment services. Another key initiative is the Green Paper of the European Commission titled ‘Towards an integrated European market for card, internet and mobile payments’ that might involve additional regulatory changes.

Introduction

Countries included in SEPA

è www.steria.com SEPA : will European businesses be ready for the transformation? | 03

SEPA is changing how businesses will collect payments from their customers

SEPA encompasses a very large market with 32 countries, 500 million consumers, 71.5 billion electronic B2C and B2B payment transactions annually. In order to maximize this large market opportunity, it is important for businesses to optimize how they collect payments from their customers. This is currently fairly challenging as there are a lot of disparities in payment methods and payment preferences across Europe (e.g., high level of cheque usage in France, of cash in Germany, of credit cards in the UK, etc.). The SEPA initiative is in the process of creating a single market for payments and this provides new opportunities (and new challenges) for businesses.

As of September 2012, 30% of credit transfers have migrated to the SEPA Credit Transfer scheme and 2% of direct debits used the SEPA Direct Debit scheme.

As European businesses will need to migrate before the 1st of February 2014 end date, understanding SEPA’s implications is key to plan a smooth migration and seize market opportunities. This report is focused on SEPA Direct Debit because the migration is more complex and less advanced to provide an overview of the migration to SEPA by answering five questions:

• Who is affected by SEPA?

• Do European businesses understand SEPA Direct Debit and what is the status of the migration to SEPA Direct Debit?

• What is the impact of the migration to SEPA Direct Debit for European businesses?

• How will European businesses migrate to SEPA Direct Debit?

• What are the next steps to migrate to SEPA Direct Debit?

0,0%

0,5%

1,0%

1,5%

2,0%

0

2

4

6

8

10

12

Volume of SDD transactions (in million)

% SDD transactions / Total transactions

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

180

Volume of SCT transactions (in million)

% SCT transactions / Total transactions

Volume of SEPA Credit Transfers regularly increases … … while volume of SEPA Direct Debits is still very low

Source: European Central Bank

04 | SEPA : will European businesses be ready for the transformation? è www.steria.com

Methodology

Steria, a leading provider of IT-driven business services, in partnership with Edgar, Dunn & Company (EDC), an international strategy consultancy specialised in payments, have published an independent report about SEPA

This report is based on a phone survey conducted by market research company CSA among 300 businesses with 250 to 5,000 employees in France, Germany and the UK. All quantitative data used in this report are based on the results of this survey (unless stated otherwise) and the term “European businesses” refer to the businesses surveyed in France, Germany and the UK.

This report is focused on SEPA Direct Debit because the migration is more complex and less advanced. As there are few or no direct debits in retail face-to-face transactions, the survey has not taken into account face-to-face retail businesses and specific sectors have been targeted to be representative of sectors issuing direct debits with a focus on B2B activities. Businesses have been grouped in three sectors: Commerce (focussing on B2B trade), Services (including administration) and Manufacturing & Construction.

EDC has also conducted more than 15 in-depth face-to-face or phone interviews among large corporates and payments experts in Europe to provide a qualitative perspective and take into account viewpoints of major stakeholders in payments in Europe.



Executive Summary Following the creation of the euro currency, the European Union initiated the Single Euro Payments Area (SEPA) initiative in the Lisbon Agenda in 2000 to create a single payments market in the euro zone. SEPA encompasses card payments with the SEPA Card Framework, as well as direct debit and credit transfer transactions by creating the SEPA Direct Debit and SEPA Credit Transfer schemes. SEPA currently includes the 27 EU Member States plus Iceland, Norway, Liechtenstein, Switzerland and Monaco. Within SEPA, bank customers can make electronic euro payments across 32 countries under the same basic rights and obligations.

Steria, a leading provider of IT-driven business services, in partnership with Edgar, Dunn & Company (EDC), an international strategy consultancy specialised in payments, have published a report about SEPA. The report, mainly focused on SEPA Direct Debit, is based on a phone survey of 300 businesses in France, Germany and the UK completed by market research company CSA. EDC has also completed more than 15 in-depth interviews among large corporates and payments experts in Europe. Steria and EDC have structured this paper to provide stakeholders with a better understanding of key aspects related to SEPA Direct Debit: the awareness of SEPA, the impact of and the migration status to SEPA Direct Debit, and the way businesses will migrate to SEPA Direct Debit.


Who is affected by SEPA? 1.SEPA encompasses a very large market and affects a majority of European businesses

SEPA’s objective is to turn the Euro area into a single payments market for credit transfers and direct debits by migrating these payment methods into SEPA Credit Transfer and SEPA Direct Debit. The majority of surveyed businesses are affected by SEPA (i.e., businesses using credit transfer or direct debit): 96% of businesses in France and Germany and 65% of British businesses (with European cross-border sales activities). More than 9 European businesses out of 10 use credit transfers and half issue direct debits to receive payments from their customers. All businesses that use credit transfers or direct debits in Euros will need to migrate to SEPA by February 2014.


Do European businesses understand SEPA Direct Debit and what is the status of the migration to SEPA Direct Debit?

Almost 70% of European businesses are aware of SEPA in general, and more than 80% of businesses have heard about SEPA Direct Debit in France and Germany. However, only 26% of British businesses are aware of SEPA Direct Debit and a large majority of European businesses fail to understand how SEPA Direct Debit is different. SEPA’s vision might face significant difficulty as more than one business out of five issuing direct debits are not even aware of SEPA.

A majority of surveyed businesses are aware of SEPA, but most do not have a full understanding of SEPA and its consequences. More than one business out of five issuing direct debits are not even aware of SEPA Direct Debit

2.

79%

21%

Have you heard about SEPA Direct Debit? Base: businesses issuing direct debit

Yes

No



-

24%

3%

31%

59%

30%

35%

15%

25%

29%

-

33%

6% 3% 9% You have fully migrated

You are in the process ofmigrating

You are assessing themigration

You have not started tomigrate

Doesn't know

Has migrated or is in the process of migrating

Status of migration to SEPA Direct Debit - by country

35% 3% 42%

Only few surveyed businesses in France, Germany and the UK have migrated or are in the process of migrating to SEPA Direct Debit

All French businesses issuing direct debits and a large majority of German businesses issuing direct debits (85%) claim that they will be SEPA compliant on time for the end date. But only few European businesses issuing direct debit (31%) have migrated or are in the process of migrating to SEPA Direct Debit (42% in Germany, 35% in France and only 3% in the UK). The migration could become a significant issue as 30% of French and German businesses have not started to work on migration to SEPA at all, and 62% of British businesses issuing direct debits will not be ready or do not know if they will be SEPA compliant before February 2014.



What is the impact of the migration to SEPA Direct Debit for European businesses?

3.SEPA can be a double-edged sword and proper migration is key to ensure that benefits exceed costs. SEPA Direct Debit is considered as bringing more benefits by half of European businesses.

Larger businesses consider that SEPA Direct Debit brings more benefits and makes the payment process easier. However, SEPA Direct Debit is not widely considered as a way to simplify direct debit payments: 40% of European businesses think that SEPA Direct Debit simplifies payments, while 33% consider that SEPA direct debit scheme makes the payment process more complex.

SEPA Direct Debit will have a significant impact on multiple business activities

More than 70% of European businesses are not worried by migration costs to SEPA Direct Debit. But SEPA Direct Debit will have a significant impact on multiple business activities with accounting, billing and IT being the most impacted activities. European businesses expect a positive impact of SEPA Direct Debit on bank fees, fraud and bad debt. This will contribute to an increase of direct debits: 11% of European businesses currently not issuing direct debit plan to issue SEPA Direct Debits in the future, and 37% of European businesses currently issuing direct debits plan to increase the number of SEPA Direct Debits.

60%

34%

34%

20%

14%

50%

38%

21%

6%

12%

83%

44%

45%

15%

11%

Your accounting / finance activity

Your billing activity

Your activities linked to IT systems

Your litigation activity

Your sales / marketing activity

FUKG

Which are the activities that are most affected by the SEPA direct debit scheme? Which are the activities that are most affected by SEPA direct debit scheme?


How will European businesses migrate to SEPA Direct Debit? 4.Businesses are considering different ways to implement SEPA and a quarter of European businesses consider working with external payment partners

Almost a quarter of European businesses currently plan to develop a specific technical solution externally for their SEPA Direct Debit activities: 12% intend to use a hybrid solution (internal and external) and 12% plan to use an external solution. More specifically, 26% of large businesses (more than 1,000 employees) plan to develop part of or all of SEPA Direct Debit activities externally, while 36% will develop an internal solution. Three processes are more likely to be outsourced by European businesses: turning paper documents into electronic documents (38%), the conversion of national direct debits into SEPA direct debits (20%) and the management of mandate (19%).


