With less than ten months left, migration is entering its most critical stage. End-users, such as public administrations and businesses, big and small, have to get ready for the SEPA payment instruments, otherwise they risk refusal of transfers by payment service providers from 1 February 2014. This is one of the key messages in the Eurosystem's first SEPA Migration Report published in March 2013. The Eurosystem is comprised of the European Central Bank and the national central banks of the European Union Member States whose currency is the euro. The report describes the state of play of the migration process in euro area countries and provides guidance on critical aspects of the transition process. The report stresses that late migration is highly undesirable in projects like SEPA, where many technical details need to be reflected in end-users' back-office systems and internal processes. The Eurosystem therefore strongly advocates that all payment service providers have their customer servicing channels ready for SEPA transactions by the end of the second quarter of 2013 and that all other stakeholders, including 'big billers', public administrations and small and medium-sized enterprises, migrate at the earliest stage possible, preferably by the third quarter of 2013 at the latest. This approach avoids risks which otherwise could impact the wider supply chain and would put the SEPA migration at risk. In this article, Wiebe Ruttenberg, Head of the Market Integration Division in the Directorate General Payments and Market Infrastructure of the European Central Bank, summarises the main findings of the report.
Key Information in this Article
The ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro’ effectively mandates migration to SEPA Credit Transfer () and SEPA Direct Debit (SDD) in the euro area by 1 February 2014.
There is no plan B: migration to SCT and SDD is required by law, not only for payment service providers, but also for payment users like big billers, small and medium-sized enterprises (SMEs), public administrations and consumers.
Operating outside the law is not an option, neither in terms of reputation nor from the business perspective. The ability to initiate payments would come at a higher cost, and reconciliation would become more problematic.
Payment service providers will be obliged to refuse further processing of payments that are not delivered to them in the right technical format after the 1 February 2014 deadline applicable in the euro area.
Ignoring the risks of non-compliance, including the hope of a slow response on the part of the responsible authorities, would be a mistake.
The SEPA migration deadline, in February next year, is not the final stage in the development of retail payments. Changes and tangible benefits will become more pronounced over time, for instance by way of innovative services.
How the Eurosystem assesses migration progress
From the first days of their launches in 2008 and 2009, the Eurosystem, which is comprised of the European Central Bank and the national central banks of the European Union Member States whose currency is the euro, has been monitoring the migration to the Credit Transfer () and the SEPA Direct Debit (SDD) Schemes by means of quantitative indicators that cover both the euro area perspective and the national dynamics. More recently, the Eurosystem has also established a set of qualitative indicators on the level of preparedness of the main stakeholder groups within each country. These qualitative assessments are performed on a best effort basis by the national central banks.1 (To view the quantitative and qualitative SEPA indicators, refer to the 'related links' below). On 21 March 2013 the Eurosystem published its first report on the migration to SEPA (see 'related links' below). It describes the state of play of the migration process in euro area countries towards the creation of a single market for credit transfers and direct debits in euro across Europe, and provides guidance on the management of the transition process.
Good progress on SCT migration
All in all, SCTs are gaining good ground. The SCT Scheme's relative simplicity in terms of the technical and contractual set-ups, its similarities with legacy schemes and its XML-conversion suitability have helped migration rates to increase. The use of SCTs accounted for 38.2 percent of the total credit transfer volume in the euro area in February 2013. The early preparedness at the interbank level, supported by SEPA-compliant infrastructures2, as well as the early migration to the SCT Scheme by public administrations, have both played a crucial role. The preparedness for the SCT Scheme is, in general, more advanced than for the SDD Scheme. However, more progress needs to be made in terms of proper end-to-end usage of ISO 20022 message formats.
Looking at the national migration data, Slovenia and Finland seem to be the most advanced. Also, Belgium is already relatively well prepared. In other markets, the situation is very dynamic and preparations are on-going. Moreover, some countries have opted for temporary derogations with regard to specific technical issues. It would be very difficult to identify lagging countries at this stage, although it is clear that some countries tend to migrate faster than others.
The challenge of timely SDD migration
The SDD Scheme thus far fails to capture a substantial volume of transactions. The use of SDDs accounted for 2.3 percent of the total direct debits in the euro area in February 2013. Apart from Slovenia, which has already migrated to the SDD Scheme, none of the other countries are close to completing their migration projects, including those with largest direct debit markets. Given the popularity of legacy direct debit payment instruments in certain countries, the materialisation of risks related to a late migration could damage the reputation of the new direct debit scheme, which could then be difficult to restore. This is a source of concern for the Eurosystem.
There is a combination of reasons for the slow uptake of the Scheme. In many cases, it can be attributed to the substantial workload associated with the technical and contractual issues surrounding the scheme. It could also be due to budgetary reasons - for example, the need to prevent the costly parallel maintenance of duplicate systems. Stakeholders in some countries (e.g. Germany, Spain and Austria) are also anticipating more advanced business offerings, for example, faster SDD collection cycles. However, in some of the other cases, the tendency to postpone migration to the last possible moment seems to be due to the matter being a low priority.
