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Retail News Interview
Retail News Interview electronic payments singly, who, for example, pay staff and creditors one at a time. For them, like consumers, the impact will be minimal, as payment details for individuals and companies will be automatically and seamlessly converted to BICs and IBANs by their bank.”
Are You SEPA Ready? John Rice, National Payments Programme-SEPA Programme Manager at the Central Bank of Ireland, advises on what FMCG companies need to do to prepare for the Single Euro Payments Area next February, and discusses the hugely controversial new Direct Debit regulations. FEBRUARY 1, 2014, will change the way electronic payments are made right across Europe, including Ireland. Are you ready for the Single Euro Payments Area (SEPA)? The SEPA area of 33 countries includes 28 EU member states, together with Iceland, Lichtenstein, Monaco, Norway and Switzerland. “SEPA is a single pan-European payment system, covering credit transfers and direct debits” explains John Rice, National Payments Programme-SEPA Programme Manager at the Central Bank of Ireland. “At the moment, each of the 33 countries who will participate in SEPA has their own electronic payment systems, built to their own specifications and standards. SEPA will build a common electronic
payment system across the 33 countries which will ultimately lead to more efficient, cost effective payments.” For the euro members of this area, the deadline for migration is February 1, 2014, with a deadline of October 2016 for non-euro countries. Simplifying Banking SEPA will essentially allow anybody, an individual or a company, to run all their payments, right across Europe, from one single bank account. So, for example, a multinational with accounts in numerous countries, will be able to consolidate into one single country and account for all credit transfers and direct debits. For consumers, a bank account in Ireland or any other country in SEPA will work just fine to
make or receive electronic payments right across the SEPA area. However, Rice points out, this particular SEPA regulation impacts online payments, direct debits and credit transfers, but not cheques or credit cards. So what do you have to do to prepare for SEPA? It depends on what type of company you are, essentially. Instead of your Irish bank account number and sort code, your bank account will now change to an IBAN (International Bank Account Number), while your sort code will be replaced by a BIC (Bank Identifier Code): both of these have been available on bank statements since 2008. “This is the only real change for the consumer,” Rice notes. “It is the same for small businesses who make
Bulk File Submitters The next level up in terms of complexity includes companies known as “bulk file submitters”, of which there are approximately 50,000 in Ireland. These are businesses that make a single payroll or creditor file: for example, they might have 25 or 500 staff but send a single file to their bank or pay multiple creditors in one file, Rice explains. For these companies, the first port of call is their existing software supplier. Depending on your supplier and the type of contract you have with them, they may upgrade all of your software to make it SEPA-ready, essentially converting your data (NSCs and account numbers), and creating a new file format, ISO XML 20022, which is the new SEPA standard. The next step is to contact your bank, let them know who your software provider is, inform them when you are upgrading to the new file formats and your bank will effectively plug you into the system. If, however, your software provider will not be ready in time for SEPA, your bank can be that third party software supplier, and will make your files
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Accountability ultimately lands with you to ensure your files are ready because your payments won’t be processed if they are not in the right format after February 1 next year. Don’t leave it to chance.
The introduction of the Single Euro Payments Area on February 1, 2014, will change the way electronic payments are made right across Europe.
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SEPA-ready. “At the moment, banks are not charging for this service, but they are incurring costs and they will probably look to recoup that over time,” Rice admits. “But you have to weigh it up against what a software provider would charge for the same service. In time, you will have to provide the new payment formats to your bank, so it makes sense to organise SEPA upgrades from your software as soon as is practical.” Rice advises every FMCG business, from the independent corner shop to the multinational distributor, the Cash & Carry to the multiple retailer, to act now. “Accountability ultimately lands with you to ensure your files are ready because your payments won’t be processed if they are not in the right format after February 1 next year,” he warns. “Don’t leave it to chance.” He advises business owners to shop around if their existing software provider and bank aren’t forthcoming. “You are free to look around because there are plenty of software providers and banks who are currently able to help you meet the requirements,” he says. New Direct Debit Regulations The most complex changes will occur for companies who are direct debit originators (i.e. their customers pay them by direct debit), according to Rice, who estimates that there are approximately 5,000 such companies in Ireland. Of
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Retail News Interview that 5,000, however, a small number of companies account for up to 90% of volume, including service providers like electricity, gas and mobile operators, who collect a large proportion of their revenue via direct debit. The rule changes for direct debits are far more complex than for credit transfers, and far more controversial. Up until now, banks retained direct debit mandates, but that will no longer be the case from February 1, 2014, with the onus on the direct debit originator to manage direct debit mandates themselves. “In the new world, that relationship, that contract, is directly between the consumer and the business,” Rice explains. “What this means, in effect, is that every direct debit originator must have a mandate management process in place, which, amongst other changes, will require them to generate a unique reference number for every direct debit mandate.” This means that banks cannot technically offer a conversion service for direct debits: only software suppliers can. If you are a direct debit originator, you need to talk to your software provider immediately, as Rice feels that many of the existing 120 software suppliers in Ireland will not offer software upgrades, because it may prove prohibitively expensive for them. “If you haven’t got confidence in your supplier, you need to start looking around in terms of who else can supply these complex software changes,” he says. “Some of the software suppliers I have met have thought through the rules and their solutions are pretty slick. You want a competent software provider who can show you that all the rule changes are embedded in their software, and that your bank is ready to start testing the system, as soon as you have your new files in place. “The financial system has to migrate 50,000 companies (Both SCT and SDD) across to the new SEPA system, which can’t be done in a week or a month, so in order to ensure businesses aren’t disrupted in terms of making or receiving payments, the sooner they get this done, the better.” The Most Contentious Issue The big “flashing light” with the new rules, however, is in relation to new consumer rights for direct debits. One of these rights allows consumers to limit the amount of any direct debit. For example, a consumer can decide that they don’t want their bi-monthly electricity bill to exceed €200, and if a debit comes through for €201, it will be rejected. It doesn’t mean the consumer doesn’t owe more than
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If you are in the distribution business, be it food, pharma, oil or any other sector, the right to refund a direct debit causes the business model to be challenged. You will be taking on more credit risk so you need to ask yourself if it is worth staying in the direct debit scheme and ensure that you understand the risks.
