payments product manager,
In December of last year, the European Commission (EC) released its plans for European Union end-dates for the migration of both credit transfers and direct debits to SEPA-compliant formats. Since that time, further input has been submitted from both the European Parliament as well as the Council of the European Union. In order for the legislation to be adopted, there must be a tri-lateral consensus from all three of these bodies.
The Euro Banking Association has recently submitted its comments and questions to European legislators seeking clarification on the proposals. Further information and clarification will be released by the EC in autumn of this year and most expect that the legislation will be adopted by early next year.
Several concerns have arisen since the announcement in December including questions about who is going to enforce the migration, how the domestic instruments are going to be migrated, what changes will be made to payment systems and other technical issues. There is continuing discussion about payment types outside of credit transfers and direct debits, which need to be addressed in terms of the further guidance. Additionally, many in the payments industry are already starting to look beyond the migration to the post-SEPA world and further value added services and innovations.
However, for many global organisations concerned about the migration itself, the primary question continues to be the end-dates themselves. The question being, when does SEPA migration become less of a best practice issue to more of a regulatory compliance issue?
The current understanding is that once enacted, credit transfers would need to migrate to SEPA instruments in a 12-month period, with direct debits migrating 24 months later. This would mean that corporates would need to have all legacy account numbers or Basic Bank Account Numbers (BBAN) for credit transfers in International Bank Account Number (IBAN) and Bank Identifier Code (BIC) format by early 2014.
However, there is discussion of allowing domestic instruments to be used until 2016, effectively allowing a three-year grace period before banks could reject payments in legacy formats. The clarification from the EC on the regulations this autumn will clearly be watched very closely by banks and corporates as they prepare for migration.
Regardless of this clarification the momentum for IBAN and BIC continues to grow on a country-by-country basis. Domestic payments in Italy, Luxembourg, Saudi Arabia and Lebanon already require IBAN and BIC. We are also seeing the likes of Belgium, Finland, Cyprus, Estonia, France, Germany, Ireland, the Netherlands and Malta making IBAN and BIC necessary for SEPA credit transfers. Transitioning to a uniform format of account number is clearly seen as advantageous for countries both inside and outside the eurozone and there is no end in sight in terms of the spread of IBAN and BIC further afield.
The general consensus on enforcement is focused on the banks themselves. The penalties for non-compliance and who will enforce the regulations are not yet clear, however many banks are taking steps to ensure that conversion services for legacy account numbers are not only a value-added service, but a core component of their payment operations. The ability for a financial institution to offer conversion services provided either by their operations teams or outsourced to a payments data provider is a key requirement in most tender documents issued by corporates to their banking partners.
Since the announcement of the EC’s proposal in December, many corporates have already begun the migration and taken action to convert legacy account numbers to IBAN and BIC format. Most global corporates are well on their way and have a clear path towards compliance. These organisations have tended to prioritise the conversion of account numbers of suppliers, clients and employees on a country-by-country basis. Countries listed above that have adopted IBAN and BIC for domestic payments are highest on the list, with those that have adopted the format for SEPA credit transfers coming next. The challenge in converting thousands of legacy account numbers to IBAN and BIC can be daunting; however, it is preferable to contacting every supplier, client and employee to ask them to contact their bank and supply the correct codes.
Some Enterprise Resource Planning (ERP) applications include functionality, which allows corporates to convert databases to IBAN and BIC format. However, this approach can be risky as these solutions tend to simply generate a check digit based on the ISO code, local clearing code and account number, without actually validating the underlying information. More complete solutions, which verify the existence of the local clearing code, as well as the structure of the account number, are preferable. Additionally, these solutions confirm the right BIC to use for IBAN payments. Corporates have viewed these conversion exercises as a unique opportunity to update information within their databases and identify problem areas where they may have been charged high fees by their banking partners.
A bigger challenge will be consumers themselves and many have suggested an aggressive marketing campaign, educating consumers in the same way as when the euro currency was launched.
IBAN and BIC have been listed on the bank statements of most European consumers for many years. The relevance to consumers’ daily transaction banking has been minimal unless they have made cross-border payments. For those more used to sending international payments, the changes should be welcome. Consumers should be excited by the prospect of lower bank charges and better service for international payments. Adopting a new format of their bank account number will be a small price to pay for this. It still remains to be seen whether 12 months is enough time to educate consumers on this change or if an extension to domestic instruments in 2016 is necessary.
In summary, there are clearly details that need to be hammered out by banking groups and European regulators. The acceptance of SEPA credit transfers is gaining pace, while direct-debits will take longer. However, migration to IBAN and BIC is gathering momentum.
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