Microsoft Dynamics 365 Blog

We get a couple of questions asked quite regularly: “How can I make my ERP system SEPA compliant” and a more basic one “What is SEPA? And how does this affect my daily work?” With this blog entry I’ll try to answer these questions.

SEPA is short for Single European Payment Area – which is set up by the European Commission as a political agreement to reinforce the Economic Monetary Union. The goal is to form a single market for payment transactions within the European Economic Area. One of the ways to do this is to create a set of standards for electronic payments using ISO20022 XML format together with a set of rules and guidelines as to how Euro payments must be handled. With SEPA fully implemented, all electronic payments in Euro within the SEPA area will be regarded as domestic payments – even if they are cross-border payments.

With a common standard it will be easier to process payments, which will lead to more efficiency in the banking system and hopefully lower prices. It will also make it possible for companies that have business activities in many countries to only interact with one bank, since the cross-border payment is assumed to be the same as the domestic payment. The long term vision is that this standard can expand and also be used in other areas such as e-invoicing and e-reconciliation.

The SEPA implementation is still in its early stages. In January 2008, the SEPA instruments for Credit Transfer became available to be used. The Credit Transfer standard will be initially used for interbank relationships with regards to cross boarder euro payments within the SEPA Countries. Banks which talks about SEPA compliant refer to this fact, meaning that they are able to create these kinds of transfers. It is important to note that right now it is only required that banks can use this format when dealing with each other; it is not required that customers adhere to these standards in either customer-to-customer or customer-to-bank situations. It is also important to note that the SEPA only covers Euro transactions – not other currencies.

Looking forward it is expected that national instruments for credit transfers, direct debits and cards are replaced by the relevant SEPA instruments by 2010 and that customers will be able to use the standards for creating electronic payments.

This will affect Microsoft Dynamics NAV customers that have banking relationships within Europe. Short term there will not be a big difference – it will not be required that customers use the SEPA standard, when they interact with their bank. Furthermore it is also only a few banks that can accept the format today. It will be possible to ask the bank for a SEPA Credit Transfer, but it will be the bank that creates the file in the proper format. It is anticipated that many of the banks within the SEPA region will be able to receive a SEPA Credit Transfer in the near future, but it is expected that there will be a transition period where they accept the old electronic formats.

One thing to prepare for is that both Bank Identifier Code (BIC) and the International Bank Account Number (IBAN) is a crucial part of the SEPA standard. These two identifiers are needed to process a SEPA Credit Transfer. This mean these numbers will have to be correct when an electronic payment is created and is something that the customers can prepare for by requiring that these fields are used and updated when a customer or a supplier is created or updated in Microsoft Dynamics NAV.

One question that we also hear and want to comment on is “If I want to make a SEPA payment, am I required to create an ISO 20022 compliant XML file”? The answer to this is both Yes and No:

  • No because all you need to make a SEPA payment, is to instruct the bank to process the payment according to the SEPA rules.  In short, this means that the payment must be in euros within the EEA and IBAN and BIC must be supplied.  There are several ways to create this payment:
  1. A company or individual can make a payment using the software provided by their bank.  The necessary information can be entered via the banking software.  The bank must then process the payment according to the SEPA rules.
  2. A company or individual can create a payment file and upload this to the bank for further processing.  This file may be an ISO 20022 XML file, but it is not mandatory.  A bank can offer to accept the existing payment files and process these according to SEPA rules if they are able to fill in missing information such as IBAN or BIC to fulfill the SEPA rules.  The bank is free to charge a fee for this conversion service. 
  • Yes because a bank is free to demand that ISO 20022 XML files are supplied in order to process payments according to the SEPA rules – It depends on your bank.
  • There are many places on the internet where it is possible to get more information on what SEPA is and what it means to businesses in EU and to banks. Many banks are also aware of the changes to come and what effect it has to their customers. I hope that the points above indicate that SEPA is an interesting new standard that potentially can make it possible to make interactions between Microsoft Dynamics NAV and banks more effective. From our perspective a common standard will make it possible for us to create bank integration that can serve more than one country or one bank – given that the banks stick to one schema! In the short term the thing to keep in mind is that it is possible to prepare for this by updating the data on supplies and customers, so that the creation of a SEPA compliant credit transfer can be created when it is required.

    Some facts around SEPA

    1. The purpose with SEPA is to create standardized payment instruments that can be used within all SEPA countries. The goal is to simplify and reduce the cost of payment flows, to facilitate trade and commerce and to strengthen the competitiveness.
    2. The European Commission (EC) and the European Central Bank (ECB) are responsible for introducing and administrating SEPA
    3. The countries involved in the SEPA agreements are: All member states in the Euro Zone incl. the EEA countries that are not part of the EU (Iceland, Liechtenstein, Norway) and Switzerland.
    4. The SEPA Schemas defines a common set of rules, processes, service levels and timeframe for each of the payment instruments. The ISO20022 is the standard for these payment instruments.
    5. Banks can adhere to the compliance requirements and thus become SEPA compliant. There is no corresponding compliance requirements for ERP solutions at the moment.
    6. SEPA covers the following payment instruments
    • Credit transfers
    • Direct Debits
    • Cards
  • Payment Service Directive (PSD) is the legal framework approved by EC and applied to all EU member states. It provides a new EU-wide licensing regime for Payment Institutions, so that non-bank payment service providers can offer their services across the eurozone. The PSD provides rules for information requirements which Payment service providers must fulfill. This applies both to SEPA and to existing national payment products.
  • Businesses are not required to make SEPA payments from January 2008. It will be possible to use both national payments standards and SEPA standards in a transfer period. SEPA payments are not anticipated to be able to replace national payment instruments until end 2010 in some of the involved countries. In some it will even be later.
    • Several countries (for instance Belgium, Finland, Portugal and Spain) have committed to phase out the old payment instruments by 2010
    • Some countries are committing to an extended deadline (for instance, Netherlands has committed to a deadline of 2013, France has committed to a deadline of 2010 for cards, 2011 for credit transfers and 2012 for direct debits)
    • Many countries (for instance Germany, Austria and Ireland) have not indicated a migration deadline
  • A SEPA credit transfer is a payment from one company or individual to another company or individual. The payment must be in euros and it transaction must include IBAN and BIC for both parties. One important point to remember is that credit transfers should be conducted between parties by means of XML files that comply with ISO 20022 payment processing standards and the XML format as specified by the European Payments Commission.
  • SEPA Directs Debits are somewhat different from the national direct debits. The existing direct debits payments can only be done with each domestic market. It is not possible to collect a direct debit from a customer’s bank account in another country. With SEPA it will be allowed to have direct debit transactions from customer bank accounts in the EU. The adoption of SEPA direct debits requires new European legislation (the Payment Services Directive) that must be transposed by the legislatures in each of the EU Member States by 1 November 2009.
  • Interesting links

    From the European Payment Council

    From the European Central Bank

    From the European Commission

    Rikke Lassen

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