Issue 11 - July 2011
Fringe Observations on SEPA
Direct Debit: Killing it Softly Reflections on the likely demise of one of the most popular payment instruments in Europe
13.07.11 By Javier Santamaría
A recent survey commissioned by the European Parliament demonstrates that 65 percent of European citizens believe that the European Parliament does not listen to them. The European Parliament relies on these surveys to identify "people's perceptions and expectations regarding its work and that of the European Union (EU)." This seems to refute the widely shared prejudice that alienated European authorities specialise in imposing unrealistic regulations, which directly infringe upon the people's right to make informed choices. Javier Santamaría, always keen to support EU reputation management, proposes to include a query on the preferred European direct debit model in the next survey carried out on behalf of the European Parliament. Data provided by the European Central Bank demonstrates that the vast majority of European direct debit users favour a model which EU lawmakers are about to abolish with the forthcoming SEPA Regulation. This is likely to happen because of unsubstantiated allegations, which claim a lack of consumer protection under the direct debit model which is trusted by millions of consumers today. Ultimately, one prejudice (perceived security concerns) will reinforce the other (EU lawmakers do not listen to citizens). The result? The likely demise of one of the most popular payment instruments in the EU. Irony does not get any better than that. This author advocates bringing facts and empirical evidence back into the direct debit debate and recalls the wisdom of German writer Kurt Tucholsky: "The opposite of good is not evil. The opposite of good is good intention." The 'Fringe Observations on SEPA' highlights aspects transcending the day-to-day management of the process, aimed at making SEPA a reality in the foreseeable future.
Key Information in this Article
The proposal for a Single Euro Payments Area (SEPA) Regulation, introduced by the European Commission (the Commission proposal) in December 2010, foresees replacing the direct debit model preferred by the vast majority of direct debit users in the European Union (EU) with a modified direct debit model.
At this point in the legislative process it seems likely that the EU legislators, i.e. the European Parliament and the European Council representing EU Member States, will effectively support the Commission proposal in this regard.
EU lawmakers should ensure that a decision to abolish the preferred European direct debit model is based on statistically significant, analytically thorough and intellectually solvent market research, rather than unsubstantiated perceptions, gut feelings or purely personal assessments.
In addition, any decision to introduce an alternate direct debit model by law should be preceded by an impact, as well as a cost-benefit, analysis. This analysis should evaluate whether a direct debit model, as modified by the legislators, will find acceptance in the market.
EU lawmakers are invited to engage in an open and fact-based dialogue on the appropriate European direct debit model in the next phase of the legislative process.
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The European direct debit debate: state of play
While this exercise increasingly invokes the experience of Don Quixote1 fighting the windmills, efforts should be kept up in the hope that rhyme and reason might make a comeback in the debate on the appropriate direct debit model to be offered in the Single Euro Payments Area (SEPA).
To briefly recap the state of play: in December 2010, the European Commission tabled a proposal for a Regulation establishing technical requirements for credit transfers and direct debits in euros (the Commission proposal). This proposal is commonly referred to as the forthcoming SEPA Regulation. The Commission proposal intends to make it mandatory for payment service providers (PSPs) to offer such mandate management features which are optional in the SEPA Core Direct Debit Scheme (SDD Core) developed by the European Payments Council (EPC) in close dialogue with the customer community. A mandate is signed by the payer to authorise the biller to collect a payment and to instruct the payer's bank to pay those collections.
At this point it seems likely that the European Union (EU) legislators, i.e. the European Parliament and the European Council representing EU Member States, will effectively support the Commission proposal in this regard. The EU legislators are considering the inclusion of the following provisions in the forthcoming SEPA Regulation as detailed, for example, in the draft report of the Economic and Financial Affairs Committee (ECOFIN) of the European Parliament on the Commission proposal:
- Payers may instruct their PSP to limit a direct debit collection to a certain amount or periodicity, or both.
- Payers may request their PSP, where the agreement between the payer and the payee excludes the right to a refund, to verify each direct debit transaction and to check whether the amount of the submitted direct debit transaction is equal to the amount agreed in the mandate, before debiting their account, based on the mandate-related information.
