All European companies and public-sector institutions are supposed to have migrated to the new Sepa payment system for credit transfers and direct debits by February 1. However, an alarming number of companies are still not ready, so the EC has been forced to intervene to prevent a crisis erupting.
On January 9 the EC said it had adopted a proposal to allow an extra six months from February 1 when payments that differ from the Sepa format can still be processed by banks and clearing houses. There was a fear that Europe’s payment system, which handles 80 billion of transactions a year, might have been paralysed had the EC not intervened.
Tony Richter, Sepa programme director at HSBC in London, says the announcement “does mitigate the risk of disruption in the payments market, for our clients, the banking community and the clearing houses”.
He adds: “All of us could see there would have been an issue had there not been a change in the way that there has been.”
Steve Everett, global head of cash management at RBS International Banking, says that given overall Sepa-compliant payment volumes were well below the 100% target, at 64.1% for Sepa credit transfers and 26% for Sepa direct debits, “the extra time will allow companies to minimize any negative impact on their businesses”.
The EC has been acutely concerned about the speed at which the European non-financial corporate sector in particular has been migrating to the new system ahead of the February deadline, an inertia that might still have drastic consequences if not addressed.
“If no action were to be taken by the Commission and the co-legislators, banks and payment service providers would be required to stop processing payments that differ from the Sepa format as of February 1,” says Michael Barnier, the EC’s internal market and services commissioner. “This could result in serious difficulties for market participants that are not yet ready, particularly SMEs, who could have their payments (incoming and outgoing) blocked.”
Such an outcome would be catastrophic, possibly provoking a double-dip recession in the eurozone. The EC is fully aware of this, which is why it has intervened to offer the transitional period.
“Clearly this type of announcement would not have not been made on the fly,” says Richter. “This has been a very well planned and orchestrated manoeuvre because it does affect so many people and institutions.”
One of the questions is whether the EC, having intervened once, might do so again if migration rates do not accelerate sharply. Richter says it will not. “If you look at some of the wording they have used in the announcement, this is once and for all,” he says.
Jonathan Williams, director of strategic development at business information company Experian, says that even though it is welcome news there are other big questions about the EC’s proposal.
“Who will legislate to waive the provisions of the Sepa regulation and when can this be done?” he says. “Can payment service providers process old euro transactions using new Sepa schemes and, if so, will they be forced to?
“Who will bear the cost of running the old systems for six months longer, if that is necessary? What will happen if a payment fails because it does not comply with the Sepa technical requirements? Who bears the cost and effort in repairing and re-processing it?”
Given the urgency of the situation, the EC is urging the co-legislators to “rapidly take up and agree this proposal so as to ensure legal clarity for all stakeholders,” according to its announcement.
The EC is also calling on member states to ensure that, should the proposal still be in the process of adoption on February 1, “banks and payment service providers will not be penalized for continuing to process legacy payments in parallel with SEPA payments”.