26 February 2014
E-mandates in the era of SEPA
E-commerce continues to grow and with the introduction of SEPA customers can buy and pay for products throughout the entire SEPA zone. The payment method for online shopping is Direct Debit, which is easy to use and cost-effective. Mandates for these direct debits have been widely used, but were limited to national payments. With the introduction of SEPA, direct debits turn into SEPA Direct Debits, but the national mandates can’t be used across borders. This calls for a SEPA e-mandate.
Delay with paper mandates
Before the introduction of SEPA, buying products in other countries with direct debits was a devious process. In order to make a purchase with a direct debit, customers had to sign mandates manually on paper so that the creditors bank could collect the money from the bank of the debtor creating significant delays. The printed document had to be signed, posted to the bank and the bank had to send it back to be verified. If the customer signed the mandate immediately, the process took at least three to five days and was expensive due to manual activities.
With commerce now on the Internet, speed is essential. Customers want to buy products instantly, without any difficulties or delays regardless of the time or day of purchase. E-mandates are the key to a fully automated payment processing. These mandates are created through the use of electronic channels, for example smartphone’s or the Internet.
A fully electronic way
According to the European Payments Council, e-mandate is an optional feature complementing the core SDD scheme. E-mandates allow debtors and creditors to exchange mandates in a fully electronic way, presenting advantages for debtors, creditors, creditor banks and debtor banks. The advantages for creditors include:
- The solution allows fully automated end-to-end processing of e-mandates including issuing, amendment and cancellation of such mandates while eliminating the need to deal with a multitude of local, technical or organisational barriers
- The e-mandate is agreed on in a secure way
- The confirmation of the debtor’s right to access the account is specified by the debtor bank
- The e-mandate process allows automatic storage and retrieval of e-mandate data
The advantages for debtors include:
- The debtor avoids the inconvenience of printing, signing and mailing a paper form to the creditor by using a fully electronic process instead
- The e-mandate facility is based on secure, widely used online banking services of the debtor bank; the debtor, therefore, can simply rely on the online banking procedures he is already familiar with
Various forms of e-mandates
E-mandates make it easier to shop in a larger international market. For banks it’s painless to manage e-mandates as opposed to paper mandates. Although, e-mandate have a lot of advantages the solution isn’t implemented yet throughout the SEPA zone. Some countries have their own solution (for example, iDeal in the Netherlands and Einzugsermächtigung in Germany) but e-mandates still lack a general SEPA solution. Several providers are investigating the possibilities of e-mandates because there are various forms of the electronic mandates.
Fraunhofer IAO, Europe’s largest application-oriented research organisation, recently published a whitepaper on the subject of e-mandates. In the whitepaper various types are investigated and compared. The white paper compares alternatives:
- E-mandate solutions based on the 2-corner model, which include processing by the debtor and the creditor only
- E-mandate solutions based on the 3-corner model, which additionally include processing by the debtor’s bank
- E-mandate solutions based on the 4-corner model, which additionally include processing by both the debtor’s and the creditor’s bank
According to the whitepaper:
“Two-corner model-based solutions (the mandate is issued directly between creditor and debtor, for example with scanned paper mandates) are universal, but also more risky for debtor and creditor banks as they are not involved in the mandate creation process. The fact that the mandate has to be filled by the debtor is also a source for possible errors, or even fraud. Three-corner model solutions can mitigate these risks by involving, in some cases, the debtor bank. Their reach is then however limited as the solution needs to be supported by the debtor bank. Finally, four-corner model solutions guarantee that all four involved parties are informed in real time of the issuance of an e-mandate, thus reducing the risks of invalid mandates to a minimum. At the same time, both debtor banks and creditor banks need to actively participate in the solution.”