SEPA Direct Debits
1. Term and function
SEPA direct debits is the term for two pan-European direct debit schemes (one core scheme and one special business to business scheme) for collection of euro-denominated payments developed by the European Payments Council (EPC) that have been offered to customers since 2 November 2009. The EPC is a decision making and coordinating body of the European banking industry (European banking market) with regard to payment services. The EPC was founded because the banking industry shared the European Commission’s vision of SEPA, a Single Euro Payments Area, which stands for a common European market for cashless payments similar to the one the euro created for cash transactions with the introduction of the euro notes and coins on 1 January 2002. SEPA’s goal is to enable customers to conduct cashless euro-denominated payments from a single payment account with just one set of payment instruments within the area’s borders as easily, safely and efficiently as national payment instruments allow them to do. Geographically, SEPA currently includes the EU/ EEA Member States and Switzerland.
An important payment instrument of cashless transactions in many European states is that of direct debit. Passed in 2007, the Payment Services Directive (PSD, Dir 2007/64) defines direct debit in Art 4(28) as a ‘payment service for debiting a payer’s payment account, where a payment transaction is initiated by the payee on the basis of the payer’s consent given to the payee, to the payee’s payment service provider or to the payer’s own payment service provider’.
The initiation by the payee can have considerable advantages compared with credit transfers (bank transfers (cross-border)) especially when considering recurrent payments (recurring obligations) with changing amounts or time intervals. As most payments initiated by the debtor are not delayed for financial reasons but because of the debtor’s forgetfulness or bad paying habits, the creditor benefits from more punctual payments. Furthermore, because most creditors are companies, which tend to initiate the collection process electronically more often than private customers, payment transactions will be carried out more efficiently and less expensively. The payer thus benefits from less work but also bears the risk of fraudulent collections. In order to mitigate this risk, direct debit schemes protect the debtor in different ways.
2. Previous significance of direct debits in Europe
In contrast to credit transfers (bank transfers (cross-border)), no binding European law for direct debits existed before the PSD came into force. Instead, the direct debit schemes were developed independently in every European country. On average, 30 per cent of the cashless transactions in the euro area in 2008 were made by direct debits, but national use varied greatly (eg Germany: 50 per cent; France: 19 per cent; Italy: 14.5 per cent; Greece: 9.5 per cent). Direct debit schemes were rarely regulated by a special body of law but rather by national interbank agreements and contracts between certain parties. Moreover, national court decisions influenced the development of direct debit schemes as well.
In 2003, on behalf of the European Commission, a study (the so-called Landwell Report) compared the direct debit schemes used throughout the then 15 Member States of the European Union. The Landwell Report identified that most national direct debit schemes relied on a unique mandate that was initially granted by the debtor to the creditor and provided that the creditor was not required to seek the debtor’s authorization for subsequent direct debit transactions (so-called pre-authorized direct debits). Moreover, one had to separate the authorization of the creditor from the authorization of the payment service provider (PSP, generally a credit institution, see Art 4(9),1(1) PSD) of the payer. However, in some direct debit schemes the authorization of the payer’s PSP was already included in the payment mandate granted by the debtor to the creditor (so-called indirect authorization). Instead, other direct debit schemes required a separate statement of the payer authorizing the payer’s PSP to allow direct debits from the payer’s account (direct authorization). Direct authorization schemes could be divided into those with authorization prior to the payment transaction and those with authorization afterwards.
National direct debit schemes differed from each other not only with regard to authorization but also to refund rights. Although many schemes provided a refund right for the payer to mitigate the risk of fraudulent collections, the designs were different. Aside from one separate scheme designed specifically for cross-border collections in Austria, all direct debit schemes allowed only domestic collections. Although some PSPs offered cross-border collections by using foreign subsidiaries and bilateral agreements, these agreements were complex and expensive. Additionally, because creditors typically did not know their rights and obligations in a foreign direct debit scheme, cross-border collections were virtually non-existent.
