We summarize in the document attached the EACT’s position on the EPC Rulebooks. It has been approved by the EACT Board and represents the opinions of the 16 EACT members who are the National Treasurers Associations (NTA) representing more than 4 300 groups/companies in the European Union.

As a starting point, EACT wants to highlight its opinion that, without some major changes, SEPA credit transfers and direct debit, as described in the Rulebooks, will not reach a critical mass and justify the shift from national payment instruments to SEPA. This is simply because the SEPA instruments are not equivalent to the best of the existing domestic schemes.

In order to improve the development of the proposed schemes we suggest (see IV of the document) a change in the working process by increasing the involvement of stakeholders other than banks.

The document attached, which specifies our main requests and comments, is structured in four parts:

• I General observations on EPC Roadmap and two Rulebooks
• II General comments on PEDD
• III General comments on CREDIT TRANSFER
• IV Proposed Plan of Action.

EACT is prepared to discuss them with and remains to the disposal of stakeholders for any question they may raise.

Pierre Poncet Gianfranco Tabasso
Chairman Chairman Payments Commission

I GENERAL OBSERVATIONS ON SEPA ROADMAP AND THE RULEBOOKS

1.1 Rulebooks fall short of corporate expectations.

In the June meeting at the ECB, we had already observed a gap between the scope of EPC’s Roadmap and the expectations of companies, with EPC concentrating on “core and basic payment products” and companies demanding standards and STP for the whole financial supply chain.

The content of the “core and basic payment products” was not defined and agreed with end-users. Many items on EACT’s list of requirements are not included in EPC 2008-2010 Roadmap.

EPC messages cover only the “inter-bank space”. To allow E2E STP of the whole payment and reconciliation processes, the “client-bank space” must also be included, particularly bank reporting and the electronic account statement which are today the basis for updating ERP/Treasury systems.

The ECB has stated in many occasions what it expects, the last time in SEPA’s Third Progress Report of Dec. 2004

“All euro area payments should become domestic and reach a level of safety and efficiency at least on par with the best performing national payment systems today”

“The EPC is also invited to reinforce its co-operation with other stakeholders and customers in order to ensure that the standards and solutions identified are suitable for and, to the maximum extent possible, compatible with the entire business chain”

“In addition to IBAN, the Eurosystem also recommends that the EPC define and implement further common standards and business practises enabling full end-to-end STP for credit transfers in the SEPA, including a unique standard for electronic payment initiation and automated reconciliation.. The Eurosystem then expects that similar steps should be developed for other payment instruments as well “

The Rulebooks for Direct Debit and Credit Transfer do not meet the two top requirements expressed by the EACT and the ECB:

1) They must be at least as “good” as similar national schemes

2) They must fully support STP of the Financial Supply & Value Chain

The EPC messages cover only the “inter-bank space”. To allow E2E STP of the whole payment and reconciliation process, the “client-bank space” must also be included in the “basic SEPA”:

• Bank reporting and the electronic account statement are the basis for updating ERP/Treasury systems;
• Interoperable data structures for an effective and efficient management of remittance information should be defined within the end-to-end SEPA, in strict cooperation with corporates, to avoid that corporates’ ERPs will have to manage different formats when communicating with different banks, thus creating further barriers to integration (instead of removing the existing ones);
• Harmonised security standards for identification and authentication of counterparts, integrity and confidentiality of exchanged information, non repudiation of messages - at E2E level - must be defined and integrated within the SEPA schemes. In this respect the usage of electronic ID cards and the definition of interoperable profiles for signed electronic documents related to SEPA transactions must be considered.

1.2 “Foundations and construction plan of the SEPA cathedral”

Even if by 2008-2010 EPC completes the “foundations of the SEPA cathedral”, companies will not have an incentive to abandon their current payment systems which, in most cases, provide richer functionalities, more certainty of collection and more STP.

