SEPA Direct Debits (SDD) is the next phase in the Single Euro Payments Area (SEPA) vision following the introduction of SEPA Credit Transfer (SCT). After a somewhat controversial planning period compared to that of the SCT scheme, SDD is due to be launched in November 2009.

Currently each SEPA territory has different sets of laws governing direct debits. These differences cover rules on, for example, refunds and can vary significantly. The objective of SDD is to standardize the rules and the formats for processing a euro direct debit from any SEPA country so that it will be as easy to do as a domestic direct debit.

The controversy in designing the SDD scheme came from the fact that many countries had to redesign laws and regulations covering these payment instruments, as well as transpose a critical piece of European Union legislation. In many countries the laws governing direct debits are very different from the SEPA scheme. Indeed there is no standard set of rules and the legislation has been designed based on accepted norms within each country. The legislative change for some countries has been significant.

The critical piece of legislation from the European Union, the Payment Services Directive (PSD), has been a requisite to enable SDD's launch. Each national parliament is required to transpose it. Although not a necessary prerequisite for SDD, PSD is designed to provide a legislative framework for the introduction of compliant direct debit law. This requirement has created its own difficulties — in fact, now that its deadline has been set for November 2009, Sweden has declared that it cannot complete the process by the deadline.

Legislative issues aside, it is in the area of interchange fees where SDD has created the biggest controversy. These are fees that banks can charge creditor banks for allowing them to conduct direct debits — in effect, processing fees. Under SDD, however, the EU has declared that interchange fees will not be allowed and are to be phased out over a period of time to reduce the cost basis for payments in general. Because the fees are a critical part of some banks' businesses there has been some amount of foot-dragging over the EU declaration. France, which is one community that places some emphasis on interchange fees, has declared it cannot be ready for the November 2009 launch and will push out the deadline for its community to November 2010.

So where do such issues leave SDD? One thing is certain — the scheme will launch in November 2009. It will, however, be a soft launch and banks will have until November of the following year to declare themselves compliant. The message to the SEPA countries is that SEPA is on a path that cannot be changed and that the aim of reducing the cost and improving the efficiency of euro payments will be met. However with such a message comes another conundrum that has to be faced — without any end date for the migration of all domestic payment systems to SEPA standards, when will those efficiencies be fully realized?

We'll discuss this issue in next week’s Viewpoint...