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€200, but it allows them to manage their cash-flow. This is not the most contentious issue, however. That dubious honour is reserved for another rule change, which gives consumers and businesses the right to claw back a direct debit for anything up to eight weeks for goods and services that have already been used/consumed. “The way the scheme rules are written is that even if you have signed a direct debit mandate with your originator, you can still walk into your bank and say ‘I want that direct debit unpaid’ for anything up to eight weeks, after February 1 next year,” Rice explains. “It is a ‘no questions asked’ refund at the moment, so your bank automatically has to give you that money back and debit the originator. “There is still debate going on about this at a European level but the European Payments Council, the owners of the scheme, have been clear that in the
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John Rice, National Payments Programme-SEPA Programme Manager at the Central Bank of Ireland.
Business-to-Consumer space, this is the way it will be,” Rice insists. Challenging Your Business Model The real problems, however, come in the Business-to-Business environment, primarily because of the absence of a SEPA Business–to-Business scheme. The provision of such a scheme is not mandatory and most Irish Banks have opted not to provide it at this stage. “If you are in the distribution business, be it food, pharma, oil or any other sector, that right to refund a direct debit causes the business model to be challenged,” Rice admits. “You will be taking on more credit risk so you need to ask yourself if it is worth staying in the direct debit scheme and ensure that you understand the risks.” So what are the options? “You can opt out of the direct debit system, collect your money electronically, reconcile your receipts and only release the next lot of goods under your normal credit terms,” Rice says. “If you are dealing with 20 or 30 businesses, that might be manageable but if you are dealing with, say, 600, that becomes a logistical challenge. But the risk/reward ratio may mean that you
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Retail News Interview Your first port of call for SEPA is your existing software supplier.
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have no choice. “If you have a good and long-established working relationship with and good credit knowledge of your clients, you may be happy enough to risk the direct debit scheme because it’s efficient, effective and reconcilable,” he continues. “Or you might be happy for a proportion of your customers to stay on the DD scheme and for another proportion to pay you electronically. These are the choices facing you right now.” Managing the Risk Both IPSO (the Irish Payments Service Organisation) and the Central Bank are trying to help companies to manage that risk, while adhering to the regulations and scheme rules, Rice explains. “IPSO have already written to the EPC for derogation and been refused, so we can’t set up our own domestic B2B scheme: it has to be a European scheme, even though 99% of debits are domestic.” That said, he feels in the longer term, common sense will prevail in terms of leg-
islation. This year’s review of the Payment Service Directive, may, for example set out more specific rules for refund rights, which may in turn “soften this stark rule from the EPC”. Otherwise, the real fear is that a company in a tight cash-flow situation decides to reverse direct debits for goods that have already been consumed or even worse, that a receiver or liquidator uses the same facility to claw back eight weeks of direct debits. “It is extremely prohibitive for companies where margins are fine but cash volumes are big, including the grocery and fuel sectors,” Rice admits. Both the Central Bank and IPSO are investigating an interim solution to help businesses in this regard. “We are surprised that this rule is as hard and fast as it is,” Rice concludes, “as it goes beyond both the current Payment Service Directive and the SEPA migration end-date regulation. It is a fabulous consumer protection right but it does challenge the Business-to-Busi-
ness model, particularly in the current absence of a SEPA B2B offering by the majority of Irish banks.” The key message Rice finishes with is to prepare
early and move to the new SEPA systems as soon as possible. This will avoid any unnecessary disruption to your payments come February 1, 2014.
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SEPA at a Glance What are the main changes that SEPA brings? • From February 1, 2014, existing national payment schemes will be closed down, following which euro electronic payments will be processed through new SEPA schemes. • By that stage, all national direct debits and credit transfers must be SEPA-compliant. This will include everything from staff payroll to paying creditors or receiving a euro electronic payment from customers within SEPA. • National sort codes and account numbers will be replaced by an International Bank Account Number (IBAN) and a Bank Identifier Code (BIC). What will it mean for businesses? From 1 February 2014, all euro direct debits and credit transfers within the designated 33-country area will be executed under the same conditions. This will create a more efficient borderless payment area by standardising euro electronic payments. All businesses must be ready for SEPA, as all existing national systems will close on February 1 2014. You will need to ensure that your pay-roll, direct debit and accounting systems are SEPA ready before February 1, 2014, so that you are able to make euro electronic payments after that date. A key benefit for businesses is that faster settlement and simplified processes will improve cash-flow and potentially reduce cost.
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