To fully commit to SEPA and make it a success, whatever time it takes, banks and corporates must get together and agree on the “overall construction plan” which includes :

(i) business models/rules,

(ii) data structures, messages and standards for remittance advice, bank reporting, automatic reconciliation, electronic payment initiation ( ePI)

(iii) e-invoicing and integration with e-payments and e-financing

(iv) trade financing,

(v) digital identity,

(vi) security,

(vii) digital signature

Only if banks and companies agree on the “complete construction plan”, payment stakeholders will find it worthwhile to make the necessary investments.

To avoid loss of value along the Financial Value & Supply Chain, data structures and standards must be agreed between banks and end-users from the very beginning, because SEPA strongly affects internal processes of both corporates and banks.

If this is not done, potential economies of scale, scope and network cannot be realised and industry’s investments in ICT and process re-engineering based on the electronic document will be ineffectual.

SEPA is a unique opportunity for the European Union to regain competitiveness but must not set its objectives too low by limiting the scope to payments and the inter-bank space.

1.3 Rulebooks as a “initial scheme”

Nevertheless, we believe that the payment schemes described in the Rulebooks , particularly, SEPA DD, with a few changes, could be used as “ one scheme” to which “other schemes “can be added on the same “service platform” to supply the services that companies need depending on type of commercial transaction, type of debtor and level of risk protection.

The One Size-Fits-All approach is not feasible with Direct Debits, given the great diversity of the underlying transactions, the first of which (but not the only one) is the distinction between B2B and B2C

It is necessary to include in the schemes non-preauthorised collections, which are common collection instruments in many countries (e.g. LCRs in France, RIBAs in Italy, Recibos in Spain) and respond to real business needs, particularly those of SMEs.

The Rulebooks repeatedly refer to “value added services” that banks can offer their customers. A large number of these “optional services” are considered “basic” by most corporate end-users.

It is important that EPC defines SEPA standards considering the “end-users basic level”. For additional “value-added” services which could be part of “higher service levels”, the EPC should define data structures in order to allow full interoperability.

anks will be free to offer such “value added services “, but, if they do, they should use the SEPA standard. Otherwise, we will soon end up with countless “proprietary solutions” and no multi-bank STP. In this regard, it is necessary to include in SEPA “basic level” a data structure (“invoice header”) containing a subset of the invoice fields that the creditor would send to his bank to obtain an invoice loan (trade finance).

The structure of the e-invoice should be defined by companies and not by banks.

To accommodate one or two additional “service levels” of Direct Debit that meet basic companies requirements, it will be necessary to modify the current “initial scheme” to make it interoperable with the new messages and added functionalities. We don’t believe this to be a complex task if the additional “service levels” are clearly spelled out by the users.

EACT is immediately available to cooperate with the EPC in order to define the missing basic services and data structures

1.4 Business Rules

We understand that business rules like value dating, period of refund , revocation, pre-notification, legal rights and responsibilities of payment actors are not within EPC’s scope, but fall in the domain of the Commission and the future NLF Directive.

We will carefully analyse the NLF Directive to make sure that its provisions are acceptable and compatible with the schemes.

1.5 Value Dating

We know that value dating is outside the scope of EPC Rulebooks as currently drafted, but should eventually form part of SEPA. EPC schemes will have to consider the NLF Directive in this respect.

We support the “ban” on value dating as a mechanism for charging for bank services, whereby the bank has use of the customers’ money for a number of days (“float”).

From the Rulebook, it is not clear when the creditor and debtor are credited /debited in case of returns, revocations and refunds.

No mention is made of the credit date of Direct Debit collections. We trust that both the debit and credit occur on the same date.

1.6 Interchange fee

EACT is surprised to see interchange fees mentioned both in SEPA CT and DD.

We think they are not compatible to European competition legislation.

1.7 Payments for account of third parties (payment factories, SSC, Central Treasury)

It is essential that adequate information for these types of operations is carried with the message.