- Payers may instruct their PSP to block any direct debits to the payer's account or to block any direct debits coming from one or more specified payees and to authorise direct debits only coming from one or more specified payees.
To clarify: the SDD Core Scheme allows for all of these, and more, mandate management options enabling PSPs to tailor direct debit services in response to market demand. The scheme does not, however, oblige a PSP to offer these checks, given that more than 75 percent of consumers making direct debit payments in the EU today do not request them. To put it even more accurately: the vast majority of dedicated direct debit payers does not even bother for the simple reason that millions of direct debits are securely and correctly collected in Europe - without mandate checks performed by law.
This article refrains from dissecting again the SDD Core model which is based on the existing pre-SEPA direct debit model preferred and trusted by the vast majority of direct debit users (billers and payers). Related details are set out in the EPC document 'The Principles Governing the SEPA Direct Debit Schemes' and on a dedicated section on the EPC Website (see 'related links' below). As reported on numerous previous occasions, the SDD Core Scheme is fully aligned with, and even goes beyond, the consumer rights defined in the EU Payment Services Directive (PSD) adopted by EU Member States just 18 months ago.
The information required to understand the provisions of the SDD Schemes which ensure complete consumer protection, are summarised in figure 1: The SDD Core Scheme ensures complete consumer protection.
(click to enlarge)
This article analyses the potential consequences of a legislative decision which simply cannot be reconciled with empirical evidence and ignores the preferences of the overwhelming majority of European direct debit users. The politically desired direct debit now contemplated by the European Parliament and the Council of the European Union, also disregards the broad consensus reached among all market participants (suppliers and users) during eight years of SDD design involving numerous consultations of the entire payment community at European and national level.
It is important to note that from the very start of the legislative process, both the European Parliament and the European Council representing EU Member States (the Council) declared the mandatory features applicable to direct debit transactions introduced by the European Commission to be non-negotiable. Taking into consideration the actual preferences of the majority of EU consumers, both the European Parliament and the Council are invited to revisit this stance. To ensure credibility of the EU legislative process, lawmakers will also have to demonstrate that a decision to replace SDD by an alternate, politically desired direct debit model relies on appropriate market research, as well as a thorough impact and cost-benefit analysis. There are however no indications that EU lawmakers would have any intentions to actually engage in this fact-finding exercise.
To listen means to action: how does the EU legislator identify the needs of direct debit users?
To date, no empirical evidence, hard data based on market research or any other reliable sources exist which would prove that the SDD Core Scheme fails to meet the requirements of the vast majority of EU consumers. On the contrary: the SDD Core Scheme is based on a proven and popular pre-SEPA direct debit model used in a large number of EU Member States today - for example in Austria, Germany, the Netherlands and Spain. The latter four countries represent those EU Member States where direct debits are used much more often to make payments than in other countries. Out of 17,656 million direct debits processed in the euro area in 2009, according to the European Central Bank (ECB) Blue Book, a total of 12,968 million direct debits or 73.45 percent were processed collectively in: Austria (841 million), Germany (8,424 million), the Netherlands (1,272 million) and Spain (2,431 million). The EPC also carries out annual public consultations to ensure that the SEPA payment schemes evolve in accordance with market requirements. These consultations regularly confirm broad support in the entire European payment community (users and suppliers) for the established SDD model.
The European Parliament Website (see 'related links' below) documents the detailed findings of surveys on public opinion in EU Member States. These surveys are regularly commissioned by the European Parliament "to keep in touch with people's perceptions and expectations of its work and that of the EU generally". The European Parliament professes these surveys to be "extremely useful at the preparation, decision-making and evaluation stages of parliamentary business." This seems to refute the widely shared prejudice that alienated European authorities specialise in imposing regulations which are out of touch with real life experience and directly infringe upon people's right to make informed choices. The European Parliament 'Eurobarometer' of February 2011 (see 'related links' below) however, finds that 65 percent of European citizens believe that the European Parliament does not listen to them. This discrepancy between the European Parliament's stated intention and citizens' actual perceptions may partially reflect the general communication problem of the European institutions. The findings however also demonstrate that actions speak louder than words; i.e. citizens' attitudes towards the EU are shaped by EU legislation rather than European Parliament surveys. Obviously, the vast majority of EU citizens are of the opinion that EU Regulations and Directives largely fail to reflect their actual needs and preferences. This impression may be intensified if EU legislators refuse to even research the needs and preferences of their constituencies but impose legislation based on the principle: "You do so, because I say so". Mature citizens do not appreciate being treated like three-year olds. The attitude adopted by the EU legislator in the current direct debit debate will reinforce prevalent public perceptions that 'Brussels' fails to adequately represent the interests of the European electorate.
