Version September Creating smart SEPA Solutions. A convenient and secure way to make payments. SEPA Direct Debit for Consumers

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1 Creating smart SEPA Solutions Version September 2010 A convenient and secure way to make payments SEPA Direct Debit for Consumers 1

2 All you need to know about SEPA EPC Brochures* Making SEPA a Reality the Definitive Guide to the Single Euro Payments Area The Most Popular Misunderstandings about SEPA Clarified SEPA for Business SEPA for the Public Sector SEPA for IT-Providers SEPA for Consumers SEPA Direct Debit for Consumers a convenient and secure way to make payments EPC Annual Report EPC Shortcut Series* Shortcut to SEPA Direct Debit Shortcut to SEPA Credit Transfer Shortcut to the SEPA Data Formats Shortcut to the SEPA Cards Framework Shortcut to SEPA Cards Standardisation Business the 10 Best Reasons to Practice SEPA Public Sector the 10 Best Reasons to Practice SEPA Merchants the 10 Best Reasons to Practice SEPA *These EPC publications are available for download at EPC Newsletter Four issues per year delivered to your inbox. Get your free subscription at Newsletter

3 TABLE OF CONTENTS SEPA Direct Debit for Consumers A convenient and secure way to make payments 1. SEPA for Consumers in a Nutshell 4 2. An Introduction to SEPA Direct Debit 6 3. The SEPA Direct Debit Mandate 8 4. The SEPA Direct Debit e-mandate Option The SEPA Account Identifiers: IBAN and BIC About the European Payments Council (EPC) 14 3

4 SEPA for Consumers in a Nutshell 1. Consumers enjoy fast, secure and streamlined SEPA services featuring the most innovative options available in payments. This publication specifically covers the SEPA Direct Debit. For information on SEPA Credit Transfer and SEPA for Cards refer to the EPC publication SEPA for Consumers available for download on the EPC website 1. This chapter offers a brief introduction to the concept of a Single Euro Payments Area (SEPA) and its benefits for consumers. What is SEPA? The Single Euro Payments Area (SEPA) is the area where citizens, companies and other economic actors can make and receive payments in euro, within Europe, whether within or across national boundaries under the same basic conditions, rights and obligations, regardless of their location. The geographical scope of SEPA covers the 27 EU member states 2 plus Iceland, Liechtenstein, Norway, Switzerland and Monaco. SEPA payments are always euro payments. The accounts of the consumer making a SEPA payment and of the biller receiving this payment must be located in one of the 32 SEPA countries. The accounts may be in euro or in another currency. 1 / SEPA Customers 2 Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom. 4

5 Why SEPA? SEPA is the logical next step following the introduction of euro notes and coins in 2002: SEPA payment instruments allow consumers to exchange electronic euro payments between any accounts in the SEPA area as conveniently as this is possible within national borders today. What are SEPA payment instruments? The European banking industry has delivered a set of harmonised SEPA payment instruments for credit transfers, direct debits and card payments. These same SEPA payment instruments can be used to make payments domestically or to pay for goods and services you purchase in a SEPA country other than your home country. In a first step, banks are offering SEPA payment services in parallel with such services based on national payment instruments, for example, your domestic credit transfer and your domestic direct debit. Eventually, harmonised SEPA payment instruments will replace the national payment instruments existing in the SEPA countries today. It is expected that this transition will take place first in the euro countries. Who makes SEPA happen? Everybody has a responsibility to make SEPA a reality. Public authorities, including the European Commission and EU governments, create the conditions that support the transition of bank customers to the new SEPA payment instruments. The European Central Bank (ECB) and the National Central Banks of those EU Member States which have adopted the euro also play an important role in the SEPA process: The ECB and the National Central Banks actively monitor the progress of SEPA in close dialogue with the political authorities, the banking industry and payment services users. The banking industry, cooperating in the European Payments Council (EPC) 3, is delivering the new SEPA payment instruments. Most importantly, SEPA will become a success once bank customers embrace the new SEPA payment instruments. How does SEPA benefit consumers? In SEPA, consumers can rely on one bank account and one payment card to make euro payments across 32 countries while enjoying highly competitive services provided by banks. In addition, SEPA drives forward technological innovation in payments empowering consumers to take advantage of many new features. As a result, the process of paying bills will be even more convenient. 3 For more information about the EPC refer to the last chapter in this publication. 5