What are the next steps to migrate to SEPA Direct Debit?Planning now for a SEPA transformation project focused on IT and on cash management optimisation

A thorough assessment of SEPA Direct Debit’s impact should not only identify required IT changes but also help to re-design cash management processes. SEPA is indeed an opportunity to consider the consolidation of banking relationships across multiple countries, create synergies (e.g. through the creation of a European structure to collect payments across multiple countries) and optimise cash management systems and processes.

5.è www.steria.com SEPA : will European businesses be ready for the transformation? | 13

Part 1

Who is affected by SEPA?

SEPA encompasses a very large market and affects a majority of European businesses


SEPA’s objective is to turn the Euro area into a single payments market for credit transfers and direct debits by migrating these payment methods into SEPA Credit Transfer and SEPA Direct Debit

17%

34% 20%

20%

49%

19%

45%

17%

56%

17% 5%

0%

20%

40%

60%

80%

100%

Distribution of non-cash payments in France, Germany and the UK

Direct credit Direct debit Card Cheque

Source: European Central Bank - 2011 data

There is currently a significant diversity in usage of payment methods within Europe and SEPA aims to create an integrated euro payments market. The three largest economies in Europe (France, Germany and the United Kingdom) have all a different payments mix, mainly due to the historical development of payments in each country:

• The high usage of cheques by both consumers and businesses sets apart the French market. Cheques account for 17% of non-cash payments, equivalent to close to 3bn transactions per year. Card usage is significant in France accounting for 45% of non-cash payments, mainly driven by consumers

• Germany is characterised by a high usage of cash, direct debit (accounting for 49% of non-cash payments) and direct credit (34% of non-cash payments). By comparison, card payments only account for 17% of non-cash payments, as opposed to 45% for France and 56% for the UK. It should be noted that the German-specific ELV payment method uses card as a physical support but direct debit as the underlying payment method. The usage of ELV, meaning literally electronic direct debit in German, partly explains the significant difference of direct debit and card usage compared to France and the UK

• The UK is the most developed card market of the three countries with card payments, accounting for more than half of non-cash payments. Both direct debit and direct credit are commonly used, accounting approximately for 20% of non-cash transactions. Cheque is continuously decreasing, being replaced by electronic payment methods and accounts for only 5% of non-cash payments.

Distributionofnon-cashpaymentsinFrance,GermanyandtheUK

71.5

February, 2014: SEPA end-date

billion transactions per year encompassed by SEPA

2014

500million consumers encompassed

by SEPA


97% 94% 92%

49%

66%

34%

0%

20%

40%

60%

80%

100%

Payment methods used by businesses to be paid by their clients - by country

Businesses being paid by direct credit Businesses being paid by direct debit

The majority of businesses are affected by SEPA: 96% of businesses in France and Germany, and 65% of British businesses (with European cross-border sales activities)

The survey reveals that a majority of businesses are affected by SEPA:

• credit transfer also referred to as “direct credit” is used by more than 9 businesses out of 10 to accept payments from their customers : 97% for France, 94% for Germany and 92% for the UK. When considering credit transfer, 96% of French and German businesses are affected by SEPA. Credit transfer can be described as a ‘push’ payment method whereby the initiation of the payment is controlled by the payer.

• direct debit is used by fewer businesses as direct debit is most of the time linked with recurrent payments and requires a certain degree of trust between the biller and the payer (the payer can either be a consumer or a business). Direct debit can be described as a ‘pull’ payment method whereby the biller pulls funds from their customer’s bank account. Almost half of French businesses issue direct debits to collect payments from their customers. This is lower than in Germany (66% of businesses issue direct debits) but significantly higher than in the UK (34% of businesses issue direct debits). Direct debit is mainly used by consumers to pay utility and telecommunication companies and direct debit in the UK is indeed mainly used by businesses such as billers and government to collect payments from consumers.

SEPA is particularly relevant for businesses with sales activities in the euro zone. In the case of the UK, SEPA is only relevant for businesses with European sales as the UK is outside the Euro zone, and this is the case for 65% of UK businesses. By comparison, 73% of French businesses have cross-border activities in Europe and 65% in Germany. These businesses will benefit from SEPA by being able to collect payments in a similar manner across Europe, knowing that all direct debits and credit transfers in euro will need to be SEPA compliant.

Overall, when considering the situation of the three countries, almost all businesses in France (97% of businesses are being paid by direct credit) and Germany (94% of businesses are being paid by direct credit) are affected by SEPA, while the proportion is lower in the UK with 65% of businesses (that engaged in cross-border sales activities) impacted by SEPA. These results might differ slightly compared to statistics from European central banks because the survey does not take into account businesses with face-to-face retail transactions (e.g., ELV transactions in Germany would not be captured in the survey).

Payment methods used by businesses to be paid by their clients - by country


Payment methods used by businesses to be paid by their clients - by business size

100%

91% 95%

30%

50%

57%

0%

20%

40%

60%

80%

100%

250 to 499 employees 500 to 999 employees 1,000 to 5,000 employees

Payment methods used by businesses to be paid by their clients - by business size


Credit transfer is used by almost all businesses regardless of their size, while the usage of direct debit increases with the size of businesses

According to the survey, direct credit is used by all businesses surveyed with 250 - 499 employees and by more than 9 businesses out of 10 for businesses with more than 500 employees. This confirms that direct credit is a well-spread payment method and is used significantly by all businesses to accept payments from their customers regardless of their size.

The situation is different regarding direct debit where there is a correlation between the size of businesses and the usage of direct debit. The usage of direct debit increases with the size of businesses, ranging from 30% of businesses with 250 - 499 employees issuing direct debit to 57% of businesses with 1,000 - 5,000 employees. This reflects the fact that large businesses are more likely to set up (or, in some cases, request) recurring payments to be paid by their customers for cash flow reasons for instance.

Compared to existing domestic bank transfers, SEPA Credit Transfer keeps key features of domestic bank transfers such as the irrevocability of payments. Significant changes (mainly IT-related) need however to be taken into account:

• Different bank identifiers with the use of the BIC (Bank Identifier Code) and IBAN (International Bank Account Number) to identify each bank and each bank account

• A new message format with the use of XML and the ISO 20022 format

• A field of 140 characters to transfer information from the payer to the biller

• Settlement is at day + 1

Understanding these changes are key for businesses to be able to send and receive credit transfers in Europe. SEPA Credit Transfer mainly impacts businesses at two levels:

• At an IT level with the use of a new message format and specifications

• At a client and supplier level, businesses need to update their account payables systems with the correct bank identifiers BIC and IBAN

Overall, the migration to SEPA Credit Transfer involves mainly a technical / IT update to create a Euro bank transfer across the 32 SEPA countries.

What is SEPA Credit Transfer?

The SEPA Credit Transfer will allow European consumers and businesses to transfer funds in euro from one bank account to another in the same conditions as in their respective home country. The objective of SEPA Credit Transfer is to facilitate payments and to decrease barriers to exchange goods and services within the 32 SEPA countries.


What is the SEPA Direct Debit Core scheme?

SEPA Direct Debit includes two schemes: the Core scheme and the B2B scheme. The Core scheme proves to be overall more popular compared to the B2B scheme and this is the reason why the information below provides a high level description of the Core scheme. More information are included in the appendix to gain a better understanding of the impact of the core version of SEPA Direct Debit on European businesses. The appendix also includes a high level description of the impact of SEPA Direct Debit B2B scheme on businesses.

The objective of SEPA Direct Debit is to enable businesses in the 32 SEPA countries to receive payments in euro from their clients by direct debit with the same conditions as in their home country. Similar to SEPA Credit Transfer, the migration to SEPA Direct Debit needs to take into account IT-related aspects:

• Different bank identifiers with the use of the IBAN and BIC to identify each bank and each bank account

• A new message format with the use of XML and the ISO 20022 format

• A field of 140 characters to transfer information from the payer to the biller

However, the Core version of SEPA Direct Debit impacts businesses beyond IT and encompasses operational changes with regards to three key aspects:

• a requirement for businesses to set up and maintain a mandate with their customers, i.e. the contract whereby the

payer gives authorisation to the biller to collect money from the payer’s account

• changes in due date or settlement date

• changes in the period when payers can dispute payments

The Core version of SEPA Direct Debit includes two types of transactions:

• for recurrent SEPA Direct Debits, businesses need to distinguish the first direct debit collection from subsequent collections to be compliant with SEPA regulations. Recurrent SEPA Direct Debits are often used for utilities and B2B payments

• one-off SEPA Direct Debit allows billers to issue a one-time payment direct debit collection. This version of the SEPA Direct Debit targets specific use cases

Besides the IT migration to SEPA, one of the challenges that businesses will face is how to handle R (refund, return, reject) transactions*. As new processes need to be defined, merchants, banks and other stakeholders will go through a learning curve to process R transactions and it is expected that stakeholders might experience issues at the beginning.