II GENERAL COMMENTS ON SEPA DD

2.1 SEPA DD does not allow full and secure end-to-end STP (E2E STP)

SEPA DD only covers the “Inter-bank space”. A number of activities (e.g. pre-notification, mandate dematerialization, mandate amendments) happen outside the scheme and will require manual interventions and/or non standard automation.
There are no controls in the system on IBANs, account owners, mandates, mandate changes and cancellations and there is no certainty of collections. Controls are left to the creditors.

It is difficult and time-consuming for companies to gather IBANs and check whether they correspond to debtors.
The lack of pre-emptive controls is bound to increase the number of technical rejections.

In E2E STP systems, banks, which hold the correct IBANs of account holders in their databases, should be asked to check and share the information with the creditors (directly or via the creditor’s bank). The same goes for all changes of IBANs during the life of the mandate.

In line with Regulation 2560/2001 for Credeuro, BIC is also required. We understand the technical reasons why the SWIFT bank reference is required in the inter-bank space but believe it would be more efficient if the code was added by the originator’s bank based on the IBAN.

In SEPA DD, debtor and debtor’s bank will not able to have an automated check on the mandates, not even as an added service, since they are not electronic and / or in standard format (companies are multi-bank).
It would be better if the mandates were also sent to the debtor bank well ahead of and separate from the first collection instruction, to allow time for the checking we seek.

2.2. SEPA DD is “not as good as” existing direct debit schemes and unsuitable for B2B and large B2C billers

We consider the SEPA DD scheme too “basic” and a significant step-back vs. the systems currently in use in many Member States. As it is, it might be used by multinational companies for cross border collections where no direct debit scheme exists but will not replace domestic direct debit, which is a primary objective of SEPA.

This is particularly true for large billers (Utilities, Telecoms, Insurance, Oil companies, Consumer Credit, etc.) which generally use more complex schemes to ensure certainty of collection and low numbers of technical rejects.

As we said earlier, the One Size-fits-All approach cannot be used in Direct Debit, given the diversity of situations: the media (face to face, Internet, phone, mail), the type of product/service provided, the value and frequency of commercial transactions, the relationship between creditor and debtor.

The fact that most Member States, to-day, have two or three DD schemes points to the impossibility of a single scheme.

An example of a direct debit system which, in terms of value-added by the banks, is at the other end of the spectrum from SEPA DD is the RID/AEA scheme, implemented in Italy in 1999, as a result of long standing bank-corporate cooperation.

In RID/AEA, banks provide value through full management and control of mandates, mandate amendments, IBANs and debtors IDs.

Correct IBANs are returned to creditors by banks after archiving the mandate.

The debtor can give the mandate to the creditor, to his bank or both. Either way, creditor, creditor bank, debtor bank and debtor (if a corporate) can keep their databases constantly aligned.

No collection is sent prior to alignment of mandate databases and confirmation by the debtor’s bank. Many smaller companies use their banks’ mandate database (an interesting case of outsourced value-added service).

Static mandate data are stored and not transmitted in collection messages, as is the case in SEPA DD. Only three static elements are needed in the collection message: creditor, debtor and mandate unique reference codes.

The portability of mandates when moving bank account to new banks is also catered for in the scheme.

The SEPA DD considers the one-off DD as a “una tantum” DD; this does not reflect the real business needs of companies.

One-off DD is a different product for which the initial mandate is not required, being the debit request strictly connected to the commercial transaction: the debtor validates the debit request only after the related commercial transaction has been regularly concluded and, therefore, after a request for validation from the debtor’s bank. The integration between this type of DD and commercial flows is of uttermost importance.

2.3 SEPA DD gives no certainty of collection and is too unbalanced in favour of the debtor

In many domestic schemes, the debtor has good protection against unauthorised or fraudulent DD collections. The main problem seems to be the level of rejected/returned collections for incorrect bank accounts and debtors identities and the commercial risk of creditors due to late information of rejects.