6 An Introduction to SEPA Direct Debit 2. The SEPA Direct Debit for the first time ever enables consumers to make cross-border direct debit payments throughout the 32 SEPA countries. At the same time, the SEPA Direct Debit can of course be used domestically. In November 2009, the EPC introduced the SEPA Core Direct Debit (SDD Core) and the SEPA Business to Business Direct Debit (SDD B2B). The SDD B2B can only be used by payers that are not consumers such as businesses or public administrations making payments by direct debits. This publication focuses on the SEPA Core Direct Debit which serves as an easy-to-use and secure payment method for consumers. The introduction of SEPA Direct Debit makes paying bills significantly easier for mobile European citizens including workers, students, holiday home owners, tourists or retirees living abroad. At the same time, SEPA benefits consumers who wish to purchase goods or services from retailers located in SEPA countries other than their home country. All consumers will be able to rely on one home account for all domestic and cross-border payments throughout SEPA. In November 2009, banks started rolling out SEPA Direct Debit services. As of November 2010, all banks in the euro area offering national direct debit services are mandated by EU law to be reachable for cross-border direct debit payments. In practice, this means that any consumer who holds an account in the euro area which provides the option to make direct debit payments at national level will then be able to make payments by SEPA Direct Debit as well. 6

7 SEPA Direct Debit payments can be made to or from any accounts that are held with a bank located in SEPA. It is not necessary that the payer and / or the recipient of the payment (the biller) have an account in a SEPA country that has already adopted the euro as its national currency. For example: a consumer who holds an account in euro with a bank in Belgium can make a SEPA payment to a retailer who holds an account in zloty with a bank in Poland. In such a case, the SEPA payment takes place as follows: (1) the euro amount of the payment is debited to the Belgian consumer s account; (2) the exchange of funds between the Belgian bank and the Polish bank takes place in euro; and (3) the amount of the payment is converted from euro to zloty when crediting the Polish retailer s account. Benefits of SEPA Direct Debit for consumers: The SEPA Direct Debit provides a convenient and secure means of paying bills and allows for easy reconciliation of debits on account statements. It offers convenience for consumers in so that they do not have to deal with the consequences of late payments. The SEPA Direct Debit also enables the consumer to know exactly when his account will be debited. Given the no-questions-asked refund right for the consumer, the SEPA Direct Debit gives the consumer complete control over the payment. Consumers enjoy a fast and simple refund procedure when making payments by SEPA Direct Debit. Refunds may be claimed within eight weeks of the debit date for authorised transactions and within 13 months for unauthorised transactions. Each party to the transaction, e.g. the consumer paying a bill on the one hand and the biller collecting the payment on the other, will be charged individually and separately by their bank for this payment service in a fully transparent manner. The basis and level of charges to customers are entirely a matter for individual banks. For more information on the SEPA Direct Debit refer to the EPC publication Shortcut to SEPA Direct Debit 4 available on the EPC web site. 4 / SEPA Customers. 7