3. European harmonization of laws
In the course of a progressing European integration process, the European Commission in particular viewed the non-integrated payment services market as an obstacle for the European internal market and demanded a unified legal framework. The answer to this demand came in the form of the PSD, which had to be implemented by the Member States by 1 November 2009. The PSD is mainly characterized by a full harmonization concept (Art 81 PSD) and applies basically to all payment services within the European Community (see Art 2 PSD, but see also the exceptions in Art 3 PSD). The PSD does not distinguish between the different types of payment instruments, but combines them under the single term of ‘payment service’ and attaches general regulations to this term. In general, the parties involved are not allowed to deviate from the provisions of the PSD to the detriment of the payment service users unless this is explicitly allowed (Art 86(3) PSD).
The relevant provisions of the PSD for direct debits seek to increase transparency with respect to payment conditions and information requirements (Title III) and to realize the harmonization of rights and obligations in relation to the provision and use of payment services (Title IV). While the PSD contains detailed and binding rules for the execution of payment transactions and liability thereof (Title IV, Chapter 3), it merely provides broad guidelines regarding the terms of payment authorization—an essential element of direct debit transactions. According to Art 54 PSD the payer and the payer’s PSP are free to agree when and how the payer can authorize the payment transaction. In the case of an unauthorized payment transaction, the payer may obtain rectification if the payer notifies the PSP without undue delay upon becoming aware of any unauthorized transactions but no later than 13 months after the debit date (see Art 58 PSD). Furthermore, the PSD reduces the significance of authorizing payments because under certain circumstances the payer can even claim a refund if the payment transaction is authorized (Art 62 PSD). Particularly important for direct debit schemes are Arts 62(2) and 63 PSD, whereby the payer and the payer’s PSP may agree in the framework contract that the payer is entitled to an unconditional refund for a period of eight weeks after the funds have been credited.
The EU intentionally provided the leeway with respect to the acceptance of payment authorizations in order to preserve current national direct debit schemes and to allow the process of harmonizing the law to be divided into several steps. The European Commission delegated the task of formulating the exact design of a pan-European direct debit scheme to the European banking industry (private rule-making and codes of conduct). To this end, the industry formed the European Payments Council (EPC) in June 2002. The EPC is a private association of European banks and European credit sector associations formed under Belgian law. The EPC developed two independent rulebooks featuring two direct debit schemes. Besides a general SEPA core direct debit scheme, the EPC designed a special SEPA business to business (b2b) direct debit scheme, which is only applicable to b2b collections. To participate, a payment service provider must sign an adherence agreement that binds all participants to the terms of the applicable rulebook. The provisions of this multilateral contract, which only sets forth the rights and obligations of the participants and the EPC, will be governed under Belgian law.
4. Main characteristics of SEPA direct debits
In order to use SEPA direct debits for euro-denominated payments, creditors as well as debtors must have a PSP that participates in the SEPA direct debit scheme. Since the contract with the PSP is a framework contract in the sense of Art 4(12) PSD, the PSP must observe particularly the information requirements of Title III PSD. According to the SEPA Rulebooks, the PSP is also obligated to ensure that the agreement with the payment service user is consistent with the applicable rulebook. Thus, obligations that are assigned to the payment service user by the rulebooks become binding for the payment service user.
Before a creditor is allowed to collect a fund, the debtor must grant the creditor a SEPA mandate. The mandate not only allows a creditor to initiate direct debits from the specified debtor’s account, but also allows the debtor’s PSP to comply with such instructions in accordance with the rulebook. Therefore, SEPA direct debits are pre-authorized. Since the mandate also includes the authorization of the payer’s PSP, the mandate constitutes an indirect authorization prior to the payment transaction in the sense of Art 54 PSD as well. In the case of the SEPA b2b direct debit scheme, debtors must also confirm with their PSP that they granted a mandate to a particular creditor. Therefore, the SEPA b2b direct debit scheme contains an element of a direct authorization.