In best schemes, debtor’s protection stems from the following elements:

• the debtor and the debtor’s bank have a copy of the mandate. Debtor’s bank checks the
  mandate before debiting
• the debtor receives bill or invoice prior to the debit. This is required by civil or
  commercial laws of the Member State. In most cases, a separate pre-notification is not
  needed or mandated;
• most debtors can daily verify the debits in their electronic bank statement;
• assuming the debtor did not oppose debit before D date, he still has time to reverse
  the debit for D + X days after the debit ( X can vary from 1 days to 6 weeks
  depending on the schemes );
• the debtor bank is informed of any change in the mandate;
• the debtor can cancel a mandate at any time.

In SEPA DD, banks play a passive role passing on information with no control over mandates and collections.

The mandate is kept by the creditor only; the mandate data is sent along with the first collection. Creditors do not have the minimum information needed to check the mandate, including the availability of funds: only banks can perform such controls.

The SEPA DD processes favour the fraudulent usage of the scheme because there are no preventive measures, thus leading to inefficiencies and disputes. Creditors are not assured of collections and debtors cannot rely on their banks to stop the debit, if irregular.

We believe that the basic scheme should give more responsibilities to the debtor bank for better protection of both debtors and creditors.

This is the case in many domestic schemes, where the debtor’s bank is responsible for managing mandates and checking debits; in some Member States, banking infrastructures allow to exchange mandates between creditors’ banks and creditors.

To provide protection to the debtor, SEPA DD envisages pre-notification and extends the possibility of refund to 90 days. After the 90 days, there is still the possibility that debtor asks to be reimbursed for invalid mandate and unauthorised collection (after all this time, there can still be a doubt about the validity of the mandate…).

Generally for creditors, an uncertainty of 90 days over collections and receivables is not compatible with the risk profiles of commercial credit and working capital management.

For companies with listed stocks and bonds this uncertainty would lead to a loss of market value. According to IOSCO, SOX and other national legislations, listed companies must explicitly communicate to stakeholders all events that could impact published financial results.

Uncertainty and non-finality of collections would also have a negative impact on securitizations and income tax calculations (when do I book a collection?)

In some domestic schemes, like RID Veloce in Italy or Abbuchungauftragverfahren in Germany, used in B2B, a clause in the mandate, agreed by both parties, does not allow the debtor to oppose or revoke the debit.

2.4 SEPA time-cycle for returns and refunds

The Rulebook indicates that a return should be settled after 5 days from settlement of the original collection but it is not clear whether a return sent later can or cannot be accepted. This adds uncertainty to the finality of credited funds.

The scheme should clearly say that “no return will be processed after the 5 days and that payment is deemed to be final”

B2B Direct Debits. We think that terms for rejects, returns, refunds and reversals, and the information provided to the creditor could be stricter and more efficient and that they could be agreed by the parties in the mandate (respecting the minimum systems’ operating cycles )

B2C Direct Debits. We consider 30 days as a maximum refund period but shorter terms should be allowed if agreed in the mandate.

Furthermore, If, as we recommended, there will be schemes where the debtor’s bank checks the mandate and the collection or pre-advises the debtor before debiting ( non pre-authorised debit scheme ) the debtor will be sufficiently informed and protected and there will be no need for long refund periods.

We also think that refund periods should logically be related to time-periods mandated by consumer protection legislation for returning goods / refusing / contesting services in distant and electronic commerce, utilities, etc.. We recommend a check of current legislation.

2.5 SEPA DD time- cycle

In B2B it is necessary to leave the parties more flexibility about time-cycles for collection.

The RID Veloce scheme, for example, is used in Italy by companies, like oil companies, who have a short commercial cycle and high value sales.. In this scheme, creditors can send their collections until 3 p.m. on the day before due date/settlement date.

Similar shorter cycles are in use in other Member States.