As European authorities never tire of reminding the EPC, 'listening is a good thing - actioning the feedback received is even better'. The EU legislator seems to have no confidence in the statistical data made available by the ECB on the preferred European direct debit model or in the publicly documented results of EPC consultations with regard to the evolution of the SDD Core Scheme. It might be a good idea then to include a query on the preferred direct debit model in the next European Parliament survey carried out to identify people's perceptions of, and expectations towards, their European political representatives. In addition, both EU legislative bodies; i.e. the European Parliament and the Council, should place reliance on statistically significant, analytically thorough and intellectually solvent market research that is based on a sound methodology and which takes into consideration the current conditions of the entire European payments market. The summer recess should provide members of the European Parliament with a valuable opportunity to further consult with national consumer organisations and constituencies on the subject. This research will ascertain that relevant legislative decisions respond to the proven requirements of a broad majority of direct debit users, rather than unsubstantiated perceptions cultivated in the Brussels fish bowl, gut feelings or purely personal assessments.
The EPC is the first to recognise the challenges faced by European institutions expected to create a consensus across 500 million consumers. It is a standard EPC exercise to bridge different payment practices and customer expectations throughout the painstaking process of forging agreement on the countless technical and procedural details that make up a SEPA payment scheme. This is only possible if all parties engaged in the process are willing to aim for a solution that caters to the majority of payment service users, while ensuring that extras can be offered on demand. The SDD Core Scheme is built on this concept.
The European legislator has yet to prove that the politically desired direct debit model, now in the pipeline, is better suited to meet the requirements of the broad majority of direct debit users.
Good intentions do not prevent (unintended) consequences
As demonstrated above, there is no evidence that the EU legislator would have performed an impact and / or a cost-benefit analysis to identify the consequences of abolishing the preferred European direct debit model, i.e. the SDD Core model. These consequences however might trigger just the opposite of what is supposedly intended; namely, to cater to consumer needs.
Firstly, making it obligatory for PSPs to offer the above detailed mandate checking obligations means that some 3,900 PSPs participating in the SDD Core Scheme today will have to re-invest in the adaptation of their payment architecture. These costs would have to be borne by all European consumers including the majority of direct debit payers who never asked for obligatory mandate checks to be performed by their PSPs. In consequence, direct debits will become more costly - directly or indirectly - for all consumers. This outcome would counteract the stated objective of the European Parliament, the ECOFIN comprising EU Finance Ministers, the European Commission and the ECB, that SEPA should trigger a downward spiral as regards the pricing of payment services.
Secondly, the EU legislator should not simply assume that the market will accept a direct debit model modified by law. It is noted that some members of the European Parliament perceive direct debits as a 'clumsy' payment instrument. It is also recognised that some payers are just not comfortable with the general concept of a direct debit, i.e. to authorise somebody else to collect payments from one's account. Such perceptions are perfectly legitimate, however they should not preclude other payers' freedom of choice. As cited above, European consumers choose to make 17,656 million direct debit payments annually. More than 75 percent of these prefer the easy to use and hassle free direct debit model which is also the SDD Core model.
Yet the EU legislator seems determined to ignore this market demand. Ease of use, as lawmakers apparently concluded, is bad for payers and must therefore be taken out of the direct debit equation. Making mandatory those features which are currently optional in the SDD Core model may however prove detrimental to the actual needs of the majority of direct debit fans. The politically desired direct debit will be too cumbersome and complex for their taste. In consequence, the market will either retain or revert to other - less efficient - payment instruments in the long run. To avoid this scenario, the right balance between efficiency and perceived security concerns must be met.