8 The SEPA Direct Debit Mandate 3. The SEPA Direct Debit builds on a direct debit model widely used and trusted by millions of bank customers in Europe. As with all existing direct debit systems, under the SEPA Direct Debit a consumer completes a mandate to authorise a biller to collect payments. At the same time, the SEPA Direct Debit mandate authorises the consumer s bank to pay these collections. The SEPA mandate can be issued on paper or electronically (see next chapter for details on the e-mandate option). The mandate expires 36 months after a biller last collected a payment from a consumer based on such a mandate. Going forward, a biller may offer payment by SEPA Direct Debit in instances where a consumer and a biller have an existing agreement on direct debit collections. For example, you are subscribing to a newspaper today paying by direct debit. Your biller will clarify whether the mandate you originally issued continues to be valid or whether you have to issue a new mandate. The SEPA Direct Debit is based on the so-called creditor-driven mandate flow (the creditor is the biller). This means: (1) The payer completes and signs a paper-based mandate and (2) sends it directly to the biller. The biller is responsible for storing the original mandate, together with any information regarding amendments relating to the mandate or its cancellation. In this scenario, the payer s bank does not receive any mandate-related information from its customer nor is the payer s bank responsible for checking the right of a biller to collect payment from a payer s account. This model is used in a large number of EU Member States today for example in Austria, Germany and the Netherlands. These three countries represent those EU Member States where direct debits are used much more often to make payments than in other countries. In Austria, Germany and the Netherlands, the usage of direct debits based on the creditor-driven mandate flow per capita far exceeds the European average; in these countries, consumers prefer the convenience and ease-of-use provided by direct debit compared to other payment methods: European Union Euro area Germany Austria The Netherlands 40,76 direct debits per capita 51,47 direct debits per capita 97,20 direct debits per capita 95,16 direct debits per capita 74,55 direct debits per capita Source: European Central Bank Blue Book 8

9 The SEPA Direct Debit, which also relies on the creditor-driven mandate flow, builds on the same business assumptions and basic trust between the parties involved that is, the payer, the biller and their payment service providers as the established pre-sepa, national direct debit model used for decades in a large number of EU Member States. This direct debit model ensures complete consumer protection: The SEPA Direct Debit is fully aligned with consumer rights as defined in the EU Payment Services Directive (PSD). Even exceeding the requirements of the PSD, the SEPA Core Direct Debit grants consumers a no-questions-asked refund right during the eight weeks following the debiting of a consumer s account; e.g. during this time any funds collected by SEPA Direct Debit will be credited back to the consumer s account upon request. In the event of an unauthorised direct debit collection, the consumer s right to a refund extends to thirteen months as stipulated in the PSD. This same refund right during a period of thirteen months in the event of an unauthorised direct debit collection applies in the event that a payer accidentally or fraudulently indicates to a biller an account other than his own to be debited. A bank customer who detects that his or her account was thus erroneously debited is of course entitled to request that funds are credited back to his or her account. The European Commission and the European Central Bank confirmed that the SEPA Direct Debit is based on proven national concepts, fully meets the respective legal requirements and in some points goes even further than required by the Payment Services Directive in order to better satisfy customer needs 5. The European Central Bank acts as an observer in the EPC. The European Central Bank and the European Commission have closely followed and monitored the development of the SEPA Direct Debit. Both institutions also encouraged the EPC to give due consideration to the provision of additional features designed to further increase the trust in SEPA Direct Debit services in particular by consumers who are accustomed to a pre-sepa direct debit model which differs from the SEPA Direct Debit concept as regards mandate management. In response to this request, the EPC introduced a variety of optional features into the SEPA Direct Debit Schemes as outlined in the next section of this chapter and the next chapter. Last but not least, payment service providers servicing billers who collect direct debit payments must ensure that only trustworthy billers are able to collect payments via SEPA Direct Debit. This is also in the interest of payment service providers as they would have to cover any losses resulting from fraudulent and / or erroneous direct debits. In this context, it also has to be noted that the SDD Scheme is designed to effectively discourage fraudulent collections: SDD payments are traceable from the payers and the payers banks up to the biller initiating the payments. As a result, any biller collecting SEPA Direct Debits can be rapidly and unequivocally identified. Any gains based on a fraudulent direct debit collection would therefore not be sustainable. For these reasons, it is highly improbable that fraudulent persons or businesses would choose the SEPA Direct Debit as a vehicle for fraudulent actions. 5 Joint letter of the European Commission and the European Central Bank to the EPC in March

