16 January 2013
‘German businesses are attached to short payment cycles’ (part 1)
As Europe’s largest economy Germany is used to being watched closely. The same goes for the preparations for SEPA. How is Germany coming along? What issues are there and what do we need to know about specific rules and exceptions in their payments market?
An interview with Jochen Metzger, head of the payments and settlement systems department at Deutsche Bundesbank sheds some light on the German situation.
On a scale of 1 to 5, how would you rate the implementation pace in your country (1 = worrying, 2 = slow but we will get there, 3 = could be better, 4 = satisfactory, 5 = good)?
In general, I have to say that payment service providers are actually quite on track to migrate in due course. On the other hand, end users (consumers and corporates alike), still have quite a long way to go. I would rate the implementation in Germany at a 3: it could be better.
Can you elaborate on this score? What are the main reasons for this adoption pace?
The market-driven approach that we have followed in the early days of SEPA has not been very effective. The use of SEPA was extremely limited in the beginning because the end date was not defined yet, which made it difficult to set people in motion.
Germany is a big market; therefore most financial transactions are domestic. A complicating factor is that a lot of German banks are involved, which makes it more difficult to coordinate efforts than for example in countries like Luxembourg or Finland.
We also encountered some specific issues around legacy mandates for direct debits. Direct debits are quite popular in Germany and they are not only used to pay utility or phone bills, but also for shopping. A shop owner needs a mandate to debit money from your account and currently mandates follow the national scheme.
SEPA Direct Debit (SDD) is quite similar to the German scheme, but not the exact same. For a long time there was no answer to the question of how collection authorizations pre-issued for execution via the German direct debit scheme (“Einzugsermächtigungslastschriftverfahren”) could be adapted for use as the SEPA direct debit mandate. The Federal Court of Justice outlined a way forward for the banking industry to convert existing collection authorizations and thus making them compatible with the SEPA direct debit mandate. By amending the general terms and conditions that apply to the relationship between the payer and his payment service provider this makes them compatible. The banking industry made the necessary changes to its sector’s general terms and conditions and these modified conditions became effective on July 9th 2012. The concerns of some important users of the direct debits have therefore been relieved.
Another issue in Germany was the time cycle for SEPA Direct Debit. For most German companies it is very important to manage their liquidity. The standard transaction time cycle for SEPA Direct Debit is D-5 and D-2. This means, an initial or one-off direct debit should be entered at least five business days before the due date, for subsequent direct debits this is two days.
For German businesses, this is very uncomfortable, because they are used to much shorter timelines. Fortunately, from November 2013 onwards, the German banking industry agreed to offer D-1 in addition to D-2/D-5, which is extremely close to what we have now as national scheme. This clearly improves the efficiency of SEPA Direct Debits. On the other hand this could bear the risk that users will prefer to wait for the migration to SEPA Direct Debits until D-1 is available. That date is only a few months before the SEPA migration end date February 1st 2014. To avoid this trouble, migration has to start today rather than tomorrow.
In general, you could say that large corporates are well prepared for SEPA, but smaller and medium sized businesses are just starting the process.