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Analysis: ‘SEPA: better late than never?’

Cards Standardisation Volume and SEPA Rulebooks receive small updates

Marcel Woutersen

Senior Communications Consultant

26 February 2014

Analysis: ‘SEPA: better late than never?’

This blog post is written by freelance consultant Edith Rigler. She has over 25 years experience in senior positions at global banks. 

About three weeks before the so-called SEPA end date (1st February 2014) a 6-month extension of this end date has been proposed. Seldom has a payments topic caused such attention in the media and resulted in so many positive and negative reactions.

What happened?

Many banks, corporates and public authorities are currently working hard to reach the SEPA end date of 1st February 2014 by complying with the SEPA rules, formats and standards. But fact is that the migration has been disappointing.  As of November 2013, some 64% of all credit transfers within the euro area were SEPA-compliant but only 26% of direct debits were made in SEPA format. In general, these figures might not look too bad. But they are averages for the whole euro area and vary significantly by country – some countries have completed their migration, a second group is making good progress, and a third group is lagging far behind. Migration progress also differs widely by type of stakeholder, i.e. whether one looks at banks, large or small corporates, associations or public authorities. The financial consequences of not becoming SEPA-compliant on time have been discussed widely: liquidity constraints might occur in cases where businesses would not be able to collect via direct debit; payment delays could mean that salaries cannot be paid resulting in consumers’ inability to pay for their mortgages, business bankruptcies might follow, etc. etc.

The proposal of the European Commission

Considering the low migration pace in some countries the European Commission concluded that “it was unlikely that the SEPA migration will be fully completed on 1 February 2014”. Moreover, since  the SEPA end date meant that payments in non-SEPA format were to be rejected by banks, the Commission stated that “market disruptions could not be excluded” which might affect payment service users, and particularly SMEs and consumers.  As a result, on 9th January 2014, the  Commission proposed to amend the SEPA Regulation of 2012 by extending the end date for a limited period of 6 months. In other words, the current 1st February 2014 end date would be replaced by a new end date of 1st August 2014. Stakeholders which are not SEPA-ready yet would not have their payments rejected until 1st August 2014. They would be able to make payments in the “old” legacy format. The proposal also states that the extension is considered as an “exceptional measure which will not be extended any further”.

The reactions to the proposal

At current, the Commission proposal is indeed just a proposal and has not been adopted yet. Normally, an 8-week period must elapse between a draft legislative act and the date of adoption. In this case the Commission has asked the EU Parliament and the EU Council for “absolute urgency”, to reach final approval. It seems fairly certain that that will indeed happen.

The Commission proposal came as a surprise to many, including banks and central banks. And the reactions of the media were immediate, critical, outspoken. TV stations reported on the subject, newspapers ran headline articles, associations commented, central banks and banking associations issued press releases. Quite a number of consenting and opposing views became apparent. On the positive side, some associations as well as payments providers welcomed a grace period of 6 months to allow SEPA laggards to catch up and avoid chaos in the payments market. On the other side, some observers predicted fear, uncertainty and chaos. Some banks voiced disappointment at the sudden extension of the end-date. Central banks reacted cautiously and recommended keeping the pressure on to become SEPA-compliant by 1st February.

Who wins, who loses?

The impact of the extension of the SEPA end date affects market participants differently:

Consumers are not impacted. IBAN and national account numbers can be used in parallel until 2016. The new proposal does not change that.

Banks which are SEPA-compliant may be faced with additional cost and effort. Currently they operate systems which can handle both legacy and SEPA payments. Operating parallel systems and processes is costly though; thus the banking industry was looking forward to being able to reduce the costly  duality. Communication with banks’ client base now needs to be changed, to explain the additional 6-month grace period. This may lead to confusion among clients, may result in thousands of questions and flood banks’ hotlines and overwhelm customer service staff. On the other hand, banks which had started to offer conversion services (converting legacy payments to SEPA format) may see this as an additional revenue opportunity, albeit for only 6 months. Interestingly, the Commission proposal does openly suggests that “payment service providers that have already fully migrated to SEPA might consider providing payments services users that have not migrated with conversion services during this transition period”.

SEPA-ready corporates may benefit from the extension: some had made the necessary changes to their systems but had not yet tested the new SEPA formats or had not completed testing yet. The additional 6 months will allow them to continue and/or complete their testing processes. For them the extension will therefore mean a reduction of risk that something goes wrong come 1st August.

Coporate laggards, i.e. those which had not completed or even started their SEPA projects yet, are the winners in the proposal: they now have an additional 6 months time to reach the finish line.

Further questions arise

So the proposal will benefit some and is seen as negative by others. However, the proposal does raise general questions which are independent of whether the proposal is adopted or not:

What does an extension or a regulatory end date mean for the credibility of the EU authorities? The SEPA end date has been well known, and was publicised, discussed, analysed and communicated for years. EU authorities kept stressing that there was “only a plan A”. The Commission proposal now obviates this statement. All of a sudden a Plan B seems possible. Will market participants pay much attention to future regulations and their deadlines?

What exactly does the proposal impact? As usual with payments, the devil is in the detail. Will the deadline for new Rulebooks (currently set for November 2014) be moved as well? Will the October 2016 deadline for non-euro area countries also be moved by 6 months?

Although the proposal states that no further extension beyond 1st August will be granted, it does say that the Commission and the ECB, together with national authorities will continue to monitor the migration process “and will be ready to take any additional measures, as appropriate”. This seems somewhat contradictory and needs explanation.

What will happen should the proposal for an amendment not be adopted? Or, as some market participants have recommended, could the proposed extension period be shortened, to 3 months rather than 6 months?

In conclusion, the Commission proposal may have unwittingly resulted in one very positive impact: the media have now raised the awareness that there is a SEPA deadline – whatever it might turn out to be – and that changes in the payments markets are afoot. What was previously often seen as a purely operational project has now made it to the headlines. And that can only be applauded.