People may think that this is an absurd claim to make. How can SEPA DirectDebit, this payment method which has only been generally valid within the EU for a matter of months, topple the reigning monarch from the throne of the payments empire? Credit cards are the only method of payment and all others are referred to as ‘alternative payment methods’ – APMs in short. So how can anyone make such a claim?
Market & Distribution
If you look at the European market – in particular the 34 countries within the SEPA area, the more than 585,000,000 SEPA-ready bank accounts (1) (2) (3) represent a considerable scheme with vast market penetration (4) (5) (6):
In terms of distribution, SEPA can compete on equal terms with the payment giants. Check.
Costs
For retailers one of the main arguments when it comes to deciding on the use of a particular payment method, is the cost per transaction. But not only the direct costs of a payment transaction such as the processing fees, disagio or risk checks determine the price. Every scheme has a significant proportion of indirect costs consisting of payment defaults, non-payments, manual editing and debt management.
For an average online retailer with 3,000 transactions, a shopping basket value of €100 and a 7% return rate, ibiResearch calculated the following direct and indirect costs (7):
The differences between the schemes are significant and show that for online and offline retailers DirectDebit represents enormous potential for cost reductions.
Acceptance
If we look closer into European countries, the use of DirectDebit shows a differentiated pattern. On one hand we see countries which have had a long tradition with similar former local direct debit schemes such as ‘Lastschrift’ in Germany and Austria, or ‘Inkasso’ in the Netherlands.
The example of total costs provided above represents DirectDebit in an environment which has grown strongly over decades. In its core countries the positive effects on costs, and above all the conversion rate for online retail, are virtually guaranteed. Experienced partners can easily be acquired for processing und risk handling.
The smaller the proportion of DirectDebit transactions within a country is in relation to its overall non-cash transactions, the less positive the effect will be on the conversion rate and choice of partners. Here is development potential which a number of service providers from Europe are already busy exploiting.
Challenges, Outlook
The preconditions for a real alternative to credit cards are in place, a low-cost scheme for the whole of Europe is available. In my opinion, whether SEPA DirectDebit can really establish itself among consumers and retailers in the coming years against the dominant payment methods and other APMs, will depend on two factors:
1. The concretisation of PSD 2 and the e-mandate, and the subsequent national implementation of the regulations. The resulting innovations could open the gate to consumer groups who still have little experience with DirectDebit and accordingly ensure increasing acceptance.2. The development of value-added services in relation to the subjects of processing and risk, in particular outside the DirectDebit core countries of the SEPA economic area.
Things are getting exciting!
(1) http://sdw.ecb.europa.eu/reports.do?node=1000004051(2) http://ec.europa.eu/finance/finservices-retail/docs/inclusion/20130506-factsheet-3_en.pdf(3) http://esa.un.org/unpd/wpp/Publications/Files/World_Population_2015_Wallchart.pdf(4) https://www.paypal.com/us/webapps/mpp/about(5) https://annualreport.visaeurope.com/our-business-performance/index.html(6) https://ibsintelligence.com/ibs-journal/ibs-news/mastercard-and-visa-dominate-european-cards-market/(7) http://www.ibi.de/files/ibi_research_Gesamtkosten_von_Zahlungsverfahren.pdf
About Viktor Brenner
Viktor Brenner is the CEO and co-founder of b4payment and in previous posts has been responsible for the areas of finance, payment, legal and IT. With almost 15 years of experience in mass transactions and e-commerce he has in-depth knowledge of the market participants within the payment ecosystem, both with regard to alternative payment methods and the dominant ones. His particular attention is always the entire value-added chain, ranging from the shopping experience of the final customer to the optimisation of backend processes.
About SEPAexpress
Founded by a team of ELV natives and payment experts, b4payment has developed an innovative all-in-one payment solution for SEPA DirectDebits. This white label solution named SEPAexpress is offered to vendors/ multipliers of the European online payment and retail/ POS market as well as to CRM/ ERP solution providers and financial institutions. SEPAexpress enables the market to process DirectDebits faster, more cost-effectively and with less risk.
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