The SEPA Direct Debit scheme enables companies and customers to make cross-border payments within the SEPA area (Single European Payment Area). For this purpose, the debtor gives the creditor permission to automatically debit the amount due from their bank account by means of a mandate (so-called pull payment). Pull payments like SEPA direct debit are part of account-to-account payments.
Compared with other payment methods, the SEPA Direct Debit scheme offers numerous advantages for merchants and payment service providers: it is more cost-effective than other payment methods and enables recurring payments to be processed without additional effort. It also reduces the risk of payment defaults and reduces the administrative burden for companies.
SEPA – Single European Payments Area
SEPA stands for Single Euro Payments Area and describes the region within which SEPA payments can be processed. Within the SEPA area, companies, organizations, and individuals can make or receive payments as if they were domestic. The SEPA area comprises 36 European countries. These include the 27 EU member states, as well as the United Kingdom, Iceland, Norway, Liechtenstein, Switzerland, Monaco, San Marino, Andorra, and the Vatican City State.
The guidelines for SEPA payments are set by the European Payments Council (EPC) and are constantly being developed. The aim of the EPC and the SEPA scheme is to standardize and streamline payments within the SEPA area. The EPC regulates not only SEPA Direct Debit, but also SEPA Credit Transfers and SEPA Instant Credit Transfers. Moreover, the EPC is currently working on developing additional SEPA schemes, including SEPA for Cash, SEPA for cards, and SEPA goes mobile.
Advantages of SEPA Direct Debit for Businesses and Merchants
Businesses and merchants can open an account at any bank within SEPA and make and receive payments easily and securely as if they were domestic.
Basic SEPA Direct Debit is much cheaper and comes with a fixed fee in opposite to card-based payments or popular Wallet solutions.
Ease of use:
customers do not have to fill out complicated payment forms or sign up with a third-party provider to authorize payments.
Automation and customer retention:
SEPA Direct Debit can automatically process recurring payments for subscriptions or recurring services – even with changing amounts, which also increases customer loyalty as a result.
Businesses and merchants can better plan their cash flow forecast as SEPA Direct Debit provides a predictable and regular source of revenue.
Businesses and merchants can accept payments from customers in 36 countries within Europe.
How does the SEPA Direct Debit Scheme work?
The central component of the SEPA Direct Debit scheme is the mandate. The mandate is the payment authorization that is issued by the debtor to the creditor, which now authorizes the creditor to collect the amount from the bank account (pull payment). This authorization can be issued either in paper form or as a SEPA e-mandate.
The mandate holds a reference to the SEPA direct debit, which makes it uniquely identifiable by means of a creditor identification number, as well as a mandate reference. It also holds information such as the name of the company, the customer’s account number and the amount to be collected. The SEPA Direct Debit Mandate can also precisely specify the due date and deadlines. The complete list of all the information that a SEPA mandate must contain can be found here.
Once the company has received the mandate, it will send the customer a pre-notification announcing the collection of the amount. This pre-notification is normally given 14 days before the transfer but can be shortened to one day. It also holds information such as the amount and the date on which the collection will take place. On the collection date, the amount is automatically debited from the customer’s account and transferred to the company’s account. This transaction is done electronically through the SEPA network and usually takes only a few days. The customer can track the debit on their account statement.
The SEPA Direct Debit mandate must be archived by the payee and is generally valid for an unlimited period but expires after 36 months if no further payment is made. After the mandate expires, it must be kept for at least 14 months after the last Direct Debit collection. Archiving the mandate is part of mandate management and can be outsourced by companies or payment service providers. Banking Circle offers Dynamic Mandate Management.
SEPA Direct Debit Mandate Management
SEPA Direct Debit mandate management is an important process for companies that offer direct debit as a payment option. Mandate management ensures that all the necessary information for collecting payments is available and that the mandate is properly archived.
Mandate management includes managing and monitoring mandates, verifying mandate data, and archiving mandates. The process begins with the creation of the mandate, which is signed by the payer and sent to the payee. The payee checks the mandate for accuracy and completeness and archives it in accordance with legal requirements.
During ongoing operations, the mandates must be constantly updated and managed. This includes monitoring incoming payments, meeting deadlines, and reviewing data to ensure that all necessary information is available. If there are changes in the payer’s bank details or other important data, the mandates must be updated accordingly.
Another important part of mandate management is checking mandates for validity and identifying errors or invalidity so that only valid mandates are used to collect payments. In addition, mandates must be archived in accordance with legal requirements to ensure they are easily accessible in the event of chargebacks or other legal issues.
What is the advantage of a SEPA Direct Debit over a standing order?
Compared to a standing order, the SEPA Direct Debit offers numerous advantages. Whereas with a standing order, the customer is responsible for making the payments on time, with the SEPA Direct Debit scheme the payee takes control of the payments.
The payee can automatically debit the amount from the customer’s account, reducing the workload for both parties. It is also easier to adjust in the event of changes such as new amounts or due dates, as the payee arranges this himself.
This makes the SEPA Direct Debit the ideal payment option for recurring payments whose amounts can potentially change (e.g., phone bills, memberships, any subscriptions). In addition, the SEPA Direct Debit is more flexible and offers the possibility to make one-time payments (e.g., online shop purchases).
What are the disadvantages of SEPA direct debit?
One disadvantage of the SEPA Direct Debit scheme is that customers must ensure sufficient account coverage. If there are insufficient funds in the account during the direct debit process, the customer’s bank may reject the direct debit and charge fees for a return debit.