In terms of commercial arrangements, it is also worth noting that multi-lateral interchange fees are to be phased out for SEPA Direct Debits, except for on R-transactions (which will be allowed under certain conditions).

* “R” transactions encompasses SEPA Direct Debit’s exceptions like Rejects, Returns, Reversals, Refunds, Refusals, Requests for cancellation and Revocations.

A smooth transition for SEPA Credit Transfer in Germany Monika Sirp, SEPA Program manager at Vattenfall, confirms that implementing SEPA Credit Transfer has mainly an IT impact. The biggest change related to SEPA Credit Transfers for this European utility company is the need to use new bank account details (BIC and IBAN). Thanks to a close co-operation with German banks, the transition to BIC and IBAN has been smooth in Germany and Vattenfall considers that SEPA Credit Transfer will not impact its cost structure besides the potential small incremental fee if they use a third-party provider to validate BIC and IBAN details.


Olivier Bornecque, honorary president of the association of French corporate treasurers and member of the French SEPA committee, considers that SEPA Direct Debit will significantly impact European businesses. SEPA Direct Debit involves an IT impact but businesses need to understand that this SEPA Direct Debit migration will have consequences beyond IT with, for instance, the management of a SEPA Direct Debit mandate. In France, there is a transfer of responsibility from banks to businesses, which need to manage the whole lifecycle of the SEPA Direct Debit mandate. Other changes such as the processing of ‘R’ (refunds, rejects, returns) transactions might create operational issues when SEPA comes into force, but these issues are expected to be resolved over time as different stakeholders learn to work together efficiently to solve potential issues.

SEPA Direct Debit: not only an IT impact


Credit transfer is one of the most used payment methods in the B2B segment and this applies to sectors analysed in our survey. 90% of businesses within the Commerce sector are paid by direct credit by their customers versus 97% in Manufacturing & Construction and 93% in Services.

More surprisingly, results are similar regarding direct debit in the three sectors: 55% of businesses in the Commerce sector issue direct debit to accept payments from their customers, compared to 47% in Manufacturing & Construction and 52% in Services. While some would expect a high usage of direct debit only for utility companies, this survey shows that direct debit is a well-spread payment method across sectors and meets the needs of businesses.

Direct credit and direct debit are used similarly in different sectors

Payment methods used by businesses to be paid by their clients - by sectors

90%

97% 93%

55%

47% 52%

0%

20%

40%

60%

80%

100%

Commerce Manufacturing & construction Services

Payment methods used by businesses to be paid by their clients - by industry sector


Direct debit is a ‘pull’ payment with the biller taking funds from the payer and both biller and payer need to agree to set up direct debit payments. The reluctance of one of the two parties is the primary reason why direct debit is not used. According to the survey, 38% of European businesses indicate that their customers do not want to use direct debits: for instance, customers might not be willing to enter into a direct debit arrangement if they do not have a long-term relationship with a given supplier. And 33% of European businesses do not want to issue direct debits: for instance, some suppliers are concerned about the risk of not collecting payments if there are not sufficient funds in their customer’s bank account. The 3rd main reason (33% of businesses) lies in the lack of recurring payments, which is one of the most frequent use cases for direct debit.

38% of European businesses do not issue direct debit mostly because of reluctance among their customers, internal unwillingness to use direct debit or lack of recurrent payments

Key reasons why businesses do not issue direct debit to be paid by their clients

9%

9%

33%

33%

38%

0% 20% 40% 60% 80% 100%

Lack of simplicity

Direct debit is not adapted to our industry sector

No recurring revenues

Our business does not want to use direct debit

Clients do not want to use direct debit

Key reasons why businesses do not issue direct debit to be paid by their clients


Part 2

Do European corporates understand SEPA and what is the status of the migration to SEPA?

A majority of businesses are aware of SEPA, but most do not have a full understanding of SEPA and its consequences


According to the survey, 70% of businesses indicate that they have heard about SEPA Direct Debit and this is confirmed when reviewing responses related to three specific aspects of the SEPA migration.

Almost 70% of European businesses are aware of SEPA in general.

• SEPA end date set to February 2014: almost 80% of businesses know that the migration of SEPA needs to completed by 2014. 47% of businesses quoted the accurate year for the migration and 30% indicated that the SEPA end date was before 2014. There are significant differences by country: more than 75% of UK businesses do not know the deadline to migrate while more than 85% of French and German businesses know that they need to migrate by 2014

• New bank details with BIC and IBAN: 70% of businesses know that they will need to use new bank identifiers for direct debits and credit transfers in the first stage of SEPA. When the ‘IBAN-only’ rule comes into force, businesses will only need to take into account the IBAN

• New ISO20022 message format: almost half of businesses were aware of the need to implement a new message format for SEPA transactions

A majority of businesses are aware of SEPA and it is positive to note that 7 businesses out of 10 are aware of SEPA. However, it remains a matter of concern that 3 businesses out of 10 do not know about SEPA and its potential implications on their business. Even more worryingly, 21% of corporate direct debit users have never heard of SEPA. This confirms that there is still a need to educate businesses about SEPA. In some countries like France, there are efforts by the likes of central banks and of associations of corporate treasurers to undertake local workshops about SEPA.

The deadline for the migration to SEPA is getting closer and closer, and some stakeholders within the payments industry wonder whether corporates have a good understanding of SEPA and will be ready to migrate to SEPA. This survey provides clear answers and provides an accurate picture of the situation among businesses in France, Germany and the UK.

Need for flexibility among banks outside of the Euro zone

Janet Oulds, International Operations Manager at the Co-Operative Banking Group in the UK provided an overview of their approach regarding SEPA Credit Transfers: “As the Co-Operative Banking Group currently processes a relatively small number of SEPA Credit Transfers, we took a view there was no business rationale to become a direct participant in SEPA and decided to reduce complexity and cost. We use the services of a direct participant bank in SEPA, to convert all inbound and outbound SEPA credit transfers. This provides the Co-Operative Banking Group with the required flexibility for both inbound and outbound SEPA credit transfers without any immediate system changes.”

79%

21%


Yes

No



Key indicators highlighting awareness of SEPA

Key indicators highlighting awareness of SEPA

22%

30%

47%

2%

What is the end date to migrate to SEPA?

Doesn't know

Before 2014

2014

After 2014

29%

2%

23%

45%

What are the new bank details do you need to use with SEPA?

Doesn't know

BIC

IBAN

BIC + IBAN orSWIFT + IBAN

4%

48%

48%

Do you know the new format message to use with SEPA transactions?

Doesn't know

No

Yes

1%

31%

68%

Have you ever heard of SEPA Direct Debit?

Doesn't know

No

Yes


France is the country where the understanding of SEPA Direct Debit is the highest with 47% of businesses stating that they fully understand SEPA Direct Debit and 40% saying that they partly understand SEPA Direct Debit. By comparison, only 28% of German businesses have a full understanding of SEPA Direct Debit and almost half of businesses in Germany have a partial understanding.

Less than 10% of businesses in the UK have a full understanding of SEPA Direct Debit and almost 70% of UK businesses have never heard about SEPA Direct Debit. This could be explained by the fact that 65% of British businesses have activities in Europe and only 34% of British businesses use direct debit to accept payments from their customers versus 49% for France and 66% for Germany. Another reason would be that only 25% of businesses with cross-border sales activities in Europe issue direct debits to collect payments from their customers. It is thought that direct debit in the UK is mainly used for domestic transactions. If businesses issuing cross-border direct debits in Europe lack knowledge on SEPA, this could lead to potential issues when SEPA comes into force.

7% 7% 9%

67%

18%

40%

17%

47%

47%

9%

28% Has heard about SEPA Direct Debit andfully understands it

Has heard about SEPA Direct Debit andpartly knows about it

Don't know about SEPA Direct Debit

Doesn't know

Has heard about SEPA Direct Debit

Awareness of SEPA Direct Debit - by country

87% 26% 75%

4%

Awareness of SEPA Direct Debit - by country

87% of French businesses and 75% of German businesses have heard about SEPA Direct Debit but this is only the case for 26% of UK businesses

over75%

Percentage of businesses in the Commerce sector fully

understanding SEPA Direct Debit

Percentage of French and German businesses having heard

about SEPA Direct Debit

73%


Large businesses (with 1,000 - 5,000 employees) are more likely to follow closely European regulations due to their organisational structure (i.e., with a fully dedicated finance director or treasurer that can focus on payments-related issues) or a higher volume of payments. It comes therefore as no surprise that large businesses have a higher awareness (70%) of SEPA Direct Debit than smaller businesses.

