SEPA and Non-SEPA Payments in Romania
When the Romanian Electronic Payments System (EPS) went live in 2005, everyone in the Romanian banking community believed years of sound and relaxed interbank payment operations would follow. The three new integrated payment systems – an ACH, an RTGS and a Security Settlement System – seemed to be exactly what the Romanian banks had been waiting for. There were also great expectations (not confirmed to date) of fast growing volumes and diversification of transactions on the government securities market.
Now the Romanian payments system operator, TRANSFOND, and the Romanian banking community seem to have two major concerns about payments: single euro payments area (SEPA) and non-SEPA payments.
The Romanian retail payments system (called SENT) was put into operation in 2005 and has had (even before the SEPA Rulebooks were issued) a high degree of compliance with SEPA standards. These were XML formats – not exactly ISO 20022, but XML nonetheless – for both direct debit (DD) and credit transfer (CT) messages, IBAN and BIC codes are mandatory for all payments in local currency, all SEPA data attributes are ensured in domestic CTs and most of the attributes are ensured for DDs. Based on this fact, the banking community, the SEPA National Committee and TRANSFOND have started a debate on the opportunity of fully adopting the SEPA standards for both domestic payments (in the domestic currency – RON) and euro payments, and also to upgrade the SENT system in order to enable their processing.
As is usually the case for SEPA topics, the opinions are very diverse, ranging from”don’t make any change” to”make the change now.” Those advocating that no change is necessary for the domestic payment system ask why change something that works great since no compliance request for change has been formulated (advocating that SEPA is for euro payments only). Those seeking to make the current payments system a SEPA-like infrastructure answer:”Because Romania will adopt euro by 2012 (or 2014) and we’ll need some time to get there with our payments infrastructure; and it will be great to have a single window system interface, for both euro and RON payments.”
Unlike the eurozone, where the SEPA Credit Transfer (SCT) was launched first, surprisingly the studies made on the Romanian market show that the adoption of the SEPA Direct Debit (SDD) scheme is the first priority of the Romanian banks as regards the adoption of the SEPA payments schemes (standards).
The Romanian banks (especially those currently providing interbank DD services) made it clear that the current direct debit scheme (for local currency) needs to be adjusted and the SDD scheme seems to be the preferred option; but the implementation of the SDD Rulebook for non-euro payments is not that easy as non-euro payments are not in the SEPA scope and new national regulations or interbank agreements will be needed. However, the implementation will only be partial, since ‘reachability’ will be provided for Romanian banks only (and limited to national territory).
Afterwards, the SCT full compliance will be easier to implement: only XML ISO 22002 and exception handling messages (the reject and return messages) are still needed to make SENT a SEPA-compliant CSM.
One possible approach would be to ensure SEPA compliance for the national infrastructure before the adoption of euro and, once the euro is adopted, to change the system currency, from RON to EUR. The Romanian banks and TRANSFOND already went through such an overnight change, in 2005, when the denomination of the domestic currency (from ROL 10.000 to RON 1) has been applied and the transition was smooth. The reachability issue remains to be solved before euro adoption and several options are currently under scrutiny.
The development of an actual SEPA euro-payment system by TRANSFOND is a different story. There is a problem of low volumes that might not justify a ‘go’ decision for the near future, unless all payments (SEPA and non-SEPA) are jointly processed in the same system as to ensure the critical volume. A decision to this effect is expected from the Romanian banking community in the near future, based on individual banks choices or plans for the future.
Another issue TRANSFOND and the Romanian banking community had to address was the ineffectiveness of the legacy (paper-based) system for debit instruments. Currently provided via 42 clearing centres across the country, the processing of these papers, which could not be included in the ACH (SENT) due to the improper legal base, is still the Romanian bankers’ nightmare. But hopefully not for much longer!
One proposed option was to take these instruments out of the banking business by administrative action, but cheque users (mainly companies) and most of the banks did not agree, since there wasn’t, and indeed still isn’t, an equivalent product in place. There was great hope when the SENT system started that the banks would promote the new DD product (provided by SENT) and companies would prefer to use it for recurrent payments and as an alternative to the old and obsolete paper-based cheques, promissory notes and bills of exchange. This has not happened yet; because of the double function of debit instruments (payment instruments and short-term commercial credit papers), these papers are still highly used (about 17% of CT cashless payments) while the interbank DD volume is still not relevant.
The problem, i.e. the ineffective clearing of cheques will be solved once the project for Debit Instruments Automated Processing (PAID project) is completed. The new system will go live on 10 October 2008.
Before starting this project, TRANSFOND needed to be sure that the legal and regulatory base would be in place by the time the new projected system went live. The process was quite complicated and took a lot of time but after long discussions and negotiations (as part of World Bank’s Special Projects Initiative programme in Romania), the necessary amendments of the legal base were put on the Government’s desk. On 11 April 2008, the Government issued an Ordinance to amend the existing laws on cheques and promissory notes so as to give legal force to the electronic presentment of debit transfer instruments. The law defines an alternative means of presentment, i.e. by truncation, which means the process of extracting the relevant data from a paper-based cheque into an electronic data file and sending the data (together with the electronic image of the original paper) to the receiving (paying) bank.
In order to enable the electronic capture, a more ‘electronic-friendly’ layout for all paper instruments was designed and the old regulations were amended accordingly. The new format instruments are already in use and, for a transitional period, they will be used in parallel with the old ones until the latest will eventually disappear.
The new SENT/PAID system will go live on 10 October 2008 but, very much like the SCTs start, it will not be a ‘big bang’ for cheque image processing, mostly due to the still large volume of old cheques in circulation, which are inappropriate for imaging. They will be cleared via a single exchange centre, managed by TRANSFOND, which will be operating for about eight months, when the volume of old cheques will reach a non-significant volume.
The PAID system will enable the banks to exchange and clear debit instruments based on a simple scheme; the beneficiary will deposit the paper with its bank to be collected; the bank of first deposit makes the electronic data capture and an image (electronic copy) of the original paper. Then (in day T-2) the bank sends to SENT the debit instruments file, consisting of an XML file with payment instructions/collections, and a number of relevant images – .TIFF files – of the original paper-based debit instruments, all files being electronically signed. The PAID system validates the received files and forwards them to the paying bank, which may refuse the payment of one or more instructions/files (up to the end of day T-1). A report with preliminary net and gross positions for each participant (for both DDs and DIs) is provided after this cut-off time and the net settlement is automatically performed in RTGS system on day T on the bank’s accounts with the central bank.
Four or six years before joining the eurozone, the relatively new and modern Romanian payment infrastructure for domestic payments is prepared to process all payment instruments in an electronic environment. As banks, one way or another, will be SEPA ready (the great majority already are) sooner or later, the only problem to be addressed is whether the existing payments infrastructure should be turned into a fully SEPA compliant CSM since this early stage, i.e. before euro adoption, for both domestic and euro payments, even though the volume of the latter does not seem to justify such an undertaking. But, as they say, ‘no pain, no gain’.