SEPA-yments

The aim of this article is to give an overview of SEPA to the readers who are not very well aware about this initiative but would like to have a basic understanding of this concept.

A lot has been happening over the last few years in the payments landscape of Europe. And the driving force is one of the most adventurous project in the history of payments industry, which is known by the name SEPA or Singles Euro Payments Area. SEPA is an initiative by the European Central Bank to harmonize and standardize the standards and infrastructure of Euro electronic payments in European countries. This is considered as a gradual step after the introduction and adaptation of common currency with in European countries.

The aim of SEPA is to minimize the operational barriers for customers making payments anywhere within Europe, to expand the market for Banks to acquire customers throughout the Europe and to increase the competition amongst banks so they are able to provide high quality services and products to various customers. This would be achieved by integrating the payments infrastructure, setting up the common rules for all banks and educating the various stakeholders involved.

In SEPA, 32 countries have agreed to participate out of which 17 belong to Euro zone (which have totally adopted Euro as their primary currency) and 11 belong to non-Euro zone but Euro area (Where the primary currency is the local currency and Euro as secondary) and rest belong to European Free Trade Area.

Once implemented completely, customers would be able to make the Euro payments under the same set of legal and technical guidelines irrespective of the country from and to where the payments are made.

To achieve this target, ECB has established the Payments Service Directive (PSD) which would overlook the journey of this initiative. PSD has provided 3 set of schemes to ensure that all modes of electronic payments are brought in scope of SEPA. These are as follows:

1.       SEPA Credit Transfer: This scheme stresses that all the electronic Euro credit transfers within the SEPA region would follow the same set of technical and legal framework and customer would be able to make any cross border Euro payment just like a domestic payment

2.       SEPA Direct Debit (SDD): All the Euro currency direct debits with in the SEPA region will follow the same standards and guidelines irrespective of the country. This is valid for both B2B direct debit and all other modes (also known as core direct debit)

3.       SEPA Cards framework: To harmonize the payments landscape it is imperative that the payments made by cards should also be follow the same guidelines throughout the Europe so that customers can use their card seamlessly in any European country without going through any operational, technical and legal issues. For this PSD has issued a mandate to convert all the cards with in SEPA region into EMV (Europay Master Card) enabled Chip and Pin card which could be used without any additional charges across the SEPA region

For these schemes to materialize, one of the biggest requirement from the technical perspective is the mandate for all the banks and financial institutions in SEPA region to adopt the ISO 20022 XML format for all the non urgent ACH Euro payments. This is also one of the biggest challenge for many banks because till now they have been operating on their legacy payment message formats such as SWIFT certified MT messages, Paymul messages, BAI etc. Also it would be mandatory that all the Euro payments should include IBAN after SEPA, hence banks have to work religiously to ensure that they have IBANs available for all the account numbers.

Apart from this, the clearing and settlement mechanism for the Euro payments has been integrated to one common platform called STEP2 or PE-ACH (Pan European automated Clearing House).

For all the 3 schemes the regulatory body has come out with exhaustive rule books which would explains the requirements, purpose, standards and guidelines in detail for all the stakeholders.

SEPA has been a long journey till now and despite all the efforts by ECB and other regulatory bodies, it has not been fully adopted or understood by all the countries and banks. Though in the past, despite setting up the deadlines for implementing SEPA schemes, many banks have missed those frequently and to ensure its seriousness in future, the PSD has given the non-negotiable timeline of 1^st February 2014 to fully implement SEPA SCT and SDD by all the Eurozone countries. And by 1^st Feb 2016 for all the non-Eurozone countries.

Progress: As per the latest report released by ECB, the migration rate for SEPA credit transfer has been  around 58 % and SEPA Direct Debit has been around 7%. This indicates that the efforts are more concentrated on SCT than SDD by the stakeholders and it is expected that the deadline of 1^st Feb 2014 for SDD could be missed again this time.

To summarize again:

1.  SEPA is an initiative by European Central bank to harmonize the payments landscape of Europe
2. SEPA’s mission is to ensure that all the Euro payments made in European countries are free of any domestic regulation and follow the same standards throughout
3.  SEPA will greatly reduce payments charges and operational issues for customers and increase the market and competition amongst banks. It would be a win-win situation for all
4. There would be an integrated clearing and settlement body for all the SEPA transactions and this is called as STEP2 or PE-ACH
5. Total of 34 countries are participating in SEPA
6. SEPA consists of 3 major schemes namely SEPA Credit Transfers, SEPA Direct Debit and SEPA Cards Framework
7. A payment would be classified as a SEPA payment when it is in ISO 20022 XML format, it is non urgent, the currency is Euro, both the debter and creditor have accounts in the banks in European countries, payment has IBAN for both the debit and credit account, clearing code is SWIFT and its charges are shared
8. The target date by the banks and financial institutions to fully migrate SEPA standards is 1^st Feb 2014 for th Euro zone countries and 1 Feb 2016 for non Euro zone countries
9. Apart from this BIC would not be a mandatory requirement for cross border payments after 1^st Feb 2016 and for national payments after 1^st Feb 2014
10. So far around 58% of the payments have migrated to SCT and around 7% to SDD

More on SEPA technicalities coming soon..