The Single Euro Payments Area (SEPA) is a payment network that makes it easy and cheap to process euro payments in the European Union (EU).
It was launched in 1999, and currently operates in an area with more than 529 million citizens making 146 billion electronic payments every year. It’s seen as a key innovation introduced by the EU in the payments sector, helping thousands of individuals and businesses manage payments effectively. But what is SEPA exactly? How can you implement it as a payment institution? What are the most prominent benefits?
In this guide, we’ll be breaking down how SEPA works, what is SEPA direct debit and the main benefits of implementing it as a merchant.
What is the Single Euro Payments Area (SEPA)?
SEPA is a European payments system that enables merchants and businesses to send and receive payments in the 35 SEPA countries. It’s an EU initiative that encompasses all 27 EU members, 3 EEA countries and 6 non-EEA countries, with the goal of making it easy and cheap to transfer money in Europe.
There are several SEPA payment schemes, including:
SEPA Direct Debit
SEPA Credit Transfer
SEPA Instant Credit Transfer
Each scheme is a specific service and has its own pros and cons. All SEPA payments are bank to bank and do not involve any card networks. All transactions must be in euros, with merchants and customers only requiring one bank account to process the payment.
What countries make up SEPA?
There are 35 countries within the SEPA:
EU/EEA countries:
Belgium
Bulgaria
Czech Republic
Denmark
Germany
Estonia
Ireland
Greece
Spain
France
Croatia
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Hungary
Malta
Netherlands
Austria
Poland
Portugal
Romania
Slovenia
Slovakia
Finland
Sweden
Non-EEA countries:
Andorra
Monaco
San Marino
Switzerland
Vatican City State
SEPA payments are most popular in cash-heavy countries or places where subscriptions are popular, such as Germany and the Netherlands. That’s because SEPA payments allow debtors to make payments directly from their bank account rather than with a debit card, cutting out the middle-man and card network costs.
What is SEPA Direct Debit?
SEPA Direct Debit (SDD) is a specific payment scheme within SEPA that is used for regular payments such as for subscriptions and bills. Like all SEPA payments, these transactions must be in euros, and payments are bank to bank. So far, the SEPA direct debit scheme operates in 21 of the Eurozone countries.
SDD is quite straightforward: the creditor issues a contract called a “mandate” with all the details necessary about the direct debit. Once the customer consents, the merchant pulls the payments on a regular basis, notifying them 14 days before the payment is due. If a payment is unauthorised, customers have 13 months to ask for a refund.
Within SDD (yes, there’s more!), there are two payment schemes:
SEPA Core Direct Debit
SEPA B2B Direct Debit
SEPA Core Direct Debit (SDD Core) is used between merchants and consumers, whereas SEPA B2B Direct Debit (SDD Business) is used for collecting payments from businesses. We’ll go into more detail in the section below.
What is unique about all Direct Debits is that it’s the merchant who is in control of the entire payment process. They issue the SEPA Direct Debit mandates, they notify the customer and they are the ones to pull the payments whenever they are due. This is different to other local schemes where either the customer or the bank is in charge of making the payments.
Difference between SEPA Core DD and SEPA Business DD
What are the differences between SDD Core and SDD Business? There are a few:
SEPA Direct Debit Core:
SDD Core is mandatory if you are a payment service provider (PSP) that offers European direct debits to consumers.
Debtors can request a refund 8 weeks after a payment without a reason, and can ask for a refund 13 months after if it was unauthorised.
The payer’s PSP does not need to be verified beforehand and receives the mandate information on the first payment collection.
SEPA Direct Debit Business:
The payer must be a business, not an individual.
The payer cannot receive a refund if the transaction was authorised.
The PSP must check and validate the mandate before collecting any money.
SEPA Direct Debit Rulebooks
The European Payments Council (EPC) publishes rulebooks to help merchants and financial institutions effectively manage the various different types of direct debits and mandates. These rulebooks include the eligibility criteria in order to accept SEPA direct debit transactions, clarifications on customer reporting, guidance on refund reason codes, fraud trends reports and information on managing payments messaging.
The 2019 SCT Rulebook is the one currently in effect until November 2021. After that date, the 2021 Rulebook will come into effect. You can download the most recent SEPA Rulebooks on the EPC website.
What is a SEPA Direct Debit mandate?
In order to collect SEPA DDs, the merchant must first get the customer or business to sign a mandate - a document that acts like a contract. This mandate is what allows the creditor to collect future payments with the payer’s consent.
The mandate is a certified document, which means it needs to include evidence of consent of the payer, identity verification using strong customer authentication and a certified signature. It will also include the payer and merchant details, as well as the type of payment used. The legal text includes details of the refund as well as an agreement to withdraw payments if necessary, which will be different for the Core DD and Business DD. Once the mandate is completed and signed, it is then submitted to the banks or PSPs and payments can be collected.
What is a SEPA DD pre-notification?
One essential feature of the SEPA DD is the pre-notification. This is a notification that happens before the creditor collects the payment, in order to notify the payer of the upcoming direct debit. The pre-notification will include the time of collection, the total amount, whether there is an adjustment to the total payment amount and the unique mandate reference. It must be sent 14 days before payment collection, however merchants can arrange their own agreement with customers to arrange for a shorter window.
The pre-notification allows the debtor to ensure they have sufficient funds to pay the direct debit. Merchants can choose to send these themselves through paper or email, or engage a third party to manage the process.