The awareness of SEPA Direct Debit actually increases with the size of businesses from 48% for businesses with 250 - 499 employees, 61%for businesses with 500 - 999 employees and 70% for large businesses with 1,000 - 5,000 employees.

This correlation is confirmed when analysing if businesses have a full understanding of SEPA Direct Debit: only 14% of businesses with 250- 499 employees fully understand SEPA Direct versus 32% for large businesses with 1,000 - 5,000 employees.

When looking at sectors, differences are less marked. 73% of businesses in Commerce fully understand SEPA Direct Debit versus 62% in Services and 61% in Manufacturing & Construction. However, the Services sector comes first regarding the full understanding of SEPA with 35% vs. 28% for Commerce and 23% for Manufacturing & Construction.

This survey highlights that businesses do not have a full understanding of SEPA Direct Debit’s details and of its implications. European businesses would need to increase their understanding either by developing knowledge internally or working with partners to ensure that all consequences can be forecast and dealt with.

4% 9% 4%

48% 30%

26%

34%

31% 38%

14% 30% 32%

250 to 499 employees 500 to 999 employees 1000 to 5000 employees

Has heard about SEPA Direct Debit and fullyunderstands it



Doesn't know


Awareness of SEPA Direct Debit - by business size

48% 61% 70%

Awareness of SEPA Direct Debit - by business size

Awareness of SEPA Direct Debit - by sector

Not surprisingly, the awareness of SEPA Direct Debit increases with the size of businesses from 48% for businesses with 250 - 499 employees to 70% for businesses with 1,000 - 5,000 employees

8% 6% 5%

20% 31% 34%

45% 27% 38%

28% 35%

23%

Commerce Services Manufacturing & contruction

Has heard about SEPA Direct Debit andfully understands it



Doesn't know


Awareness of SEPA Direct Debit - by industry sector

73% 62% 61%


Among businesses currently issuing direct debits in France, Germany and the UK, 21% have not heard about SEPA Direct Debit. This is surprising and shows that there is a significant need to educate businesses given that one business out of 5 currently using direct debit has not heard about SEPA Direct Debit.

According to the survey, almost 85% of businesses consider that SEPA Direct Debit is different from the direct debit payment method they currently use. 22% think that it is completely different while 62% believe that the European direct debit is only partly different. This perception is true regardless of country (France, Germany or the UK), business size or sector (Commerce, Services, Manufacturing & Construction).

However, there are significant differences when it comes to understanding the actual changes involved by SEPA Direct Debit. More than 75% of French and German businesses understand changes implied by the migration to SEPA Direct Debit while almost 75% of British businesses do not. This confirms the fact that a majority of businesses in the UK do not have a full understanding of SEPA and its implications.

The mandate, the contract between the biller and the payer, is at the core of the new SEPA Direct Debit and may prove to be a good indicator of the level of understanding of SEPA Direct Debit. 60% of businesses issuing direct debit are aware of a new contract but only a quarter were able to say that it was the mandate, versus 65% of businesses who were unable to do so. This result highlights that a majority of businesses are aware of SEPA and of high-level impacts, but do not grasp the details involved in SEPA Direct Debit as well as its consequences.

It is important to note that European businesses will not be required to sign a new mandate if they already have a valid authorisation with the payer to collect recurring direct debits. This is positive for European businesses as it decreases the cost of migration to SEPA Direct Debit, allowing existing mandates within current domestic direct debits to be used within one of the SEPA Direct Debit schemes.

Some stakeholders have indicated that there are initial issues when SEPA comes into application. For instance, businesses could not make the difference between a first direct debit and subsequent direct debits or use incorrect BIC and IBAN details. This is likely to lead initially to a higher proportion of R transactions (reject, return, refund) than it is the case now. It is expected to be solved over time as all stakeholders learn to deal with all aspects of SEPA Direct Debit.

However, 21% of corporate direct debit users have not heard of SEPA Direct Debit, and a large majority of businesses fail to understand how SEPA Direct Debit is different

Key indicators highlighting the changes related to SEPA Direct Debit

Key indicators highlighting the changes related to SEPA Direct Debit

65% 11%

24%

Do you know the new type of contract for a SEPA Direct Debit between the biller and the payer?

Doesn't know Other Mandate

5% 11%

62%

22%

Is SEPA Direct Debit different from your current direct debit?

Doesn't know NoYes, partly Yes, completely

30%

70%

Are you aware of changes related to SEPA Direct Debit?

Yes No


One of the reasons explaining the fairly low level of understanding of SEPA Direct Debit’s implications is the low numbers of businesses who have migrated or are in the process of migrating to SEPA Direct Debit. 35% of French businesses and 42% of German businesses have fully migrated or are in the process of migrating, but this is the case for only 3% of British businesses.

These results differ significantly from the low proportion of SEPA Direct Debits. As of September 2012, only 2% of direct debits have migrated to the SEPA Direct Debit schemes. Businesses who have fully migrated may not be yet issuing SEPA Direct Debits. Some businesses could be in a testing phase in order to identify potential issues like database problems with BIC and IBAN. Other businesses could adopt a careful approach and start to issue SEPA Direct Debits progressively, first to specific customers before widening to a larger number of customers. Interviews have revealed that companies are concerned about potential issues with the migration to SEPA Direct Debit and would like to avoid any negative impact on customer relationships.

It may be a matter of concern to note that 30% of French and German businesses have not started to migrate, or have not even assessed the impact of SEPA. This is even higher in the case of the UK with 6 businesses out of 10. This confirms that there is a need to inform and educate businesses about SEPA and the need to migrate prior to 2014.

Some stakeholders shared their perception that European banks could play a greater role by providing more / better education (e.g., providing check-list about systems and processes that might be impacted by SEPA) to their corporate customers and by providing migration support services.

Only few businesses issuing direct debit (31%) have migrated or are in the process of migrating to SEPA Direct Debit (42% in Germany, 35% in France and only 3% in the UK), and 30% of French and German businesses have not started to work on migration to SEPA at all


-

24%

3%

31%

59%

30%

35%

15%

25%

29%

-

33%





Doesn't know



35% 3% 42%


62%

Percentage of European businesses indicating they have started

their migration process

Share of British businesses stating the 2014 deadline for SEPA Direct Debit will not be met

30%According to the survey, 30% of European businesses indicate that they have fully migrated or are in the process of migrating regardless of their size.

However, when including all three stages in the migration process (“assessment”, “in process of migrating”, and “already migrated”), the migration process is more advanced as the size of businesses increases, from 48% of businesses with 250 - 999 employees to 65% of businesses with 1,000 - 5,000 employees.

Medium-sized businesses might need less time to migrate to SEPA Direct Debit as the migration may be less complex than larger businesses. However, as 52% of businesses with 250 - 999 employees have not even started to assess the impact of SEPA Direct Debit, it is to be expected that some businesses may struggle to become SEPA compliant. Some might not even become SEPA compliant by 1st February 2014 and be negatively impacted when collecting payments from their customers after this deadline.

There are no significant differences between sectors with 32% of businesses in the Commerce sector having not started to migrate versus 35% in Manufacturing & Construction and 41% in Services.

The migration process to SEPA Direct Debit is overall more advanced for larger businesses when including the assessment phase and the migration, but half of businesses with less than 1,000 employees have not even started to assess the impact of SEPA Direct Debit

Status of migration to SEPA Direct Debit - by business size

8% 5%

44%

30%

18%

34%

25% 23%

5% 8%

250 to 999 employees 1000 to 5000 employees

You have fully migrated




Doesn't know


30% 31%

Status of migration to SEPA Direct Debit - by business size


The current situation could a matter of concern as a relatively high proportion of businesses have not started to migrate. However, businesses in France and Germany adopt a rather positive attitude, with almost all businesses in France (98%) and a majority of businesses in Germany (85%) claiming that they will have fully migrated to SEPA Direct Debit by February 2014. 12% of German businesses may face significant issues as they state that they will not be SEPA compliant by February 2014.

It remains to be seen if this positive attitude is followed by timely implementations to SEPA Direct Debit. If the numbers above are correct, this would mean that all of the 31% of French businesses and more than half of the 30% of German businesses that have not yet started to assess the impact of SEPA Direct Debit, will begin very soon the process to migrate to SEPA Direct Debit.

Some large businesses indicated that it will be a very tight timeline for them to be ready by February 2014, and the number of businesses sharing this concern appears to be increasing as the deadline gets closer. This would tend to indicate that the above results are potentially on the optimistic side and that there is a risk that a large minority of businesses in France and in Germany will not be ready by February 2014.