10 The SEPA Direct Debit also meets the requirements of consumers used to an alternative direct debit model based on the so-called debtor-driven mandate flow (the debtor is the payer). Whilst the SEPA Direct Debit builds on a national, pre-sepa direct debit model relied upon in a large number of EU Member States today (the creditor-driven mandate flow), it is recognised that in some EU Member States an alternative pre-sepa direct debit model is currently in place. This alternative model is based on a so-called debtor-driven mandate flow (the debtor is the payer a consumer, for example). This means: (1) The biller informs the payer s bank that the payer indicated the desire to make payments by direct debit; (2) the payer s bank then issues the actual mandate and informs the payer accordingly; i.e. the mandate stays with the payer s bank. When a biller presents a direct debit collection to the payer s bank, the payer s bank might choose to check the authorisation of the biller to collect payment based on the mandate. This model is used, for example, in Belgium, Portugal and Italy today. (In Italy, actually, both models the creditor-driven mandate flow and the debtor-driven mandate flow coexist.) The main difference between these two alternative direct debit models therefore lies in the fact that a consumer used to the debtordriven mandate flow assumes that his bank verifies whether a direct debit collection is authorised by the consumer prior to debiting the consumer s account 6. Those consumers who are used to the creditor-driven mandate flow, by contrast, do not require such verification. As mentioned above, the vast majority of consumers in the European Union making a direct debit payment today rely on the creditor-driven mandate flow; i.e. the model governing the SEPA Direct Debit. 6 In the Italian domestic direct debit scheme, all payers (debtors) and billers (creditors) can rely on the fact that the payer s bank and the biller s bank check the mandate prior to the first collection, independently of the mandate management model. This is possible thanks to a database alignment service enabling billers to exchange electronically the information related to the mandate, before the collection, through the biller s bank with the payer s bank. 10

11 To help in meeting the preferences of consumers living in countries currently using the debtor-driven mandate flow, the SEPA Direct Debit includes options which allow banks to offer services such as the verification of mandates by the payer s bank: 3. The SEPA Direct Debit includes the option to issue a mandate electronically: in this case, the mandate information stays directly with the payer s bank so that this bank can validate the mandate once a biller presents a collection (see also next chapter). 1. The timelines defined in the SEPA Core Direct Debit for the execution of a collection allow payers banks to tailor mandate management to customer needs; i.e. to validate mandates if customers so request. 2. To give even more comfort to those bank customers who are used today to a direct debit model which relies on the debtor-driven mandate flow, the EPC will also deliver an optional Advance Mandate Information (AMI) functionality to be included in the SEPA Direct Debit. The Advance Mandate Information functionality provides an extended timeline for the optional verification of mandate information by the payer s bank thus increasing its ability to widen its mandate management in relation to its customers. The Advance Mandate Information could also serve as a basis for banks and communities of banks to develop further Additional Optional Services (AOS) building on this functionality and facilitating migration from existing national direct debit systems to the SEPA Direct Debit. 11

