In 2008, British television presenter Jeremy Clarkson found himself the victim of a scam after he published his bank account details in his weekly Sunday Times column, to prove a point about fraud. One of his readers afterwards used the details to set up a GBP500-a-month direct debit from Clarkson’s account to the charity Diabetes UK. While many may have admired the culprit’s philanthropic spirit, critics of the EU’s new direct debit scheme must have looked on with glee.

The flagship direct debits, which are the second step in a bid to create Single Euro Payments Area (SEPA), have threatened to scupper the entire project. Consumer and business groups complain they are open to “massive fraud” and say the project can not be completed until the problems they identify have been resolved. Although only launched on 2 November last year, SEPA direct debits have proved the most contentious part of the project so far.

FRAUD

According to the European Payments Council, which sets the rules for SEPA, direct debits should operate as they do in Germany, the UK or the Netherlands: the flow of money is triggered by the creditor, for example, a utility company, which asks its customer to sign a mandate for the payment of a bill. The company’s bank then debits the customer’s bank once it gets the go-ahead. But in some countries - France, Belgium, Spain and Italy among them - it is the debtor (or customer’s) bank that initiates the flow of cash, and the customer’s bank then holds the direct debit mandate. Under Regulation EC/924/2009 on cross-border payments, which came into effect last year, all banks must be ready - or “reachable” - for creditor-triggered debits by 1 November this year.

According to Olivier Brissaud of the European Association of Corporate Treasurers, the creditor and debtor argument is geographical. “The direct debit project is a very cultural one. It reflects the traditions of the country or region. In Northern Europe people tend to trust each other, while in the Southern part people tend to mistrust each other.”

BEUC, the group representing European consumers, is staunchly opposed to the creditor-driven system. Banks, it says, are not obliged under SEPA rules to verify the accuracy of the mandates or run checks on the companies requesting them. Anne Fily, head of the group’s legal department, said, “This leaves the door wide open to a type of fraud equivalent to what occurs with distance payments by card, on a cross-border scale this time. All the fraudster has to do is issue a wave of cross-border direct debits and disappear once having received the funds”.

It is about trust, says Norbert Bielefeld, deputy director of payment systems at the European Savings Banks Group (ESBG). “Who knows how a credit transfer or a cheque is being processed? What people care about is, do I trust the institution I have an account with?”

But consumers are entitled to a refund within eight weeks if a mistake is made (and within 13 months for an unauthorised direct debit).

SOLUTIONS

This is enshrined in the EU’s ‘consumer-friendly’ Payment’s Services Directive (PSD), says Bielefeld. “It’s very clear that non-cash and cash payments attract people interested in trying to defraud them. There are solutions in the cash world and there are in electronic payments as well. It’s a matter for legislation. That’s what the PSD does.” Patrick Poncelet of the European Banking Federation agrees. “The PSD has enormous amounts of consumer protection, sometimes more than we want in banks.”

Several member states, however - including Belgium, Greece, Spain, Malta, Poland, Finland and Sweden - have so far failed to implement the directive, even though the deadline was November last year.

GOVERNANCE

There is also a question mark hanging over how the project is run. Cécile Grégoire of EuroCommerce says the EPC – which is made up of 75 member banks and banking groups – is not listening to merchants’ concerns. “End-users are frustrated because the banking industry does not seem to listen to their proposals. Some are even starting to boycott the whole project.” Brissaud, who also heads up the End-Users’ Committee (EUC), which includes EuroCommerce and BEUC, says the governance structure is flawed. “SEPA is a good project that started on the wrong foot.”

Grégoire says merchants should have been involved from the beginning, and welcomes a move by the European Commission – announced in a September 2009 communication – to set up a more inclusive SEPA council at EU level. It should take the form of a steering committee, she says, that makes political decisions and solves disagreements between banks and users. The EU executive had promised to come out with concrete proposals before the end of 2009, and Grégoire says if it does not materialise it will be a “catastrophe” for SEPA.

“In the long run we will all benefit,” adds Brissaud. “But the scheme that has been presented by banks is too narrow to cater for all involved.”

DEADLINE

The upshot of the argument is that it looks near-impossible to set an end date for banks to abandon their national debit systems, a market that was worth over €15 trillion in 2008. Although there are no official statistics available to measure how many SEPA-branded debits are going through, Bielefeld points to data published by interbank clearing house EBA, which processed 13 of the core (consumer) debits in December last year, and only seven of the business-to-business transactions, worth a combined total of €17,000.

Michel Barnier, the incoming internal market commissioner, has pledged to set a deadline to get things moving, but Andreas J. Zehnder, managing director of the European Federation of Building Societies, says, “A premature abolition of proven national direct debit transfers, which are legally compliant and are highly accepted by the consumers, would lead to significant costs and fuels uncertainty. There are no obvious reasons that could justify a deadline.”

There are legal problems as well. Germany, for instance, has still not resolved how its banks will be able to switch over to the new system without forcing their customers to sign a whole slew of new mandates. For the largest direct debit-using country in Europe, this is no small task.

FEES

And there are competition concerns. The Commission and ECB ruled, in 2009, to abolish per-transaction multilateral interchange fees (MIFs) for direct debits, the levies banks charge each other for each payment. This will happen by November 2012. Until then, under Regulation 924/2009, banks can charge a maximum of €0.088 on cross-border transactions. But Bielefeld says the Commission is not offering any alternative solutions to the MIF. “If you provide a service to a counterparty, there must be a way for that counterparty to remunerate you for that service.”

This fight will spill over into the cards field, where merchants are eagerly awaiting the outcome of EU anti-trust cases against Visa and MasterCard. Until the outstanding problems are resolved, and the Commission can set an end date, direct debits may find they do not even have a start date.

Glossary

Credit transfer

Funds are moved between banks on the request of a payer/account holder.

Direct debit (under SEPA)

Funds are moved on the request of the receiver (eg utility companies). It requires the payer to sign a mandate.

Debit cards

Allow the cardholder to charge purchases directly and individually to his or her bank account.

Credit cards

The cardholder is effectively borrowing money under a certain limit and must pay it back in part or in full within a given time. Interest must be paid on outstanding debt.

Clearing

The exchange of messages. A clearing house is an agency that transmits, reconciles and confirms orders for payment.

Settlement

The exchange of funds, the actual moving of money.

IBAN

International Bank Account Number - a standard set by the ISO to make international transfers possible. Particular to each bank account.

BIC

Bank Identifier Code - a standard set by the ISO to make international transfers possible. Particular to each bank.

Multilateral interchange fee (MIF)

A charge paid by a merchant’s bank to a customer’s bank for using card networks like Visa and MasterCard. It is also charged on some cross-border direct debits.