Another weakness of the SEPA Direct Debit scheme is that it is easy to pay by direct debit using incorrect data or an invalid account, which can cause damage to businesses. One disadvantage of SEPA Direct Debit as a payment option for businesses is that customers can initiate a chargeback 13 months after the purchase. However, this only applies to direct debits without a mandate – if the company uses mandate management, the period is reduced to 8 weeks. For comparison: with credit cards, customers can initiate a chargeback for four months, and with a popular E-Wallet solution for 180 days. Banking Circle offers Dynamic Mandate Management for this purpose.
When will the money be debited with SEPA direct debit?
With the SEPA core direct debit, the money will be debited after two to three business days. The exact time depends on various factors, such as when the direct debit is submitted, and the processing times of the banks involved. Strictly speaking, it takes three interbank days. The debit from the customer account and credit for the vendor account takes place on the Interbank Settlement Date (ISD). The debtor can be debited as early as one day before the credit entry.
As a rule, the direct debit is collected after a pre-notification of 14 days. This means that the company or organization must inform the customer of the exact amount and date of collection before the direct debit is collected. The exact date of collection of the direct debit is then determined by the customer’s bank, based on the agreed due date. Usually, the user pre-notification period is reduced to one day. An automated user pre-notification is also part of the Banking Circle offer.
SEPA Clearer and Reconciliation Report
A SEPA clearer is a central clearing and settlement system responsible for processing SEPA transactions within the SEPA area. It serves as an interface between participating banks and payment service providers and ensures that all submitted payments are correctly processed and settled. The SEPA clearer monitors payment transactions in real time, performs security checks and ensures that all transactions comply with SEPA standards. Using a central clearing system minimizes the risk of errors and fraud and increases the efficiency of payment transactions.
At the end of a processing day in SEPA Clearer, which usually ends around 22:00, all participants receive a “Daily Reconciliation Report”. This report contains a summary of all submitted and delivered bulks processed on the same day, including SEPA R-transactions. Using these Reconciliation Reports, participants can monitor their payment flows and verify that all transactions have been processed correctly.
The Reconciliation Report lists all transactions processed by the SEPA Clearer during the day, including SEPA R-transactions. SEPA R-transactions are chargebacks that can occur when a direct debit could not be processed. The report serves as a reconciliation of the various accounts and transactions and ensures that all entries and exits in the clearing system are balanced. In this way, errors and discrepancies can be quickly identified and resolved. Banking Circle offers automatic reconciliation reports.
Is there a charge for SEPA direct debit?
For merchants who offer SEPA direct debit as a payment option, the transaction price is made up of many different factors, which is why it is not easy to give a blanket answer to the question of costs. Essentially SEPA direct debit is significantly cheaper than card payments or E-Wallet solutions.
The costs for SEPA transactions vary depending on the provider, negotiation skills, transaction volume and hedging levels of the transactions. There are various options for this, from a standard direct debit protection to a full liability shift, which can even include a reminder process and ensures that the merchant no longer has any risk or effort to deal with chargebacks. A combination of maximum protection and outsourcing of the entire payment process results in a high transaction price. It is also possible that providers charge a basic fee in addition.
If no extensive risk protection is required, the transaction volume is high and further payment services are outsourced, the transaction price for merchants is even lower. Furthermore, companies not only save on the transaction price, but also by saving on internal resources, e.g., if the mandate management is outsourced from their own Finance & Controlling department to a third party. Thanks to the fixed booking data of the recurring SEPA direct debits, companies get a much better financial overview and ideal liquidity management.
Why use SEPA Direct Debit with Banking Circle?
- SEPA Direct Debit provider for the entire SEPA area (EU).
- Vast chargeback reduction due to open banking (AIS / PIS) and in-house chargeback fighting scheme covering:
- incorrect data, fake bank account
- uncovered account
- active chargebacks due to fraud
- Automated processing of chargebacks (cancellations, refunds)
- Automated mandate management (creation, selection, sending, archiving, storing of mandates and pre-notifying customers) to conserve your in-house resources.
- Automated reconciliation reports and fastest possible transaction status updates – partly real-time
- Automated performance reports displaying all information transparently and without any delay (e.g., SEPA reason codes)
- Processing cost reduction by cutting out card schemes.
- Improved cashflow by reducing the risk of late payment.
- White label option: Our technology, your logo
- Simple checkout process for your customers with minimal data entry
- Advantage to easily upgrade to our future services (improved risk assessment, centralized and fastest possible status reports, increased coverage for Open Banking services)
Use Cases for SEPA Direct Debit
Companies can offer SEPA Direct Debit for various use cases, such as recurring payments like rent or subscriptions, single payments like online shopping, and for paying taxes or insurance premiums.
Recurring payments: Companies can automatically collect monthly rent, memberships, cell phone contracts or subscriptions from customers. This saves time, avoids delays in payments, prevents missed payments, increases cash flow planning, and provides greater planning certainty for the business.
Single payments: Customers can make purchases online or pay bills by authorizing their bank account to debit the amount due. This provides customers with a convenient payment method.
Taxes and insurance premiums: Businesses can automatically collect tax payments or insurance premiums from customers to ensure they are paid on time. This minimizes the risk of non-payment.
Donations and membership fees: Non-profit organizations can automatically collect donations or membership fees to provide a convenient and efficient payment method for their supporters. This can increase donation revenue.