Within the Single Euro Payments Area (SEPA), online payment transfers in Euros can be made across borders in all EU member states, Iceland, Liechtenstein, Norway, Monaco, Switzerland, San Marino, Andorra, and Vatican City State. These financial transactions are completed within a working day, facilitating e-commerce and online trade on the continent. Yet a ruling of the European Court of Justice, the supreme court of the European Union (EU), on the SEPA Direct Debit (SDD) payment method on September 5, 2019, may increase financial risks for e-commerce businesses in Europe.
While the SDD is a convenient payment method, a court case (Case C-28/18) between the Austrian Association for Consumer Information (Verein für Konsumenteninformation) and the German railway giant Deutsche Bahn have caused concern about whether the SDD payment method has now become redundant. The Association for Consumer Information sued Deutsche Bahn for offering the SDD payment option on its online ticketing platform only to customers settled in Germany. The Austrian plaintiff argued that the German company discriminates against customers from other European countries who do not possess a bank account in Germany. The European Court of Justice ruled in favor of the plaintiff, stating that selectively offering SDD is unlawful according to Article 9(2) of the EU Regulation No 260/2012 because businesses must not differentiate between consumers in the same country and consumers from other SEPA countries. European businesses must offer all consumers access to the SEPA online payment service, regardless of the location of their homes and bank accounts. The court added that companies can alternatively exclude the SDD payment service from their e-commerce platforms if they do not want to offer the service to all citizens of SEPA countries.
EU Regulation 2018/302 on geo-blocking also reaffirms that discrimination against customers based on their nationality, place of residence, or place of establishment within the European internal market is not permitted. The geo-blocking regulation contains an exemption clause, which states that companies may refuse transactions with consumers if there is no valid information on the consumer’s credit-worthiness. However, access to profiles on credit-worthiness across all European borders is not always available or is simply too expensive for businesses, especially for small and medium-sized enterprises.
As a result of the European Court of Justice ruling, SDD may become a less attractive payment option for businesses. Online shops may stop offering this option because it can entail a relatively high default risk. If consumers possess insufficient funds on their bank accounts, the direct debit payment will be refunded for the benefit of the buyer. Buyers may cancel payments up to eight weeks after their bank has transferred the money. If consumers did not authorize the transaction through a SEPA Direct Debit Core Mandate in the first place, they are paid back their money up to 13 months after the transfer. The buyer may also cancel the SDD without being required to give a reason.
Critical factors determining whether businesses will continue offering the SDD option are consumer behavior and regulatory safeguards. In Germany, the consumers’ willingness to pay is reported to be relatively high, decreasing the risk of default. Online businesses in Germany may also find it easier to manage payments cancelled by domestically located customers because legal processes are in place to reverse transfers. German businesses may fear that such supportive regulations are not in place in other European countries. After the court ruling of September 5, 2019, some companies may stop offering SDD completely. Some e-commerce experts criticize that this only complicates cross-border online trade.
If businesses continue to include SDD in their range of online payment options, European customers will enjoy equal treatment. Yet the risk for customers is that businesses could discontinue the SDD option. Other common payment options are credit card payments and Paypal transfers. Some customers may not possess credit cards, while other customers may find setting up a Paypal account more complicated than the SDD method, which requires customers to only enter bank account details during the direct payment process – similar to credit card payment processes.
Businesses could decrease default risks by only delivering their products once the financial transaction is completed. The issue with this solution is that, while SDD transactions only take one day, this may be too slow for some consumers. In order to minimize default risks while still offering SDD in a viable way, experts recommend that e-commerce companies may choose not to offer SDD to first-time customers or those whose purchases exceed a certain amount of money. These criteria would not exclude customers based on the location of their home or bank account, while still ensuring that the risk of financial loss is lowered. While sceptics heralding the end of the SDD era have strong arguments, these ideas may provide ways to reassess the application of the SDD, individual business goals, and associated risks.