Late migration is risky
In SEPA, many technical details need to be reflected in end-users' back-office systems and internal processes. Projects of this kind should not be left to the very last moment. In some cases, companies could even face the risk of some level of disruption in their handling of payment orders. Everyone should bear in mind that there will be limited capacity on the side of payment service providers () and software vendors at the end of 2013, meaning that some migration projects could lack the resources for proper execution. These bottleneck risks, even though of an operational nature, could eventually affect the wider supply chain and even jeopardise the public's confidence in SEPA payment instruments. Therefore, the Eurosystem strongly advocates that all stakeholders, including big billers, public administrations and small and medium-sized enterprises (SMEs), migrate at a relatively early stage, preferably by the third quarter of 2013 at the latest.
PSPs - still some to-dos left
From today's perspective, meeting the migration deadlines does not seem to be problematic for PSPs. However, there is some urgency to complete PSPs' preparations as soon as possible because preparations by end-users depend on them. In particular, PSPs are not fully prepared for making customer servicing channels, associated with payments initiation and cash management services, ready for SEPA transactions or for ensuring the availability of consumer protection measures to debtors. It is in the interest of PSPs to be fully prepared as soon as possible. In this view, the Eurosystem sees the end of the second quarter of 2013 as the crucial deadline.
Being at the heart of retail business, PSPs should also devote sufficient resources to familiarising end-users with the technical, business and contractual issues relating to migration, as well as to explaining how consumers' protection measures, established under the legal framework, could be exploited. The public's confidence in SEPA, in general, and in the SDD Scheme, in particular, is of utmost importance and is a precondition for a smooth transition process.
Preparedness of end-users - a mixed, yet dynamic picture
Most of the big billers have already completed the planning phase and know what SEPA will mean for them in practical terms. However, when it comes to the actual implementation of the schemes, a number of corporates seem to have postponed their internal deadlines, even as far as the end of 2013.
Public administrations, and, in particular, central administrative authorities have taken the lead when it comes to SEPA migration, and, in many cases have already completed the migration process to the SCT Scheme. Most public administrations either use direct debits to a rather limited extent or not at all. Therefore, they are unable to provide the market with the same kind of impetus as for the SCT Scheme. The main migration challenges, however, lie on the side of municipalities or regional authorities, owing to a pretty low level of awareness of the SEPA project. The same is true with regard to their preparedness.
SMEs are very much dependent on the availability of SEPA-compliant software solutions developed by IT vendors and customer servicing channels developed by PSPs. It is, however, worrying that SMEs' awareness of SEPA is still fragmented and the level of preparedness is rather poor. Owing to their usually low individual market power, SMEs could be faced with somewhat higher fees for conversion services being offered by their PSPs or by other third parties.3 Also the everyday finances of SMEs could be specifically challenged by any level of payment disruption caused by bottlenecks at the end of the migration period.
There is no plan B
Migration to SCTs and SDDs is required by law: not only for PSPs, but also for big billers, SMEs, public administrations and consumers. Operating outside the law is not an option, neither in terms of reputation nor from the business perspective. The ability to initiate payments would come at a higher cost, and reconciliation would become more problematic. Moreover, after the migration deadline, PSPs will be obliged to refuse further processing of payments that are not delivered to them in the right technical format. Therefore, ignoring the risks of non-compliance, including the hope of a slow response on the part of the responsible authorities, would be a mistake.
The end date is not the final destination point
The SEPA migration deadline in February next year is one important milestone, but by far not the final stage in the development of retail payments. Changes and tangible benefits will become more pronounced over time, for instance by way of innovative services. SEPA may also trigger further improvements in processes and workflows, for example by exploring the possibility of using e-invoicing across Europe. Moreover, the SEPA roadmap also encompasses card payments. The industry, supported by the public authorities, is working on further steps to harmonise this important market. Let us recall the goal of SEPA, as defined more than a decade ago: making cashless payments in euro, across Europe fast, safe and efficient. We still have a long way to go, of course, even after February next year; however, we are on good course.
Wiebe Ruttenberg is Head of the Market Integration Division in the Directorate General Payments and Market Infrastructure of the European Central Bank (ECB). The author would like to thank Sarunas Grigas and Monika Hartmann for their substantial contribution to this article.
The views expressed in this text are those of the author and do not necessarily reflect the views of the ECB.
Related articles in this issue:
Learn to Love SEPA: the 1 February 2014 Migration Deadline Mandated by European Union Law Will Not Go Away. The focus must now be on joining forces to ensure that every market participant in the euro area required to achieve SEPA compliance will meet this deadline
If You Have Not Migrated to SEPA Yet - Get Ready and Get Inspired: SEPA Pioneers on the Demand Side Share Best Practice. The SEPA deadline will not move from 1 February 2014 so act today to ensure your compliance
UNION TANK Eckstein: "SEPA Credit Transfer and SEPA Direct Debit Allow Everyone to Do More and Better Business across Europe". This company looks forward to 1 February 2014 when migration to SEPA will be completed in the euro area
Related articles in previous issues:
1 Quantitative indicators: http://www.ecb.europa.eu/paym/sepa/about/indicators/html/index.en.html. Qualitative indicators: http://www.ecb.europa.eu/paym/sepa/about/countries/html/index.en.html.
2 Infrastructure (or an interbank funds transfer system) is a formal arrangement based on private contract or law, with multiple membership, common rules and standardised arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between the members, in which all (or almost all) participants are credit institutions.
3 In a post-migration environment (February 2014 or February 2016 respectively), PSPs could still offer conversion services, provided that these services are operationally fully independent from all subsequent payment services offered by that PSP. The conversion would practically take place prior to the "receipt" of the payment instruction by the PSP.
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