The Direct Debit Schemes in a nutshell
The Direct Debit ( ) Core and the Business to Business ( ) Schemes developed by the European Payments Council ( ) - like any other direct debit schemes - are based on the following concept: 'I request money from someone else, and, with his prior approval, I can credit it to myself'. For the first time ever, Schemes enable consumers to make cross-border direct debit payments throughout the 32 Single Euro Payments Area ( ) countries1. At the same time, the Schemes can of course be used domestically. The payer and the biller2 must each hold an account with a payment service provider ( ) located within . The accounts may be held in either euro or in any other currency. The transfer of funds (money) between the payer's bank3 and the biller's bank always takes place in the euro currency. Currency conversion aspects are out of scope of the scheme.
The main differences between the and the Scheme are:
- Services and products based on the Scheme are only available to businesses; the payer must not be a private individual (consumer).
- In the Scheme, the payer (a business) is not entitled to obtain a refund of an authorised transaction.
- The Scheme requires the payer's bank to ensure that the collection is authorised 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 B2B direct debit.
- Responding to the specific needs of the business community, the Scheme offers a significantly shorter timeline for presenting direct debits and a reduced return period.
The reason for the shorter timelines of the Scheme, compared to the Scheme, is that business payments by direct debit require a timely certainty about the finality of the payments, so that goods or services can be delivered whilst minimising financial risks and costs for the payee. For business transactions which do not require this certainty, the Scheme can also be a satisfactory solution for making payments.
For more information on the Schemes, refer to the publication 'Shortcut to Direct Debit' (see 'related links' below). This four page publication summarises the main features of the Schemes in non-technical terms, including their key benefits. Detailed information on the Schemes is available on the Website (see 'related links' below).
What a difference a day makes
To understand the timelines governing the Scheme, the following terms need to be introduced:
- Due date: the Schemes allow payers and billers to anticipate the precise date (due date), when their account will be debited or credited, respectively. The due date is assigned by the biller and should be agreed with the payer in the contract underlying a direct debit collection.
- Settlement date: the day on which settlement4 takes place; i.e. the day when the funds are transferred between the bank of the payer and the bank of the biller.
- Debit date: the day on which the payer's account is debited.
Keeping in mind that the process of collecting a payment by direct debit is initiated by the biller, the biller (and, in consequence, the biller's bank) must respect the following timelines under the Scheme: the payer's bank must receive the request for a direct debit collection (first, one of or subsequent) at least one inter-bank business days prior to the due date.
The Scheme defines a 'calendar day', a 'banking business day' and an 'interbank business day'. A calendar day is any day of the year. A banking business day means, in relation to a bank, a day when a bank is open for business, as required for the execution of an payment. An inter-bank business day is when banks are open for business between banks. The 'Trans-European Automated Real-time Gross Settlement Express Transfer System' (TARGET) calendar is used to identify inter-bank business days. To avoid frequent changes to TARGET closing days, due to national holidays for example and thus the introduction of uncertainties into financial markets, a long-term calendar for TARGET closing days has been established and applied since 2002. This calendar is published by the European Central Bank. Settlement of funds, resulting from direct debit payments always takes place on an inter-bank business day.
Prior to the due date, the biller must observe the following steps: the biller must obtain a mandate from the payer; the 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; the mandate can be issued in paper or electronic format and expires 36 months after the last initiated collection. The signed mandate must also be stored by the biller as long as the mandate is valid and for at least 14 months after the last collection.
The Scheme is available to business customers only, i.e. for customers who are not automatically covered by the refund right for authorised transactions defined in the Payment Services Directive (PSD). Business customers are allowed by the applicable national law to opt out of the right for a refund defined in the PSD. Therefore, unlike the Scheme, the Scheme excludes the right for a refund for authorised collections. Due to this and the potentially high amounts of the collections, the payer's bank is obliged:
To verify, before debiting the payer's account, that the mandate related data received as part of the first collection complies with the mandate related data received, confirmed and authorised by the payer.
- To check the first and the subsequent collections against the stored mandate data, and the related verification instructions received from the payer.
- To oblige payers to inform the debtor bank on any amendment or cancellation of the mandate.
It should be kept in mind that a payer who makes a payment under the Scheme retains the right to a refund for unauthorised transactions during 13 months from the debit date as stipulated by the PSD. Considering however that in the case of a collection under the Scheme, the payer's bank must verify the existence of the mandate and the payer is obliged to inform his bank of any cancellation of a mandate, it is expected that refunds for unauthorised transactions will be exceptional.
The biller must send a 'pre-notification', an invoice for example, 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 the due dates and the amounts of future collections are stated. For example: a biller may send a single pre-notification annually to the payer if this pre-notification states that the amount of the monthly payment will be collected. The biller must send the payment messages to their bank in line with the agreement with that bank, so that the correct procedures and timelines are met. The biller's bank must then send the payment messages to the bank of the payer via a Clearing and Settlement Mechanism (CSM)5. The payment messages must be at the disposal of the bank of the payer at least one inter-bank business day before the due date. The bank of the payer can store the payment message or offer any other service to the payer during the period between the receipt of the payment message and the due date. If the due date falls on a day which is not an inter-bank business day, then the settlement date will be the next inter-bank business day.
