Direct Debits

The SEPA Direct Debit is scheduled for launch in Nov 2009.  It will enable users to pay bills across national borders.  The SEPA Direct Debit (SDD) is a new form of direct debit. It will be available on request initially. From that date, all banks in the SEPA area must be able to accept incoming SDDs on behalf of their payer customers, and post those transactions as appropriate. Many banks should be able to accept and process files of SDD transactions created by their payer customers. A Pan-European Automated Clearing House Debit Clearing system will be operational.

SDD will cover both one-off payments and recurrent payments. The one-off version may have a particular significance in Ireland as a substitute for cheque payment. It may also have application for payment for online purchases:

• SDD will offer services throughout the SEPA area, provided that the transaction is denominated in euro.
• It will have a comprehensive set of rules for rejected or returned payments.
• It will be supported by new legislation.
• Many of the operating procedures for originators are quite different.
• Within the banking industry, significant new infrastructures are required

For Irish users, there are some downsides. Firstly, the authorisation mandate (the Direct Debit Instruction), which traditionally in Ireland had a very simple structure will be replaced by a much more complex legal document. Secondly, the signatureless direct debit (Direct Debit plus) which can be authorised over the phone will be replaced by an online authorisation requiring a very secure interface.

• SDD will come in two variations, and a third is being contemplated:
• In the first model, the payer gives a direct debit authorisation (mandate) to the payee company
• In the second model, the payer gives a direct debit authorisation (mandate) to his bank
• The third model (if developed) is specifically designed for business-to-business transactions

After 2008, there will be parallel operation of domestic and SEPA direct Debits. There will be pressure on the banks, however, to migrate domestic direct debits to SEPA direct debits. It is unclear how the migration will be done. However, in the long term, it is unlikely that two systems will continue to provide the same service. A migration from the old to the new is inevitable. For the migration, there are some major unknowns:

• Will the existing DD mandates be legally convertible and enforceable, or will new mandates be required?
• How can the IBAN and BIC information be assembled for the SEPA. Will payers have to seek these from payers individually. This author believes that a central file of account numbers and IBAN numbers can be created and made available
• Many direct debit originators will find it difficult to justify the expense of changing over to SEPA direct debit, particularly those who operate solely in Ireland. Direct debit management is likely to be increasingly outsourced to specialist payment systems operators.