A quarter of British businesses state that they will not meet the 2014 deadline for SEPA Direct Debit and almost 40% do not know whether they will be SEPA compliant. This would mean that potentially 65% of UK businesses will not be able to issue SEPA Direct Debit in February 2014. This analysis, somehow concerning, could be counterbalanced because not all of these businesses may use direct debit for cross-border collections as SEPA is not relevant if direct debits are only issued in the UK.

This migration is heavily dependent on the ability of banks to process SEPA Direct Debit. Among businesses who have not yet issued SEPA Direct Debits, more than half state that they have not received pricing information related to SEPA Direct Debit. Discussions with industry players indicate that there are still some initial “bugs” related to the processing of SEPA Direct Debit by some of the large banks in Europe. For instance, reject rates appear to be higher among specific banks and reason codes are not always filled in properly.

Potential issues related to SEPA compliance could lead to negative press coverage, highlighting potential risks for consumers. For instance, some stakeholders in France are concerned about a “nightmare scenario” that would involve a decrease in the usage of direct debit and an increase of cheque volume if the SEPA migration does not take place smoothly.

All French businesses issuing direct debits and a large majority of German businesses issuing direct debits (85%) claim that they will be SEPA compliant on time for the end date, unlike British businesses (62% will not be ready or do not know if they will be SEPA compliant before February 2014)

Status of SEPA compliance in 2014 - by country

2%

38%

3% -

24%

12%

92%

35%

76%


Has not migrated but will beready for the 2014 deadline

Has not migrated will not beready for the 2014 deadline

Doesn't know

Will be SEPA compliant by 2014

Status of SEPA compliance in 2014 - by country


Part 3

What is the impact of the migration to SEPA for European corporates?

SEPA can be a double edged sword and proper migration is key to ensure that benefits exceed costs


According to the survey, 54% of European businesses consider that the SEPA Direct Debit scheme will generate more benefits than disadvantages. This positive perception is the highest in Germany with 64% compared to 49% in France and the UK. However, a third of French businesses, 21% of German businesses and 11% of British businesses indicate that SEPA involves more disadvantages than benefits.

This perception is certainly linked to the changes needed to migrate from domestic direct debits to SEPA and manage the different aspects of SEPA Direct Debit like the requirement for business to set up and manage a mandate. As there are more changes required for French businesses, this would explain why a higher proportion of French businesses (33%) do not consider SEPA positively.

The actual benefits of SEPA Direct Debit will also depend on the implementation of SEPA Direct Debit in each of the 32 SEPA countries. Discussions with some stakeholders have indicated that some countries are reluctant to fully implement SEPA Direct Debit and could keep the current version of the domestic mandate. SEPA Direct Debit will bring full benefits to European businesses if all European countries implement SEPA Direct Debit in a consistent manner, and if the migration effort is coordinated between all the countries.

SEPA Direct Debit is considered as bringing more benefits by half of European businesses

With regards to the SEPA direct debit scheme, do you think the scheme has more advantages or more disadvantages?

13%

36%

6%

6%

4%

9%

32%

11%

21%

49% 49%

64%

More advantages

More disadvantages

Same situation

Doesn't know

With regards to the SEPA direct debit scheme, do you think the scheme has more advantages or more disadvantages?

54%

Number of European countries impacted by SEPA

Percentage of European businesses considering that the SEPA Direct Debit

scheme will have a positive issue

32

6%Percentage of French, British and

German businesses considering that the SEPA Direct Debit scheme won’t

change the current situation


SEPA has been conceived as a way to simplify payments in Europe and 40% of European businesses agree with this principle while 33% disagree.

The situation varies by country:

• 41% of French businesses think that the payment process is more complicated with SEPA Direct Debit while a third find it simpler. This comes as no surprise as SEPA Direct Debit creates a transfer of responsibility from banks to businesses, which need to handle a significant part of SEPA Direct Debit’s activities compared to the current situation

• almost half of German businesses think that the payment process is easier with SEPA Direct Debit, while almost 40% find it more complex

• in the UK, 40% of businesses consider that SEPA Direct Debit simplifies the payment process compared to 20% of businesses finding it more complex. SEPA is indeed beneficial for British businesses, which can standardise processes to issue direct debits in euro. However, more than a third of British businesses do not have an opinion whether SEPA Direct Debit simplifies the payment process. This high proportion is certainly to be related with the high share of businesses in the UK that have not heard of SEPA Direct Debit (67%) and have not started to migrate to SEPA Direct Debit (59%).

SEPA Direct Debit is not widely considered as a way to simplify direct debit payments: 40% of businesses think that SEPA Direct Debit simplifies payments, while 33% consider that the SEPA direct debit scheme makes the payment process more complex

Do you think that the SEPA direct debit scheme makes the payment process easier or more complex?

14%

34%

9%

12%

6%

7%

41% 20%

37%

33% 40%

48% Easier

More complex

Same situation

Doesn't know



The perception of SEPA Direct Debit improves with the size of businesses from 48% for businesses to 250 - 499 employees to 55% for larger businesses (1,000 - 5,000 employees).

46% of businesses with 1,000 - 5,000 employees consider that SEPA Direct Debit makes the payment process easier, a significantly higher proportion than businesses with 250 - 499 employees (32%). As larger businesses tend to have increased operational complexities due to their involvement in cross-border activities, it makes sense that the positive perception related to SEPA Direct Debit increases with the size of businesses. Considering their size and their volume of payments, larger businesses are indeed more likely to benefit from SEPA Direct Debit to collect payments.

A higher proportion of larger businesses consider that SEPA Direct Debit has more benefits than disadvantages and larger businesses tend to think that SEPA Direct Debit makes the payment process easier


26% 18% 17%

14%

10% 5%

28%

35% 32%

32% 37% 46%


Easier

More complex

Same situation

Doesn't know


With regards to the SEPA direct debit scheme, do you think the scheme has more advantages or more disadvantages? – by business size

28% 17% 15%

6%

8% 5%

18%

19% 24%

48% 56% 55%


More advantages

More disadvantages

Same situation

Doesn't know

With regards to the SEPA direct debit scheme, do you think the scheme has more advantages or more disadvantages? – by business size


Overall, 70% of businesses indicate that they are not worried by migration costs to SEPA Direct Debit. German businesses are more worried (30%) compared to their French (18%) and British (13%) counterparts. This result could be seen as slightly surprising as some stakeholders indicated their concern about the level of migration-driven IT expenses: respondents might have offset these IT expenses against future SEPA-driven cost reductions when responding to this question.

The migration to SEPA Direct Debit is complex and has significant impacts on European businesses. A European insurance company shared some estimates regarding the migration effort related to IT:

• For large insurance companies with at least 3 to 5 subsidiaries, the migration effort is estimated to be around 25,000 man-days in the IT area

• For medium-sized insurance companies with one central IT location, the migration effort is estimated to be around 15,000 to 20,000 man-days in IT resources

• For smaller insurance companies, it would be estimated between 1,000 and 5,000 man-days.

These numbers highlight that there is considerable effort for the migration to SEPA Direct Debit and it explains why larger businesses tend to be more worried about migration costs. Almost a quarter of businesses with 1,000 - 5,000 employees express concerns about migration costs compared to only 10% of businesses with 250 - 499 employees. However, this is a one-time effort to migrate and once it is completed, only little incremental effort is expected to operate SEPA Direct Debit.

When considering migrations costs to SEPA Direct Debit, potential errors like incorrect IBAN or BIC also need to be taken into account. Some stakeholders think that banks might currently correct errors in the case of a branch closure for instance to decrease the number of errors. When SEPA comes into force, these errors might generate a high number of R transactions. Experian2 has analysed more than half a million bank account records held by businesses around Europe and found out that 12% of electronic payments made to and from businesses in euro currently contain data errors. SEPA-related payment data errors could prove to be significantly expensive and European businesses would need to check their bank account database to assess the relevance of using a third-party provider to validate BIC and IBAN details.

Overall, more than 70% of European businesses are not worried by migration costs to SEPA Direct Debit. However, 30% of businesses in Germany are worried compared to 18% in France and 13% in the UK

Are you worried about migration costs to SEPA Direct Debit? – by country

5% 14%

6%

77% 73%

64%

18% 13%

30% Yes

No

Doesn't know

Are you worried about migration costs to SEPA Direct Debit? – by country

2 Experian’s white-paper on Counting the hidden costs of SEPA migration http://www.experian.co.uk/assets/payments/brochures/counting-the-hidden-cost-of-sepa-migration.pdf


A major European telecommunication operator commented on costs related to migration to SEPA Direct Debit:

“Costs related to migration to SEPA Direct Debit are a potential concern. We have just started a scoping exercise to gain a better understanding of the workload, the complexity and costs related to the migration to SEPA Direct Debit.”