On the due date, the account of the payer is debited and the amount of the payment presented by the biller's bank is settled, i.e. the funds are automatically transferred from the bank of the payer to the bank of the biller. As from the due date, the biller's bank can credit the account of the biller, according to the agreement between the biller and his bank. If the status of the payer's account does not allow the bank to debit the account, due to insufficient funds for example, then the bank may continue to try to debit the payer's account until two inter-bank business days after the due date.
After the due date: up to two inter-bank business days after the due date, the bank of the payer may return a payment and refuse to debit the account of the payer, due to insufficient funds or because the bank is unable to accept the payment for other reasons. It could be the case, that the verification instructions agreed between the payer and the payer's bank at the signing of the mandate are incorrect. Or it could be the case, that the account is closed or blocked for direct debit. In another scenario, the payer might request the bank to return the payment as the payer does not agree with the execution of the payment. Two inter-bank business days is the limit for the bank of the payer to send a 'return' message to the bank of the biller through a CSM. The CSM will settle the amount of the return to the benefit of the bank of the payer, as the amount of the original payment has already been settled on the due date.
The general rule and applicable exceptions
The due date, debit date and settlement date are the same for a direct debit payment. This general rule applies when the bank of the payer and the bank of the biller are materially able to settle on a due date.
Banks however, may have technical or communications problems which make it impossible to settle on that date. Further, even if the CSM executing the settlement action is open for business on the due date, other entities in a country may be closed due to public holidays for example. Also, even if the bank of the payer is able to debit the payer's account on the due date, the account of the payer may show an insufficient balance to allow the debit of the account.
Therefore, exceptions to this general rule apply. If for any reason the payment is delayed, then the due date must be replaced by the next possible date by the biller or their bank. At inter-bank level, a given due date may never be changed. If the due date falls on a day which is not an inter-bank business day, then the settlement date will be the next inter-bank business day. If the settlement date falls on a day which is not a banking business day for the payer's bank, then the debit date will be the next banking business day. If the bank of the payer cannot debit the payer's account on the due date (for example, there are insufficient funds), then the debit can be executed later.
The Scheme also defines timelines applicable to the execution of 'R-transactions' such as, for example, rejects. These timelines will be described in a separate article addressing 'R-transactions' scheduled for publication in a future edition of the Newsletter.
Javier Santamaría is the Chair of the Payment Schemes Working Group. Herman Segers is a former Secretary General of the and also served as the editor of the Rulebooks for many years.
The Website features a section dedicated to . To view this section, click here
Related articles in this issue:
SEPA Regulation: European Legislator Mandates Migration to SEPA by 1 February 2014 in the Euro Area and Transfers the Responsibility for SEPA Scheme Management to the European Commission. EPC Chair comments on the new regulatory reality governing the integration of the euro payments market
Related articles in previous issues:
Newsletter articles published in the section 'SEPA Case Studies': Learn from the SEPA migration experience of early movers in the business and public Sectors!
SEPA Direct Debit for Billers: the SDD Core Scheme Timelines ( Newsletter, Issue 12, October 2011)
SEPA Direct Debit for Billers: the Creditor Identifier (Go Get It!) ( Newsletter, Issue 11, July 2011)
SEPA Direct Debit for Billers: The SDD Mandate ( Newsletter, Issue 10, April 2011)
The Quantum Leap for SEPA Direct Debit. From 1 November 2010, all banks in the euro area are reachable for SEPA Core Direct Debit ( Newsletter, Issue 8, October 2010)
Have it Your Way! The EPC e-Mandate option: a secure way to authorise a SEPA Direct Debit payment ( Newsletter, Issue 6, April 2010)
Refunds and Returns Revisited. Questions and answers on the correlation between the PSD and the SDD Schemes ( Newsletter, Issue 4, October 2009)
Creditors: Help is Here. EPC introduces rules on the use of legacy mandates under the SDD Scheme ( Newsletter, Issue 2, April 2009)
1 currently consists of the 27 Member States plus Iceland, Liechtenstein, Norway, Monaco and Switzerland.
2The technical terms used in the Scheme Rulebooks refer to the payer as 'debtor' and to the biller as 'creditor'.
3The term bank is used in a non-discriminatory fashion and does not exclude payment service providers which are not banks.
4Settlement is 'an act that discharges obligations in respect of funds or securities transfers between two or more parties.' Committee on Payment and Settlement Systems.
5In the context, a payment system in the meaning of a 'funds transfer system' is referred to as a 'Clearing and Settlement Mechanism' (CSM). A funds transfer system enables the exchange of funds and messages between two executing a payment transaction. These funds transfer systems can be as well as separate business - public or private - entities (which may or may not be owned by banks). CSMs are also referred to as infrastructures.
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