The Direct Debit () Schemes in a nutshell
The Core and the Business to Business ( B2B) 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.
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 Core 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 (a newsletter subscription, for example).
- 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 Core Scheme: the payer's bank must receive the request for a first direct debit collection, or for a one-off direct debit collection, at least five business days prior to the due date. For subsequent direct debit collections, the payer's bank must receive such a request at least two business days prior to the due date. The updated version of the Core Rulebook, which will be published in November 2011 and takes effect in November 2012, includes a new optional element regarding timelines applicable to the presentation of direct debit collections. This new optional element will be further explained below.
The Core 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. 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. The mandate can be issued in paper or electronic format. The mandate 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 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 time line 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 publisher (biller) may send a single pre-notification annually to the newspaper subscriber (payer) if this pre-notification states that the amount of the monthly subscription fee will be collected. The biller must send the payment messages to their bank in line with the agreement with that bank, so that the biller's bank is able to provide the payment message to the bank of the payer at least two inter-bank business days before the due date. 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 two inter-bank business days 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 bank of the biller can credit the account of the biller, according to the agreement between the biller and his bank. If the status of the account of the payer 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 five days after the due date.
After the due date: up to five 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, for example, 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. Five 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.
Billers might also wish to keep in mind that exceeding the requirements of the Payment Services Directive (PSD)6, the Core Scheme grants consumers a 'no-questions-asked' refund right during the eight weeks following the debit date of a consumer's account; e.g. during this time any funds collected by will be credited back to the consumer's account upon request. In the event of unauthorised direct debit collections, the consumer's right to a refund extends to thirteen months as stipulated in the PSD. An unauthorised collection is a collection which is not covered by a mandate. The latest day for the settlement of a refund transaction is two inter-bank business days after the date on which the deadlines specified above come to an end.
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 IT 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 on a specific day when this day is a public holiday in the country. 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 Core Scheme also defines timelines applicable to the execution of 'R-transactions' such as, for example, rejects and refunds. These timelines will be described in a separate article addressing 'R-transactions' scheduled for publication in a future edition of the Newsletter.
New optional element introduced into updated version of the Core Rulebook allows for shorter timelines
In November 2011, the will publish updated versions of the Scheme Rulebooks. The updated versions will then take effect in November 2012. The Core Rulebook version 6.0 includes the possibility to use a shorter time cycle for the presentation of both first and recurrent direct debit payments by allowing the biller's bank to send the payments to the payer's bank at least one inter-bank business day prior to the due date. This option caters for the needs of certain businesses which require a shorter time cycle for direct debit payments than the standard cycle. It allows for time critical business transactions, e.g. security related transactions and insurance collections for example. It should be noted that all participating in the Core Scheme must continue to support the standard time cycle of the Core Scheme, irrespective of any agreements to use the new optional time cycle.
Billers should contact their bank to learn more about the possibilities to use these shorter timelines, as certain banks or communities of banks may accept to operate also under these timelines, while other banks may not support this option.
Javier Santamaría is the Chair of the Payment Schemes Working Group. Herman Segers is a former Secretary General of the . He 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:
Related articles in previous issues:
SEPA Direct Debit for Billers: the Creditor Identifier (Go Get It!) ( Newsletter, Issue 11, July 2011)
Direct Debit: Killing it Softly. Reflections on the likely demise of one of the most popular payment instruments in Europe ( 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)
SEPA Survey 2009: Corporate Readiness on the Rise - The findings confirm that early movers have everything to gain ( Newsletter, Issue 5, January 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 (money) and messages between two payment service providers () 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.
6Directive 2007/64/EC of the European Parliament and of the Council of 13 November, 2007 on payment services in the internal market is generally referred to as the Payment Services Directive (PSD). The PSD was implemented by most European Union (EU) Member States by 1 November, 2009. The PSD aims at establishing a modern and comprehensive set of rules applicable to all electronic payment services - not just services - in the EU.
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