The mandate document is standardized in content and form. The information contained in the mandate must include, but is not limited to, an identification number of the creditor (‘creditor identifier’), which is independent from a certain payment account, and a unique mandate reference number to ensure the precise identification of each transaction. In terms of the form, the mandate must be paper-based and physically signed by the debtor. Alternatively, the mandate can be generated electronically on specific conditions made by the SEPA Rulebooks (e-mandate). When the mandate is paper-based, the data elements of the signed mandate must be dematerialized by the creditor to enable a fully automated processing without manual intervention of the transaction (so-called ‘straight through processing’).
Prior to the collection of the fund, the creditor must notify the debtor of the amount and due date. The pre-notification must be sent at least 14 calendar days before the due date unless another timeline is agreed upon between the two parties. Afterwards the creditor is allowed to send the instruction of collection to the creditor’s PSP, but as a rule not earlier than 14 calendar days before the due date. The collection instruction signifies a payment order in the sense of Art 4(16) PSD, which the PSP must transmit to the payer’s PSP within the time limits agreed upon between the payee and its PSP, enabling settlement on the agreed due date (see Art 69(3) PSD). To transmit the payment order, the PSP of the creditor may select a clearing and settlement mechanism such as an automated clearing house or intra-group arrangement. The SEPA Rulebooks clearly define the transmitting time limits. For a first or one-off SEPA core direct debit, the payee’s PSP is obligated to ensure that the payer’s PSP receives the collection at least five inter-bank business days before due date. If subsequent collections occur in a series of recurrent collections, the minimum time limit is reduced to two inter-banking business days. The time limits are supposed to enable the payer’s PSP to offer the payer an additional optional service (AOS), by confirming the payment’s validity, because normally neither the PSP of the payee nor that of the payer checks whether a mandate really exists. In the case of SEPA b2b direct debits, the payer’s PSP must receive the payment order at least one inter-bank business day before due date. The payer’s PSP then checks whether the payer has confirmed the mandate. Additionally, both schemes allow the payer and the payee to revoke the payment order or rather the authorization for up to one business day prior to the agreed due date (see Arts 66, 54(3) PSD).
If the payer’s credit balance or credit limit are sufficient to debit the fund, the payer’s PSP must, as a rule, execute the payment order, as the payment order is already authorized through the mandate (see Art 65(2) PSD). Therefore, the payer’s PSP debits the account of the payer for the amount of the order on the due date. According to the SEPA Rulebooks, as a general rule, inter-bank settlement occurs on that same day. Articles 69(2) and 73 PSD stipulate that the payee’s PSP ensures that the amount of the payment transaction is at the payee’s disposal immediately after the amount is credited to the payee’s PSP’s account and the credit value date is no later than that business day on which the payee’s PSP account is credited. This concludes the payment transaction. Nevertheless, the payer is contractually entitled to request a refund on a no-questions-asked basis for any SEPA core direct debit within eight weeks from the date on which the amount was debited from the payer’s account (see Art 62(2) PSD). The PSP of the payer must immediately credit the payer’s account for the amount of the collection and is entitled to obtain a refund compensation from the PSP of the payee afterwards, which in turn is allowed to debit the payee’s payment account for the same amount. After that period of eight weeks or, in the case of a SEPA b2b direct debit with no right of such a refund, the payer can only make a claim for a refund of an unauthorized payment transaction (see Art 58 PSD).
The SEPA core direct debit scheme is suitable for exploiting the advantages of direct debits for cross-border payment transactions. The payer is sufficiently protected by the refund right for eight weeks without disclosing a reason, which renders the payer’s optional protection prior to the transaction, ie the time limits for turning in the payment orders, unnecessary as a practical matter. While this optional protection might be helpful to instil confidence in SEPA direct debits, especially during the transition phase, this type of protection also makes the scheme more complicated and less efficient. As such, the SEPA core direct debit scheme might protect the debtor too much, yet the SEPA b2b direct debit scheme affords insufficient protection of the debtor, which could prevent extensive use of this latter scheme. If an authorized creditor collects excessive amounts, the debtor must go to the creditor directly—outside the scope of the direct debit scheme—in order to demand a refund of the unduly withdrawn funds. This can be very problematic especially in cases of cross-border transactions. Thus the b2b scheme only seems well-suited in cases where the debtor has high confidence in the creditor.