Advantages of using SEPA DD
There are several advantages of implementing and using SEPA Direct Debit:
SEPA DD allows merchants to collect direct debits in 36 separate countries
It offers a standardised payment method that makes it less complex to manage payments, enhances security and reduces the barrier to market entry.
It allows for a greater number of transactions and allows merchants, payers and banks to keep payment processes relatively simple.
It enables the subscription model, a payment method that is steadily increasing in popularity: several European countries have nearly half of their populations paying for multiple subscriptions, with 27% of global consumers expecting to increase the number of subscriptions they pay for.
It’s a great payment instrument for companies seeking to add liquidity during the Covid-19 pandemic.
There are some additional unique advantages for each player in the SEPA ecosystem:
Merchants
SDD drastically lowers transaction costs for merchants, therefore reducing costs of working capital.
Revenue is more predictable and consistent, but is still flexible enough that payment amounts can be adjusted accordingly.
It is low risk: since merchants are in charge of managing the recurring payment and notifying the customer, payments are more likely to be completed on time and in full.
Payers, both individuals and businesses
SDD is cheaper than other forms of payments, which further decreases the cost of the product or service they are buying.
It’s a payment method that is incredibly convenient and straightforward to set up.
It’s easy to keep track of payments.
The pre-notification means that debtors have time to add sufficient funds, which lowers the chance of going into overdraft.
Subscriptions are an increasingly preferred way to manage payments.
Banks
Lower costs.
Higher efficiency through automation.
Less responsibility since they don’t need to manage the payment process.
Difference between SEPA DD & SEPA CT
The SEPA Credit Transfer (SEPA CT) is a simple one time bank transfer within the SEPA Zone, in euros. The Credit Transfer does not require a mandate and can be initiated by both the payer and the creditor.
This is different to SEPA DD, which is only for recurring payments and requires a signed mandate issued by the merchant.
Difference between SEPA DD & Standing Orders
Both SEPA DD and Standing Orders are automatic payments, however the key difference is the entity in control. With standing orders, the customer is in control. With SEPA DD, the merchant is in control.
Standing order:
Initiated by the customer: the customer initiates the regular payment which is “pushed” through the bank.
Less flexibility: they only work at regular intervals (e.g. every 2 weeks, every 1 month, etc) and for a fixed amount.
More documentation: a lot of admin and documentation is required in order to set up a standing order.
Direct Debit:
Initiated by the merchant: the merchant issues the mandate and pulls the payment from the customer.
Highly flexible: merchants can collect variable amounts and pick the intervals.
Automatic: with a direct debit scheme the entire process is automated and the only documentation necessary is the mandate and prenotification.
In general, the standing order is a more risky payment method for the merchant, since there is always a possibility that the debtor is late or misses a payment. For small organisations with very few customers, standing orders may be sufficient. For organisations with more than 30 customers, standing orders are cumbersome and direct debits are a much better option.
Popular use cases for SEPA DD
SEPA DD is generally used for regular payments. These could be for:
Software companies
Subscriptions
Marketing agencies
Billing companies
Memberships
Etc.
SEPA DD works well for regular payments that aren’t overly frequent and are used for long-term work. Payments are not instant and can take a few days to clear, which is why using SEPA DD for payments that are required to happen more than once per week can be inefficient.
When not to use SEPA DDThere are two main cases when it may not be wise to use SEPA DD:ChargebackIf you’re selling high value items such as property or investments, you may not want to implement SEPA DD. This is because the chargeback time frame is limited to 13 months. If there are many chargebacks, you may also end up doing a lot more administrative work.Instant paymentsIf your business requires instant payments, SEPA DD is not an ideal payment method as payments can take a few days to be processed.Of course, it goes without saying that the Direct Debit scheme is not ideal if you are solely targeting consumers or businesses from outside the Single Euro Payments Area.What is a Credit Identifier?The credit identifier is the unique reference every creditor holds when collecting direct debits. It helps identify where the SEPA payment is coming from and therefore must be included in every direct debit collection.This reference allows banks to verify the transaction, request refunds and adjust the mandate if necessary. It also allows the payer to check whether the direct debit mandate is correctly in place.How to cancel a SEPA DDThe process in order to cancel a SEPA DD varies from country to country.In most countries, you cancel a SEPA DD by submitting a “cancel direct debit mandate” form. The cancellation is often done by the merchant, but both the debtor and the merchant can cancel if needed. The DD is also cancelled automatically if there is no activity after 36 months.The merchant is responsible for archiving and storing the cancellation documents (both paper and digital). Once a mandate has been cancelled, it cannot be used again.SEPA DD and FinXPFinXP has significant experience offering SEPA DD services to companies across Europe for the last 6 years with some of the most competitive fees in the market. Our SEPA DD product is trusted clients across Europe. The fees are lower than most banks and card networks, which make it a very attractive product option for merchants.We hope this SEPA Direct Debit guide has clarified what SEPA Direct Debit is all about. The payment network is one of the most utilised for European payments and offers a standardised way to easily take payments from customers. If you’re a small business that charges subscriptions or requires regular payments from clients and customers, SEPA DD is an intuitive, cheap and easy way to manage payments. At FinXP, we’ll help you implement SEPA Direct Debit in a way that is compatible with your business.If you’d like to receive our B2B payments and banking insights in your inbox, subscribe to our monthly newsletter here.