SEPA Direct Debit’s impact goes beyond IT and has significant impacts across the different business functions. Despite differences between France, Germany and the UK, three activities appear to be the most impacted by SEPA Direct Debit:

1. Accounting / finance for 64% of European businesses (the highest is Germany with 83% compared to 60% of French businesses and half of British businesses)

2. Billing for almost 40% of European businesses (the highest is again Germany with 44% compared to 34% in France and 38% in the UK)

3. IT comes only in third position with a third of European businesses thinking that it is one of the activities the most impacted by SEPA Direct Debit (45% of German businesses versus 34% of French businesses and only 21% of British businesses)

Stakeholders indicated that they will need to develop internal expertise and experience or leverage external resources to fully benefit from SEPA. In particular, this includes building up IT capabilities to implement and maintain SEPA message formats, as well as how to “play” within the new SEPA rules. Discussion with industry players confirmed that

businesses might experience issues to deal with specificities implied by SEPA like XML. It will also be key to develop a specific know-how related to SEPA such as understanding when to send direct debits (e.g. which timing between a first and a subsequent direct debit) or how to manage R transactions depending on the type of direct debit (Core or B2B). This expertise also involves gaining a good understanding of how different banks handle such exceptions.

SEPA Direct Debit may have a major impact on the relationship between businesses and their customers, and this shows that businesses need to carefully plan their migration to mitigate risks and ensure a smooth transition. Discussions with industry players highlight potential risks related to customer relationship. Negative press coverage or potential issues in the migration to SEPA Direct Debit could affect customers’ perception (and in particular consumers’ perception) and damage customer relationship. If some customers change their payment habits and turn away from direct debit (e.g., starting to use cheques again), this could create a bottleneck and significant pain for businesses to collect payments from their customers.

Accounting, billing and IT are the three activities most impacted by SEPA Direct Debit in France, Germany and the UK

Which are the activities that are most affected by the SEPA direct debit scheme?

60%

34%

34%

20%

14%

50%

38%

21%

6%

12%

83%

44%

45%

15%

11%

Your accounting / finance activity

Your billing activity

Your activities linked to IT systems

Your litigation activity

Your sales / marketing activity

FUKG

Which are the activities that are most affected by the SEPA direct debit scheme?


13%

6%

2%

6%

42%

40%

42%

18%

7%

13%

20%

18%

24%

36%

20%

40%

13%

6%

7%

7%

Bank fees

Risk of fraud

IT system infrastructure

Bad debt

2% 10%

3%

6%

10%

35%

40%

19%

21%

19%

4%

22%

15%

24%

43%

40%

49%

9%

9%

7%

6%

3%

Positive impact

55%

46%

44%

24%

Negative impact Very negative impact Doesn’t know No impact

Positive impact

Positive impact

34%

34%

16%

41%

36%

43%

25%

31%

What is the impact of SEPA Direct Debit?

Very positive impact Positive impact

9%

2%

-

14%

25%

32%

16%

27%

16%

5%

7%

14%

27%

41%

39%

34%

30%

36%

20%

2%

11%

9%

5% 2%

6%

European businesses expect a positive impact of SEPA Direct Debit on bank fees, fraud and bad debt

SEPA Direct Debit could impact businesses at different levels. At first, when looking at bank fees, 46% of businesses consider that SEPA Direct Debit will have a positive influence. Businesses can generate cost savings because SEPA eliminates multi-lateral interchange fees and provides the opportunity for businesses to consolidate the number of banking relationships across the euro area. As a consequence, the impact is seen as positive in countries where businesses had to pay fees to issue direct debits like in France. 55% of French businesses consider that SEPA Direct Debit will have a positive impact on bank fees compared to 9% of businesses perceiving a negative impact. The situation is more balanced in Germany with 36% of businesses thinking that SEPA will have a positive impact on bank fees compared to 22% considering a negative impact. Almost half of British businesses either do not know or think that SEPA will not have any impact on bank fees compared to 34% of businesses perceiving a positive impact and 18% a negative impact.

Secondly, the fraud risk has been put forward by some stakeholders as one of the key threats created by SEPA Direct Debit, using the example of fraudulent foreign businesses collecting money from consumers and

businesses alike without valid SEPA Direct Debit mandates. However, European businesses do not share this perception as 40% consider that SEPA Direct Debit will have a positive impact on the fraud risk and 37% indicate that it will not have any impact.

Regarding bad debt, 29% of French businesses indicate that SEPA Direct Debit will have a negative impact compared to 24% who believe it will have a positive impact. More businesses in the UK (41%) and Germany (31%) think that SEPA Direct Debit will be beneficial. This could be related with a higher proportion of R (reject, refund, return) transactions that some stakeholders have seen at this early stage in France.

European businesses do not have a common perception of the impact of SEPA Direct Debit on IT system infrastructure. While 44% of French businesses believe that it will have a positive impact, 41% of British businesses and 40% of German businesses consider that SEPA Direct Debit will not have any impact at all on IT systems. Overall, IT system infrastructure is the criteria scored the most negatively across the three countries.

What is the impact of SEPA Direct Debit?


The impact of SEPA Direct Debit can be measured in the change of business behaviour regarding direct debit.

• Among businesses that currently do not issue direct debits to collect payments from their customers, 11% plan to issue direct debits in the future. There are significant differences between countries, with 15% of British businesses planning to issue direct debits compared to 12% in France and only 3% in Germany. There is also a strong variation across sectors, with 22% of businesses in Commerce planning to issue direct debits in the future versus 10% in Manufacturing & Construction and 10% in Services

• Among businesses currently issuing direct debits, 37% of European businesses plan to increase the number of direct debits issued, compared to 7% planning to decrease the number of direct debits issued and 53% intending not to change their current behaviour

These results show that SEPA contributes to a favourable ground for businesses to increase the usage of direct debit across Europe and facilitate financial exchanges in the 32 SEPA countries. For instance, it appears that an increasing number of e-commerce merchants are considering the implementation of SEPA Direct Debit as a way to collect payments in addition to payment cards and/or as a way to support a change in their business model (e.g., a consumer electronics company is considering “renting” its products to consumers via monthly rental fees instead of pursuing one-off sales).

The number of direct debits issued will increase: 11% of European businesses currently not issuing direct debit plan to issue SEPA Direct Debits in the future, and 37% of European businesses currently issuing direct debits plan to increase the number of SEPA Direct Debits issued

11%

Percentage of European businesses planning to increase the number

of direct debits issued

Percentage of European businesses planning to issue direct debits among businesses currently not issuing any

37%


Part 4

How will European corporates migrate to SEPA?

Businesses are considering different ways to implement SEPA, including working with payment partners


43% of European businesses issuing direct debits have received an offer to migrate to SEPA Direct Debit from their bank or an external service provider according to the survey. Considering the complexity of the migration to SEPA for businesses, it comes as no surprise that businesses may need assistance to understand SEPA Direct Debit’s impacts and ensure a smooth migration.

Changes are more significant in France with a transfer of responsibility from banks to businesses and this is likely to explain why a high proportion of French businesses issuing direct debits (61%) have been contacted by banks or external service providers for proposals. By comparison, 45% of German businesses issuing direct debits have received an offer to migrate to SEPA Direct Debit and this is the case for only 12% of British businesses.

61% of French businesses issuing direct debits have received an offer to migrate to SEPA Direct Debit from their bank or an external service provider compared to 45% in Germany and only 12% in the UK

Have you already received an offer to migrate to the SEPA direct debit scheme from an external service provider or your bank (e.g.: mandate management tool)?

6%

27%

8%

33%

62%

48%

61%

12%

45%

Yes

No

Doesn't know

Have you already received an offer to migrate to the SEPA direct debit scheme from an external service provider or your bank (e.g.: mandate management tool)?


Almost a quarter of European businesses consider working with external payment partners to manage SEPA Direct Debit activities: 12% intend to use a hybrid solution (internal and external) and 12% plan to use an external solution

57% of European businesses have appreciated the complexity of SEPA Direct Debit and intend to create a specific technical solution for SEPA Direct Debit. A third plan to migrate to SEPA Direct Debit by developing an internal solution and almost a quarter intend to use an external solution to manage part of or all of SEPA Direct Debit activities.

12% of businesses across the three countries (France, Germany and the UK) indicate that they will use a hybrid solution, dealing internally with some activities and using an external solutions for others, while 12% plan to use external providers for all activities related to SEPA Direct Debit to ensure a smooth migration to SEPA Direct Debit. More businesses in France (41%) intend to migrate internally to SEPA Direct Debit compared to Germany (36%) and the UK (18%).