It is easy to shovel some mandate checking obligation into a Regulation, however this does not mean that the outcome of this action is predictable or desirable. The forthcoming SEPA Regulation as currently envisaged, on the contrary, would jeopardise one of the most popular and successful payment instruments in the euro payments market. As the German writer Kurt Tucholsky accurately observed: "The opposite of good is not evil. The opposite of good is good intention."
Bring facts and reason back into the direct debit debate
It is fully recognised that based on their considerations during the first half of 2011, both the European Parliament and the Council of the European Union representing EU Member States have identified important improvements to the European Commission proposal for a SEPA Regulation. In the next phase of the legislative process it is essential however, to allow for an open and fact-based dialogue on the appropriate European direct debit model.
If EU lawmakers continue to suppress this debate, adoption of the SEPA Regulation risks that one prejudice (perceived direct debit security concerns) will reinforce the other (that EU lawmakers do not listen to citizens). The result? The likely demise of one of the most popular payment instruments in the EU today. Irony does not get any better than that - however the interests of European direct debit users should not be treated as a laughing matter.
Javier Santamaría represents Banco Santander. Banco Santander is a member of the European Payments Council.
Joint letter of the European Commission and the European Central Bank to the EPC regarding SEPA Direct Debit (March 2010). In this letter, both institutions confirmed that the SEPA Core Direct Debit Scheme 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
The EPC Website features a section dedicated to SDD. To view this section, click here
Related articles in this issue:
Related articles in previous issue:
The Good, the Bad, the Ugly and a Knight in Shining Armour? European Commission requests unprecedented powers to determine payment functionalities (EPC Newsletter, Issue 9, January 2011)
The SEPA Regulation - A Progress Report. First reactions by European Parliament and Council of the European Union introduce important improvements to European Commission´s proposal for a SEPA Regulation (EPC Newsletter, Issue 10, April 2011)
1'The Ingenious Gentleman Don Quixote of La Mancha' is a novel written by Spanish author Miguel de Cervantes. Published in two volumes a decade apart (in 1605 and 1615), Don Quixote is the most influential work of literature from the Spanish Golden Age in the Spanish literary canon. As a founding work of modern Western literature, and one of the earliest canonical novels, it regularly appears high on lists of the greatest works of fiction ever published. (Wikipedia)
Other articles in this issue
13.07.11 What is Your View? - EPC invites stakeholders to participate in consultations on the SEPA Scheme Rulebooks and the SEPA Cards Standardisation Volume - Book of Requirements By Ugo Bechis and Javier Santamaría 13.07.11 EPC Goes Social - EPC invites stakeholders to connect to the newly launched EPC social media platforms By Gerard Hartsink 13.07.11 EPC Plenary Meeting Update - Main decisions taken in June 2011 By Gerard Hartsink 13.07.11 Change is Inevitable... - 'Except from vending machines' (Robert C. Gallagher): the impact of new standards proposed by the CPSS-IOSCO for financial market infrastructures on payment service providers By Dermot Turing 13.07.11 Get Ready for More - Basel III marks only the beginning of increased regulatory scrutiny of the payments market By Ruth Wandhöfer 13.07.11 A Closer Look at Innovation in Retail Payments - Central bank research in preparation: a report on first findings of working group established by the Committee on Payment and Settlement Systems By Dirk Schrade 13.07.11 Facing the Facts in July 2011 - The EPC Newsletter tracks the progress of SEPA migration By Gerard Hartsink 13.07.11 One Size Fits All - EPC launches an initiative to ensure the efficient management of the SEPA ATM infrastructure By Leonor Machado 13.07.11 The Art of Integration - Finnish Government Shared Services Centre for Finance and HR simultaneously migrates to SEPA and new IT systems introduced at central government agencies By Mikko Grönman (Interview) 13.07.11 Arrested Development*** - Inconsistencies between European Commission´s objectives threaten to hamper SEPA progress By Gerard Hartsink 13.07.11 SEPA Direct Debit for Billers: the Creditor Identifier (Go Get It!) - EPC Newsletter series provides support for billers preparing migration to the SDD Schemes By Javier Santamaría and Herman Segers
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