12 The SEPA Direct Debit e-mandate Option 4. In addition, the SEPA Direct Debit includes the option to create mandates through the use of electronic channels called e-mandates. If the payer issues an e-mandate, the mandate information stays directly with the payer s bank. Also in this case, the payer s payment service provider has the option to verify whether the payer authorised a direct debit collection. When issuing an e-mandate, payers can reuse their online banking credentials or other bank-provided electronic access channels for completing the mandate online with the biller. No additional means of identification are necessary. When issuing an e-mandate, the payer wishing to pay by SEPA Direct Debit avoids the inconvenience of printing, signing and mailing a paper form to the biller by using a fully electronic process instead. The e-mandate process: this is how it works Typically, issuing an e-mandate takes place in the following manner: a payer such as a consumer, for example, chooses to purchase goods or services from a service provider, i.e. a utility company. The service provider; e.g. the biller offers the payer (a consumer, for example) the option to pay by SEPA Direct Debit and to authorise the SEPA Direct Debit collection(s) based on an electronic mandate. In a first step, the payer must enter all the required data including the Business Identifier Code (BIC) of his own bank on the biller s website. The biller then submits the e-mandate proposal to the payer s bank. At the same time, the payer is routed from the biller s website to the website of his own bank. The payer s bank validates the BIC and the payer chooses the IBAN (International Bank Account Number) of the account that should be debited. In addition, the payer s bank verifies the payer s account access rights: the payer must identify and authenticate himself with his online banking credentials as agreed with his bank. After successful authentication, the payer confirms the e-mandate to his own bank. This last step of confirming the e-mandate is essentially equivalent to the signing of a paper-based mandate. The payer is then routed back to the biller s website. In addition, the payer s bank delivers the signed e-mandate to the biller. The biller s website acknowledges the receipt of the e-mandate and confirms this to the payer. Moving on, biller and payer exchange goods or services and payments as agreed. Availability of the e-mandate will depend upon individual bank service offerings. 12

13 The SEPA Account Identifiers: IBAN and BIC 5. When making a payment by direct debit today, consumers indicate account identifiers an account number and a bank code that allow specifying bank accounts on national level. SEPA, however, enables bank customers to exchange euro payments between any accounts in the 32 SEPA countries. This is only possible when banks and bank customers agree to use account identifiers which are unique and therefore allow pinpointing an account not only at national level but anywhere in SEPA. In SEPA, therefore, IBAN (International Bank Account Number) and BIC (Business Identifier Code) are the only permissible account identifiers. IBAN and BIC are features that were developed by ISO, the International Organisation for Standardisation. ISO is the world s developer of globally compatible standards that enable service providers (such as banks) to offer internationally compatible solutions (such as SEPA payment instruments). Banks, businesses and public administrations will provide the tools to ensure a smooth transition for consumers to IBAN and BIC. Billers, including businesses and public administrations, will feature related information prominently on websites, invoices and stationery. Consumers find IBAN and BIC pertaining to their own account on their account statements and / or imprinted on their bank card. In addition, banks provide easy-to-understand instructions on the use of IBAN and BIC on Internet home banking channels or by making available print flyers, for example. In most SEPA countries, a national website devoted to SEPA is available which contains a range of IBAN and BIC related items, including educational material facilitating the use of these account identifiers. To find these web sites, contact your payment service provider or your national banking association. 13

14 About the European Payments Council (EPC) 6. The purpose of the European Payments Council (EPC) is to promote the Single Euro Payments Area (SEPA). The EPC is the banking industry s coordination and decision-making body for the cooperative space of payment services. The EPC is responsible, amongst others, for the development and maintenance of SEPA payment schemes as defined in the SEPA Credit Transfer Scheme Rulebook and the SEPA Direct Debit Scheme Rulebooks. The Rulebooks contain sets of rules and standards for the execution of SEPA payment transactions that have to be followed by payment service providers. These Rulebooks can be regarded as instruction manuals which provide a common understanding on how to move funds from account A to account B within SEPA. The rules and standards which make up a payment scheme are defined by payment services providers in a collaborative space that is the EPC. The particular SEPA payment products and services offered to the customer are developed by individual payment service providers or groups thereof operating in a competitive environment. The SEPA Schemes developed by the EPC in close dialogue with the user community provide the flexibility and options which enable payment service providers to add features and services of their choice to the actual payment product. To learn more about the EPC visit the EPC web site at 14

15 EUROPEAN PAYMENTS COUNCIL (AISBL) Avenue de Tervueren 12 B 1040 Brussels, Belgium Phone: Fax: secretariat@europeanpaymentscouncil.eu SEPA Direct Debit for Consumers a convenient and secure way to make payments EPC document reference: EPC316-10, version Copyright European Payments Council (EPC) AISBL Reproduction for non-commercial purposes is authorised; with acknowledgement of the source. Design by arnaudbeelen.be / Brussels 15