While the PSD and the SEPA direct debit schemes constitute a de jure set of common rules for direct debits throughout Europe, it is imperative for the de facto implementation of these rules and the creation of a unified market for payment services that the customers actually use the SEPA direct debits. To promote the use of SEPA direct debits, the European Commission enacted the Regulation on Cross-Border Payments (CBP, Reg 924/2009) (regulation) and specified specific actions in the Communication ‘Completing SEPA: a Roadmap for 2009–2012’ (Roadmap, COM(2009) 471). For SEPA direct debits, several provisions are of particular relevance: because especially excessive prices could prevent a wide use of SEPA direct debits, Art 3 CBP dictates that charges levied by a PSP on a payment service user in respect of cross-border payments of up to €50,000 must be the same as the charges levied for corresponding national payments of the same value and in the same currency. The Commission will observe the impact of SEPA on consumers through a benchmarking study until mid-2011 and is willing to take appropriate remedial actions if SEPA leads to negative price developments. With regard to interchange fees, which are common in some European countries, Art 6 CBP determines that a multilateral interchange fee of €0.088 must be paid by the payee’s payment service provider to that of the payer for each cross-border transaction executed before 1 November 2012, unless a lower multilateral interchange fee has been agreed upon. For the subsequent period, the Commission has assigned the task of developing and implementing a long-term business model to the EPC. In a joint statement, the Commission and the European Central Bank have provided some guidelines for this model.
To ensure the success of SEPA direct debits, it is essential that payers’ accounts are reachable for such transactions. To achieve this, the CBP requires that a payer’s account that is reachable for a euro-denominated national direct debit transaction must also be reachable for a SEPA direct debit since 1 November 2010. If a Member State does not have the euro as its legal currency, this time limit is extended to 1 November 2014 (see Art 8 in conjunction with recital 12 CBP).
The Commission desires further actions to promote the change to SEPA direct debits. To this end, the Commission has asked the banking industry to find solutions that will transform national mandates into SEPA mandates without losing their validity. If this cannot be done within the realm of civil law, the Member States have been called upon to take the necessary actions to ensure the legal validity of old mandates under the SEPA Rulebooks.
As the migration process to SEPA schemes is still slow, the European Commission finally proposed a new regulation (COM(2010) 775) in December 2010 which has been subject to an intensive discussion. According to this proposal, interbanking fees would be generally prohibited apart from cases of rejected, refused, returned or reversed payment orders (see Art 6). But most notably: all euro denominated direct debits carried out 24 months after the regulation came into force would have to fulfil technical requirements set out in the Annex (see Art 5). As these requirements are geared towards SEPA payment instruments, the regulation would mean the end of the current national direct debits schemes.
In any case, the developments in the field of (SEPA) direct debits remain interesting and worth following.
Bogaert and Vandemeulebroeke, Study on Harmonisation of the Legal Framework for Cross-border Direct Debit Systems in 15 Member States of the European Union (2003) (so-called Landwell Report); Roger Dippel, Mareike Lohmann and Norbert Peschke, SEPA (2008); Mareike Lohmann, Die grenzüberschreitende Lastschrift (2008); Benjamin Geva, ‘Payment Transactions under the EU Payment Services Directive: A US Comparative Perspective’ (2009) 27 Penn St Int’l L Rev 713; European Central Bank, ‘Oversight Framework For Direct Debit Schemes’ (2009) <www.ecb.int/pub/pdf/other/oversight frameworkdirectdebitschemesen.pdf>; Stefan Grundmann, ‘Das neue Recht des Zahlungsverkehrs’ (2009) WM 1109, 1117, 1157, 1064; Centre for European Policy, ‘Single Euro Payments Area (SEPA)—A Roadmap For 2009–2012’ (2009) <www.cep.eu/fileadmin/user_ upload/Kurzanalysen/SEPA/KA_SEPA_Engl.pdf>; Agnieszka Janczuk, ‘The Single Payments Area in Europe’ (2010) 16 Colum J Eur L 321.