2.6 Implications for credit and trade financing

The long refund period has a substantial impact on the risk profile of the creditor, independently of its real credit rating. As a consequence, it may influence the risk taken by the bank and, according to Basel II rules, increase the risk profile and the cost of credit to the same customer.
Certainty of time-cycle for refunds, as suggested earlier, would allow treasury to optimise the management of corporate funds and enhance the ability of banks to offer short-term credit in anticipation of expected collections.


III GENERAL COMMENTS ON SEPA CREDIT TRANSFER

The scheme features are broadly similar to those of domestic and cross-border transfer services.
These are the major comments and suggestions.

3.1 Maximum. 3 local working days cycle

We understand this limit to be a “maximum” and that banking communities, who already have shorter cycles, can continue do to so.

Reference is made in the Rulebook to a possible reduction in maximum time after 2008.

PRIEURO, for same-day single and bulk credit transfers is mentioned as a separate scheme but it is not clear whether EPC will produce the scheme by 2008.

If SEPA Credit Transfer will be the only mass credit transfer available, companies ask that maximum time be reduced to 2 working days and preferably 1 working day..

We also request to make PRIEURO available from 2008, with a much shorter cycle (1-day,
4-hour,…?).

With SEPA CT, Prieuro and Target 2, companies would have three different alternatives of paying by credit transfer. While Target 2 should be considered only for single, urgent, high-value payments, SEPA CT and Prieuro should be clearly differentiated in terms of service levels and cost.

3.2 Amounts credited to beneficiaries solely on the basis of IBAN

In SEPA CT, all responsibilities for error and fraud rest on companies and consumers, since banks are not requested to check correspondence of account owner and beneficiary indicated in the payment order.

This is contrary to current practices in many Member States and increases the risk of fraud and crediting payments to wrong parties.

We understand the need for STP, but we are of the opinion that an additional validation is needed. To facilitate STP while maintaining adequate control, EACT suggests to adopt the existing identification codes which used at national or / and cross-border level to identify counterparts (e.g. fiscal code). A thought should be given to using the same codes as in anti- laundering, anti-crime FATF GAFI legislation which requires identification of originators and beneficiaries of payments (companies and consumers).

These identification codes are normally maintained and updated by public administrations, are used for payments in a number of Member States, and are already present in some administrative databases of banks and companies.

This seems to be more efficient and less costly than creating and maintaining a new database, and is consistent with the approach followed by the ISO TC68 SC4 Working Group 8 in defining the IBEI standard , which is not meant to supersede but to complement existing identifiers.

The NLF Directive should create a uniform legal framework in this respect, since there are Member States where, in case of discrepancy, the account number prevails over the account owner and vice-versa.

3.3 Remittance Information

The Rulebook indicates a 70-character length (2x35) as the space for remittance information. We are a bit surprised to find this specific reference in the Rulebook rather than in the future Data Set Book and note that SWIFT’s customer-to-bank payment initiation contains a field for “unstructured” remittance information of 140 chars.

Good referencing is vital for booking and reconciling payments. Without seeing the actual data-set and the bank-to-customer reporting messages, we cannot express a final opinion on the adequacy of these two fields If the 70-chrs field is all that PEACHs will forward in full about the payment, the space may be insufficient to contain all the necessary references. If it is strictly for remittance information it will be enough for consumer and some small business but many companies will only be able to include the URI and send a separate remittance advice.

The EPC should include in its data model two basic structures: the electronic Payment Initiator (a pre-compiled “CT request”) and the “invoice header” that would allow to send to the creditor’s bank a subset of the invoice information necessary for reconciliation and invoice loan.

3.4 Acceptance date

This date is mentioned in the Draft of NLF Directive but never defined. Is it the date the payment order sent to the creditor’s bank? In most Member States, a payment order is to-day revocable until it is entered in the Inter-bank network/clearing, or , if it is on the same bank, until it is credited to the other account.

