What is SEPA Direct Debit?

SEPA Direct Debit has now been implemented in all eurozone countries and non-eurozone SEPA countries. In these countries, all Euro-denominated payments must be collected via the SEPA payment scheme.

This guide explains what SEPA is, and summarizes the main features of the SEPA Direct Debit schemes from a merchant’s perspective, to help you understand what it means for your business.

What is SEPA?

SEPA - the Single Euro Payments Area - is a European Union (EU) initiative to harmonize payments across the Eurozone. Its goal is to make European payments as easy and cheap as domestic ones by creating a single market for euro-denominated payments.

To achieve this, the European Payments Council (EPC) has created three SEPA payments schemes. Each scheme is a set of interbank rules, practices and, standards that defines a payment instrument:

• SEPA Direct Debit (SDD)

• SEPA Credit Transfer (SCT)

• SEPA Cards Framework (SCF)

Key features of SEPA Direct Debit

SEPA Direct Debit is broadly similar to ACH Debit in the US

1. SEPA Direct Debit is pull-based - Once given a mandate by their customer, it is the merchant who initiates payments.

2. SEPA Direct Debit payments are bank-to-bank - There are no card networks involved in the SEPA Direct Debit scheme. All communications happen directly between the banks.

SEPA Direct Debit differs from ACH Debit in five key ways

1. Currency

All SEPA Direct Debit transactions happen in Euros (even if the relevant accounts aren't in Euros). Any currency exchange required is up to the payer's and merchant's banks.

2. Chargebacks

Payers can get a refund from their bank for unauthorized SEPA payments for up to 13 months. Under the ACH scheme in the US, the payer has 60 days to request a return (the official name of a "chargeback" in this scheme).

3. Bank details

To collect SEPA payments, you need a customer's BIC and IBAN rather than their account number and routing number.

4. Customers

Businesses and consumers can be treated differently (see SEPA Direct Debit refers to two schemes below).

5. Implementation

Several implementation details of SEPA Direct Debit differ from ACH Debit in the US, including:

• Payment timings

• How mandates are stored

• Submission process

SEPA Direct Debit refers to two schemes

SEPA Direct Debit refers to two schemes:

• SEPA Core Direct Debit

• SEPA B2B Direct Debit

In short, the B2B scheme is only available if you are collecting Direct Debit payments from other businesses.

The Core scheme is mandatory for all SEPA banks offering Euro-denominated Direct Debits. However, the B2B scheme is an optional scheme, meaning that not all banks are able to offer it.

When deciding on which scheme to adopt, the following should be considered to select the scheme that best suits your needs:

1. Customers – The SEPA B2B Direct Debit scheme can only be used for payers who are businesses - not private individuals or microenterprises. The Core scheme can be used with all payers.

2. Indemnity claim protections - SEPA B2B Direct Debit customers are not entitled to refunds of authorized transactions. Refunds for unauthorized transactions are only possible if the payer proves that they did not agree to a B2B mandate (up to 13 months after the debit date).

3. Timing - SEPA B2B Direct Debit offers a shorter timeline for payment submission (1 day before the collection) and a faster response time from the banks in case of technical failure or being unable to realize the collection (2 days after collection).

Throughout this guide references to SEPA Direct Debit are, unless explicitly stated, to both the Core and B2B schemes.

Use cases for SEPA Direct Debit

Collecting regular payments such as subscriptions

For companies collecting regular payments, such as membership or subscription organizations, SEPA Direct Debit has three important advantages:

1. Control – SEPA Direct Debit gives merchants greater confidence their customers will pay their bills on time every month.

2. Retention rates – SEPA Direct Debit eliminates failed payments due to card expiry or cancellation. It also increases customer loyalty by offering a convenient set and forget payment method.

3. Reduced admin – SEPA Direct Debit can significantly reduce the time required on financial admin, such as chasing late payments and updating card details.

Invoicing for services where instant payment is not required

An example would be marketing agencies or accountancy firms. SEPA Direct Debit is great for B2B invoicing for three important reasons:

1. Improved cash flow – SEPA Direct Debit puts control back into the merchant’s hands. Merchants are able to collect payments when they want. This provides greater control over cash flow.

2. Variable amounts can be easily collected – SEPA Direct Debit enables merchants to collect variable amounts using a single upfront authorization. As and when the payment amount changes, merchants are able to automatically claim the new amount. This differs from a standing order where customers need to give their bank new instructions each time a change is needed.

3. Less admin and payment chasing – SEPA Direct Debit reduces the time and manual effort required by chasing late payments and reconciling payments. It also reduces average debtor days without requiring awkward conversations about money with customers.

Account customers with an ongoing relationship with the merchant

A good example would be wholesalers. Using SEPA Direct Debit to collect payments from account, or ongoing customers, works well for the same reasons as invoices (above). It also provides two additional key benefits to your customers:

1. Simple payment method for customers – It automates the collection process and enables customers to simplify the way they pay.

2. Allows a flexible payment option – SEPA Direct Debit allows ongoing customers the option of spreading costs and paying on account.

Markets with low card use

In markets such as Germany and the Netherlands, where credit card penetration is lower than 50%, businesses taking recurring payments can see greater uptake of their services by offering SEPA Direct Debit.

Paying through SEPA Direct Debit - which only requires the customer have a bank account - is the preferred way to pay in many of these countries. Similarly, in industries or markets where usage of corporate cards is low, B2B customers tend to prefer paying by bank account.

SEPA Direct Debit isn't so good for...

Transactions which need immediate clearing - SEPA Direct Debit payments are not instant, even under the faster B2B scheme. More info on timings is provided later in this guide.

Transactions that are likely to be charged back, including liquid assets and high value goods - The no questions asked refund policy under SEPA Core Direct Debit makes chargebacks easy in the initial eight weeks following the payment.

SEPA Direct Debit and GoCardless

GoCardless is an online Direct Debit specialist that can manage the entire SEPA Direct Debit collection process on your behalf. Merchants can collect and manage their payments through our REST API, an online dashboard, or by connecting GoCardless to various partner softwares.

For a full list of countries you can collect SEPA Direct Debit payments from using GoCardless, see our support centre.