Among the remainder 43% of European businesses, 14% do not know if they will develop a specific technical solution and 29% of businesses will not develop a specific technical solution and will integrate SEPA Direct Debit to current applications, considering that the new European direct debit is an update of their current systems. This can appear relatively surprising given the complexity of SEPA Direct Debit. It remains to be seen if all businesses will develop internal expertise on SEPA and manage to migrate to SEPA Direct Debit. Some businesses might increasingly consider using external providers for all of or part of SEPA Direct Debit management if they face significant hurdles to migrate, or run out of time or internal resources. It might indeed be difficult to develop the IT expertise or the know-how related to SEPA like handling exceptions and R transactions given the tight timeframe before February 2014.

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by country

14% 26%

7%

22%

35%

30%

10%

9%

15%

12%

12%

12%

41%

18%

36%

Yes internally

Yes externally

Yes, by using a hybridsolution (internal andexternal)

No

Doesn't know

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by country

Internal implementation to control the migration to SEPA Direct Debit but potential for outsourcing Hans-Gerd Lindlahr, Administration Director at Canada Life Assurances Europe, considers that the migration to SEPA Direct Debit is more complex than the migration to SEPA Credit Transfer with significant IT costs. Canada Life in Germany has decided to manage the whole 12 to 18 month transition process in-house, considering that there was a significant reputational risk for the insurance firm and it was of prime importance to have full oversight of the migration. Canada Life is considering outsourcing the development of an SEPA Direct Debit mandate management system.


When comparing businesses of different sizes, the internal migration to SEPA Direct Debit is the solution favoured by larger businesses with 36% of opinions across France, Germany and the UK. Large businesses are likely to have more internal IT capabilities. Internalising the migration to SEPA Direct Debit is the solution chosen by 36% of businesses with 1,000 - 5,000 employees compared to 33% of businesses with 500 - 999 employees and 20% of businesses with 250 - 499 employees.

However, as large businesses have more complex IT infrastructure and systems, there is also a higher proportion of large businesses planning to use external providers, either to choose a hybrid solution with a mix of internal and external development (13% of businesses with 1,000 - 5,000 employees) or a fully external solution (13% of large businesses).

Choosing the appropriate solution is indeed a major decision to ensure a smooth migration to SEPA Direct Debit. All interviews with European corporates have revealed that the scoping exercise is key to thoroughly assess SEPA Direct Debit’s impacts and estimate the workload for the migration. This scoping exercise assists businesses in making their decision whether they should develop an internal solution or require the assistance of external third-party providers.

26% of large businesses plan to manage part of or all of SEPA Direct Debit activities externally, while 36% will develop a specific internal solution

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by business size

20% 16% 12%

40%

29% 26%

13%

10% 13%

7%

12% 13%

20% 33% 36%


Yes internally

Yes externally


No

Doesn't know

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by business size

SEPA Direct Debit: assessing the opportunity to outsource Raffi Basmadjian, Head of Group Cash Management & Treasury IT at Orange- France Telecom, indicates that Orange- France Telecom has started assessing the opportunity to outsource part of or all of the management of SEPA Direct Debit to third-party providers. Orange - France Telecom is one of the largest issuers of direct debits in France and is considering to adopt an ‘on-us’ strategy to mitigate risks when transitioning to SEPA Direct Debit. Orange - France Telecom will work with large French banks to have as many ‘on-us’ arrangements as possible (direct debits related to customers of bank X will be sent directly to bank X)...


When it comes to SEPA migration, businesses within Commerce, Services and Manufacturing & Construction sectors have different plans. In the Services sector, there are as many businesses planning to use third-party providers to migrate to SEPA Direct Debit (29%) as businesses intending to develop a specific internal solution (29%).

In the Commerce sector, a majority of businesses (45%) plan to develop an internal solution to migrate to SEPA Direct Debit compared to 27% intending to use external providers. This compares to a third of businesses planning to develop an internal solution in the Manufacturing & Construction versus 19% intending to use third-party providers.

Strategies differ across sectors: 29% of businesses in the Services sector and 27% in Commerce plan to use external solutions for part of or all of SEPA Direct Debit activities compared to 19% in Manufacturing & Construction

In terms of outsourcing, businesses make strategic decisions and choose first whether they want to outsource and, if they decide to outsource, which activities they will externalise. 23% of European businesses would consider outsourcing the full management of SEPA Direct Debits, with a higher proportion in Germany (31%) compared to the UK (18%) and France (14%).

A quarter of medium-sized businesses (250 - 999 employees) indicate that they would consider externalising the full management of SEPA Direct Debits versus 21% of larger

businesses (1,000 - 5,000). There is little difference between sectors with 25% of businesses in Services, 23% in Commerce and 21% in Manufacturing & Construction considering to outsource the full management of SEPA Direct Debit.

This shows that businesses regardless of their size or their sector consider outsourcing the full management of SEPA Direct Debits to benefit from the expertise of partners, who have developed specific solutions to migrate to SEPA Direct Debit.

23% of European businesses would consider outsourcing the full management of SEPA Direct Debits

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by industry sector

9% 18%

11%

18%

29% 32%

9%

8% 18% 18%

11% 11%

45% 33% 29%

Commerce Manufacturing & construction Services

Yes internally

Yes externally


No

Doesn't know

In order to benefit from opportunities related to the SEPA direct debit scheme, do you plan to develop a specific technical solution? – by industry sector


Among the activities the most likely to be outsourced, “turning paper documents into electronic documents” is the activity the most likely to be outsourced with 38% of businesses considering this option. Almost half of German businesses (48%) would consider outsourcing this activity compared to 35% of French businesses and 24% of British businesses. There are no differences across business sizes but sectors tend to take difference stances: 41% of businesses in Services indicate they would outsource the process of turning paper documents into electronic documents compared to 39% in Manufacturing & Construction and 27% in Commerce.

Externalising this activity is not directly related to the management of SEPA Direct Debit and may require a specific expertise in terms of scanning a large number of mandates and storing electronic documents. Some businesses might prefer to manage core activities of SEPA Direct Debit and externalise activities deemed as less strategic.

The second activity the most likely to be outsourced is the conversion of national direct debits into SEPA Direct Debits with 20% of European businesses considering this option:

• This option appears to be more popular in France and the UK as almost a quarter of businesses indicating likely to outsource the conversion of direct debits compared to only 15% in Germany

• There are also significant differences across sectors with 29% of businesses in Services thinking of outsourcing the conversion of national direct debits into SEPA Direct Debits compared to 17% in Manufacturing & Construction and 9% in Commerce.

Outsourcing the conversion may decrease the IT complexity for some businesses but all the aspects related to SEPA Direct Debit need to be taken into account. For instance, the unique reference of mandate has to be integrated in SEPA Direct Debit messages and updated when bank account details are changed or if the mandate is amended.

The third activity the most likely to be outsourced is the management of mandate with 19% of European businesses thinking of externalising this activity. Outsourcing the management of mandate is the most considered in France with 24% of businesses compared to 18% in Germany and 15% in the UK. Differences need to be taken into account when considering:

• business size, with 23% of businesses with 1,000 - 5,000 thinking of externalising the management of mandate compared to 17% of businesses with 250 - 999 employees,

• and sectors, with 29% of businesses considering outsourcing the management of mandate in the Services sector versus 17% in Manufacturing & Construction and only 9% in Commerce

The SEPA Direct Debit mandate is a new European contract between billers and payers and businesses need to handle all aspects of this new contract including managing the whole lifecycle of the mandate. Face with this increased complexity, some businesses may decide to externalise the management of mandate to ensure a smooth transition to SEPA Direct Debit and may analyse at a later stage whether they would like to internalise this activity.

Turning paper documents into electronic documents is the activity the most likely to be outsourced (38%), before the conversion of national direct debits into SEPA direct debits (20%) and the management of mandate (19%)

Would you consider outsourcing the following processes linked to the SEPA direct debit scheme? – by country

18%

4%

6%

4%

16%

20%

18%

10%

33%

43%

31%

33%

4%

6%

4%

4%

Turning paper documents intoelectronic documents

Mandate management

Conversion of national directdebits into SEPA direct debits

Full management of SEPAdirect debits

29% 3%

-

6%

-

21%

15%

18%

18%

29%

38%

32%

29%

18%

18%

21%

21%

Potential for outsourcing

35%

25%

25%

14%

Definitely Probably Probably not Definitely not Doesn’t know

24%

15%

24%

18%

48%

18%

15%

31%

Would you consider outsourcing the following processes linked to the SEPA direct debit scheme? – by country



22%

6%

9%

18%

25%

12%

6%

13%

19%

30%

34%

25%

5%

5%

5%

3%

27%

46%

28%

48%

40%

29%

29%

24%

32%

41%

49%


Part 5

Which next steps for European corporates?