It is not clear if acceptance date (hour/ minute) will be recorded and reported or detailed only in case of dispute?

3.5 Pre-determined value date for beneficiary

In some Member States, like Italy and Spain, a very useful feature of credit transfers is the possibility for corporate treasurers to include a pre-determined value date for the beneficiary Sometimes, this is required by “settlement instructions” clauses in contracts or by fiscal laws.

At time of order, the pre-determined value date can be a past or future date.

Example of past date is payroll which, in some Member States, is paid with value date end-of-the month. Sometimes, union contracts require salary payments to include all hours and overtime worked to the last day of the month. Payment procedures that calculate the amounts and generate payments cannot cope with this timing and payments are generated and sent to banks after that date but with value date end-of-the-month for the beneficiary.

Payment to suppliers is an example of future dates.

The prefixed value date is observed by banks, regardless of delays in payment cycle times, which, otherwise, would penalise beneficiaries.

The importance for treasurers of knowing beforehand with certainty the availability of funds cannot be underestimated.

This feature may be considered a “value added service” but the scheme should allow for its use. EACT agrees with the “ban on value date” (float) when “value date” is used by banks as a mean of charging for services. This is other than abolishing value dates altogether and expecting that value and book dates coincide at all times.

Value dating practices are outside the scope of EPC but EACT thinks the issue needs clarification and harmonization.

3.6 Value-added services

The scheme appears to be designed for credit transfers of retail customers, especially consumers.

In many Member States, large corporates, SMEs and government agencies use credit transfers with additional features (urgency, payroll payments, payments with confirmations, guaranteed payments like Confirming in Spain and VECOM in France)

There may be a need to flag certain types of bulk credit-transfer that must be processed in a special way or according to a different time-cycle.

IV PROPOSED PLAN OF ACTION

4.1.New Modus operandi

Discussion tables should be opened for the major points in our list of requirements.
Around these tables, experts should sit representing banks, companies, other payment stakeholders, regulators. As a stakeholder, EACT is ready to work on changes/additions to the current schemes over the next year.
Recommendations made by stakeholders’ experts should be submitted to the community of stakeholders for public consultation and, following final adoptions, included in the Roadmaps, when necessary with the support of European regulators to accelerate adoption.

4.2 From where to start?

Even if EACT understands that, it made sense to start with the bank-to-bank domain, it should be clear that current schemes do not satisfy the SEPA requirements of companies. So a plan of action should be shortly defined to extend the scope from the current “bank-to-bank” to an “end-to-end” SEPA
Rulebooks should be upgraded to include services that are considered basic by companies. In particular the EPC should define, together with end-users, cross-industry standards necessary for:

• B2B solutions for DD (e.g. one-off DD, “fast” DD) and CT (e.g. PRIEURO);
• integration between commercial and financial flows;
• integrated management of security aspects in the customer-to-bank domain.

Definition of these issues will necessarily require an evaluation of infrastructure aspects.

4.3 GAP Analysis

In many cases, it will not be necessary to start from scratch; for instance XML standards already exist or are work-in-progress (SWIFT, TWIST, Rosettanet, etc). A Gap Analysis by stakeholders can quickly bring results

4.4 Best practices

In new areas, like electronic commerce and invoicing, where standards are yet undefined or different business models exist, more analysis and a different kind of project may be required. Relevant initiatives exist in a number of Member States and should be carefully considered. Projects could go on in parallel.

Even if these objectives are currently outside the scope of EPC’s Roadmap, EACT proposes that a plan of action should be defined at the European level.

Everybody agrees that a strongly increased participation of stakeholders in the definition of SEPA payments instruments is key to their acceptance and, more important, to a successful migration from current payment instruments to the SEPA ones.
Stakeholders, particularly companies, and we believe, also banks, will not fully commit to SEPA until they are able to comprehend and accept the “entire plan of the cathedral”, not just the foundations.