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What is SEPA Direct Debit

Saturday, December 05, 2015

Understanding a common method of payment in Europe

If you do business in the European Union, you may run into a few payment methods not available in the United States. As a business, you’ll need to know these payment methods in order to understand and accept them. One such method is Single Euro Payments Area (SEPA) Direct Debit. In this article, we’ll tackle what it is, how it works, and how it compares to other payment methods. To start, let’s define SEPA.

What is SEPA?

SEPA is a payment network in Europe that makes it easy and inexpensive for businesses to process euro payments, both in domestic and cross-border transactions. There are 35 SEPA countries, including some in the European Union – 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, and Sweden – and 5 other countries: Andorra, Monaco, San Marino, Switzerland, and the Vatican City State.

The SEPA network allows for bank-to-bank transfers and does not require any involvement from the card networks. There are a few different types of SEPA payments – SEPA Direct Debit, SEPA Credit Transfer, and SEPA Instant Credit Transfer. For this article, we’ll be focusing on the first type of SEPA payment: SEPA Direct Debit.

What is SEPA Direct Debit?

Like direct debit options in the United States, SEPA Direct Debit (SDD) is a payment scheme within the SEPA network that allows for regular payments like subscriptions and bills. But, like ACH, SDD transactions can be one-off payments. Per the SEPA network, the payments are in euros and take place between banks. While SEPA is in 35 countries, SDD is only available in 21 countries.

Here’s how SDD works: a creditor issues a mandate, or a contract. An SDD mandate has all the details necessary for the direct debit, including your creditor identifier, which identifies your business. Once a customer consents to the payment, a merchant pulls the payment. Merchants must notify the customer 14 days before the payment due date. If somehow the payment is not authorized, customers can request a refund up to 13 months after the payment. Let’s further compare the process to something many Americans may already understand – the Automated Clearing House (ACH) system.

SEPA Direct Debit vs ACH Debit

As you can see, SDD is similar to the American ACH debit process. There are two key similarities between payment instruments: The merchant “pulls” the payments from the customers, and there are no card networks involved as all communication happens between the two banks. However, there are some unique differences between the two debit types.

The first is that a SEPA Direct Debit transaction has to be in euros, even if the accounts are not in euros. That means a currency exchange could take place. The payer and merchant banks decide on how to handle this exchange. Next, SDD transactions have a more lenient return window. With the SEPA network, payers can get a refund for up to 13 months after the unauthorized payment occurred. In the U.S., a chargeback can only happen within 60 days of the transaction. Next, SEPA payments rely on two key numbers – the Bank Identification Code (BIC), which can be eight to 11 digits, and an International Bank Account Number (IBAN). These numbers are similar to a customer’s bank account and routing numbers in the U.S. There are also two different types of direct debit schemes based on how a consumer uses the SDD. Let’s look at these two types of SDD now.

The two types of SDD

There are two different types of SDD schemes – SEPA Core Direct Debit and SEPA business-to-business (B2B) Direct Debit. These two schemes have some important differences that your business needs to know. Some banks that offer SEPA do not even offer the SEPA B2B scheme as an option to customers. However, as the name suggests, B2B direct debit only works for businesses. Individuals aren’t able to utilize that scheme. However, the core scheme works for all types of payers.

As far as claims go, SEPA B2B Direct Debit customers cannot receive refunds for authorized transactions. They also can only receive a refund for unauthorized transactions if the payer proves they didn’t agree to the B2B debit mandate. Another benefit for businesses that utilize the SEPA B2B Direct Debit scheme is that there’s a shorter timeline for payment submission – only one business day before collection. Now, let’s take a look at the advantages of SDD.

The advantages of SEPA Direct Debit

Whether you’re taking payments from other businesses or individuals, SDD can allow your business greater payment flexibility. This is especially true if your business collects any kind of regular payments, from membership payments to subscriptions. By utilizing SDD, you’ll see higher retention rates from customers since they can set their payment method, and then forget it. This can even help eliminate failed payments at your business due to a card expiration.

The SEPA network is also great for B2B payments as it can help improve cash flow with more consistent payment schedules instead of having to pay invoices in the mail. SDD can also make it easier to collect payments, thereby reducing administrative time and the manual process of chasing late payments.

SDD can also strengthen ongoing relationships between businesses by allowing for automated payment collection and allowing customers to spread out large costs over time. By letting customers or other businesses pay how they want over time, you’re more likely to overcome any cost objections they may have. Now that you’ve seen some of the benefits of SDD payments, let’s look at some scenarios where SDD may not be the best payment option for your business.

What is SEPA Direct Debit not good for?

When it comes to SDD, there are clearly a lot of benefits, but it also has its shortcomings. For instance, SDD is not a good payment method for any transaction that needs to be cleared immediately. That’s because, like the ACH system, payments don’t happen instantly. Therefore, a different payment method is likely to be superior for immediate needs.

Also, SDD is a poor option for retailers who deal with liquid assets or high value goods. That’s because the leniency of the refund policy makes chargebacks easier to perform than in the United States. Obviously, the higher the cost and more desirable your goods are, the higher likelihood someone may try to take advantage of your business.

For those who do business in Europe, SDD is a great type of transaction that can help you accept payments in a different way. While it has its limitations, it can be a great tool for your business, especially if you operate on a subscription or recurring model. You’ll want to talk to a payment processing expert or your payment service provider to help you implement SEPA network payments in your business.

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