Planning now for a SEPA transformation project focused on IT, and on cash management optimisation


When redesigning cash management processes, European businesses are likely to review the number of banking relationships across the euro area and may decide to consolidate banking relationships. This could make processes easier and generate cost savings. As multi-lateral interbank fees are in the process of being removed (except for R transactions), businesses are likely to generate additional cost savings and benefit from synergies with a consolidation of banking relationships.

In terms of cost efficiency, Business Process Outsourcing (BPO) can be the solution to use the experience of partners and benefit from effectiveness and efficiency in an environment with tight deadlines and significant complexity.

SEPA creates new European payment methods and implies significant changes for European businesses. In particular, SEPA Direct Debit’s impact goes beyond IT and affects many business functions. Businesses need to assess thoroughly SEPA Direct Debit’s consequences to plan for their migration.

This thorough assessment is an opportunity for businesses to re-think and optimise their cash management. One of SEPA’s indirect opportunities is to analyse the different processes from a European perspective, optimise current processes to fully benefit from SEPA and generate significant cost savings in the long term. Interviews revealed that many stakeholders plan to redesign current cash management processes and generate synergies. An example of synergy would be cash flow optimisation with the creation of a European structure to collect payments from European customers across multiple countries.

A thorough assessment of SEPA Direct Debit’s impact should not only identify required IT changes but also opportunities to re-design cash management processes

This is also an opportunity to consider the consolidation of banking relationships across multiple countries or using BPO partners


Europe has currently a very fragmented payments landscape and SEPA contributes to the convergence of different payment methods (including but not limited to credit transfers, direct debits and card payments). As payment methods tend to converge in the future, European businesses can benefit from SEPA to plan ahead, redesign cash management processes and generate synergies between business units. SEPA is after all also a matter of seizing opportunities to become innovative.

Based on the survey, many businesses have realised that this migration generates benefits, especially for businesses involved in cross-border trade. As for most new opportunities of this type, businesses will need to adopt a three-phase implementation approach:

1. Completing a thorough assessment of the current situation (where are we now?). This should involve an assessment of SEPA’s impact onto IT systems as well as a review of cash management practices that could be re-designed and optimised as part of the SEPA migration

2. Establishing a clear vision of the end state (where do we want to go?). Based on the above assessment, this will involve a comprehensive map of all IT and process changes, as well as a prioritisation of potential improvement initiatives related to cash management

3. And finally a structured plan combined with on-going monitoring and management (are you getting there efficiently and on time?). Experience shows the necessity to set up an internal cross-functional team as a SEPA migration impacts many business functions, along with monitoring tools and key performance indicators.

In conclusion, which next steps for your business?


Appendix

The impact of the Core version of SEPA Direct Debit depends on characteristics of existing domestic direct debits and therefore differs between the three countries studied (France, Germany and the UK):

• regarding the mandate, France experiences a significant change with a transfer of responsibility from the bank to the merchant (also called biller) to manage the SEPA Direct Debit mandate. European businesses will need to manage the whole lifecycle of the mandate, from signing-up the mandate (paper or electronic), storing the mandate (the mandate is often scanned in the case of a paper mandate for electronic storage, and the mandate must be stored until 14 months after the last collection even if the mandate is cancelled), transferring information of the mandate to banks, providing evidence in case of disputes and cancelling the mandate if appropriate (the biller must cancel the mandate after 36 months from the date of the latest collection). In Germany, there are no significant changes as businesses were previously managing the contract between the payer and the biller. The mandate is characterised by a unique identifier and needs to include specific data elements such as name and full address of the payer, and identifier and full address of the biller in addition to payment details. The electronic mandate also known as e-mandate will help to develop e-commerce for recurrent transactions once e-mandate solutions become available or more widespread depending on the development of e-mandate solutions in each country.

• regarding the due date of the Core version of a SEPA Direct Debit, the biller’s bank must send the request for a direct debit collection to the payer’s bank at the latest 5 business days before the due date for the first occurrence or a one-off direct debit, and then at the latest two business days before the due date for subsequent occurrences. In Germany, existing direct debits are issued

without an explicit due date and the rule is “due on occurrence”. Businesses need to implement these different settlement dates internally and ensure that SEPA Direct Debit files are sent early enough to their banks so that payments can be processed according to SEPA regulations. The due date could be shortened to one day (D+1) in the case of Cor1, which is optional and based on a bilateral agreement between banks or a group of banks. This could a feature developed by some banks to target specific use cases like for instance time-critical security transactions where the transfer of the counter-value must be arranged at the latest on a an agreed settlement date.

• regarding the period to dispute payment, payers can contest up to 8 weeks after the payment by direct debit in case of a valid mandate and 13 months in case the mandate is invalid.

German businesses are not significantly affected as payers were previously able to disputes domestic direct debits and German businesses handled these disputes. The key change with SEPA Direct Debit is the increase of the period to dispute payments from 6 to 8 weeks.

However, the change is significant in France as businesses were not previously responsible for managing disputes. The migration to SEPA Direct Debit implies that businesses need to create specific processes to handle disputes and include this aspect in their risk policy. This change has significant impact on the way businesses manage risk and treasury.

In the case of the UK, there is no deadline to dispute a domestic direct debit payment. Businesses will need to take into account the different deadlines and analyse the impact with regard to the dispute process of a SEPA Direct Debit.

What is the impact of the SEPA Direct Debit Core scheme?


What is the SEPA Direct Debit B2B scheme?

Besides the Core version, the SEPA Direct Debit B2B scheme caters for specific needs:

The B2B scheme has been specifically designed for B2B payments and provides a specific payment tool with the objective to offer businesses significant efficiency gains such as optimising cash management processes. Key changes between the B2B scheme and the Core version of SEPA Direct Debit are the following:

• the B2B scheme is only available to businesses

• unlike the Core version of SEPA Direct Debit, the B2B scheme excludes the right for a refund related to authorised direct debits

• to ensure that the B2B direct debit is authorised, the payer’s bank needs to authorise the direct debit payment by checking the collection against mandate information. The payer’s bank and the payer are required to agree on the verification to be performed for each SEPA B2B direct debit

• the payer’s bank must receive the request for a first, one-off or subsequent direct debit collection at the latest one inter-bank business day prior to the due date as opposed to 5 days for a first or one-off direct debit collections and 2 days for subsequent direct debit collections for the Core version of SEPA Direct Debit

• the payer’s bank has up to two inter-bank business days after the due date to return a payment and refuse to debit the account of the payer. This may happen for instance if the payer has insufficient funds, if the verification of the mandate proves to be incorrect or if the payer does not agree with the execution of the payment.

As it is the case with the Core scheme, the biller must send a ‘pre-notification’ similar to an invoice to the payer at least 14 calendar days before collecting the payment, unless a different timeline has been agreed between the payer and the biller. The pre-notification includes the due date and the amount of the collection. The pre-notification may be sent only once even for recurrent direct debit collections if due dates and amounts of future collections are stated

The SEPA Direct Debit B2B scheme addresses specific needs of businesses by offering a significantly shorter timeline for presenting direct debits and a reduced return period. This is indeed convenient for businesses, which require a timely certainty about the finality of payments to minimise financial risks and costs.


About Edgar, Dunn & Company, Global Experts in Payments Consulting

Edgar, Dunn & Company (EDC) is an independent global financial services and payments consultancy. Founded in 1978, the firm is widely regarded as a trusted advisor to its clients, providing a full range of strategy consulting services, expertise and market insight.

From offices in Atlanta, Frankfurt, London, Paris, San Francisco, Singapore and Sydney, EDC delivers actionable strategies, measurable results and a unique global perspective for clients in more than 45 countries on six continents.


About Steria

Steria delivers IT enabled business services which help organisations in the public and private sectors operate more efficiently and profitably. By combining in depth understanding of our clients’ businesses with expertise in IT and business process outsourcing, we take on our clients’ challenges and develop innovative solutions to address them.

Through our highly collaborative consulting style, we work with our clients to transform their business, enabling them to focus on what they do best. Our 20,000 people, working across 16 countries, support the systems, services and processes that make today’s world turn, touching the lives of millions around the globe each day.

For more than 25 years, Steria has been the business transformation and IT partner to support cross sectors companies for improving their payment information system thank to 500 European payment experts.

Founded in 1969, Steria has offices in Europe, India, North Africa and SE Asia and a 2011 revenue of €1.75 billion. 21%(*) of Steria’s capital is owned by its employees. Headquartered in Paris, Steria is listed on the Euronext Paris market.

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