Treasury Today Country Profiles in association with Citi

SEPA: time to take the plunge

Man swimming in ice cold water surrounded by snow and ice

Corporate treasurers have tried their best to ignore the Single Euro Payments Area (SEPA), but the recently issued end-date regulation means they will have no option but to adopt the system over the next two years.

The end is nigh

It is customary for Beethoven’s Ode to Joy, the EU’s national anthem, to ring out whenever an event of particular significance takes place within the corridors of power in Brussels. The 16th December was such a moment, but the only sound you may have heard was the continent’s bankers heaving a collective sigh of relief.

The occasion was the release of the European Commission’s much anticipated SEPA end-date regulations proposal. The 30 pages and 19 articles in which the agenda for migration is outlined ensure that the effort and cash invested in the project by Europe’s banks over the past three years has not been in vain.

“As a result of the intense consultation, it has been concluded that a mixed approach consisting of setting common standards and general technical requirements is the most appropriate for defining Union-wide payment instruments,” the document says.

The Commission has opted for a compromise solution, but one that ensures SEPA will become the standard method of low-value payments within Europe over the next two to three years. The document makes provision for separate migration end-dates for credit transfers and direct debits. Article 5 indicates that all Eurozone credit transfers will be SEPA compliant within 12 months of the regulation coming into force. The same article stipulates that direct debits should follow within 24 months of the same date.

EU Member States not in the euro will have until 1st November 2014 to make the switch. A number of caveats – or ‘waivers’, as the document terms them – mean that certain legacy systems will be given a stay of execution, but for the most part will be phased out over the next two years.

The proposed regulation also stipulates that payment service providers (PSPs) must be fully reachable for SEPA credit transfers – as they are now for direct debits. Article 3 indicates that all PSPs which are now reachable for a national credit transfer denominated in euro should also be reachable for SEPA credit transfers.

The regulation will come into force on the day following that of its publication in the Official Journal of the European Union. This is said by the Commission to be “likely” to be “during 2011 following debate by the EU Council and European parliament”.

Fears allayed

This announcement, although still falling short of an exact timetable for implementation, has allayed banks’ fears that the project was in trouble. Previous draft legislation had left open the possibility that legacy systems might receive a stay of execution, a possibility the banks found deeply troubling.

At the time, Ruth Wandhöfer, EMEA Head of Payment Strategy and Market Policy for Citi Global Transaction Services, said: “Allowing competing schemes will mean that we maintain the status quo as it is today – totally fragmented, no integration, no competition; and we will do that on a new standards level. It may be a nice marketing gag, but it means that you won’t have real interoperability, nor will you have any real competition in the market.”

The prospect of a two-tier – or Mini-SEPA – system was deeply unappealing to the banks, which had invested substantial amounts of cash in the new payments infrastructure. The ECB and the EPC spent the best part of 2010 exhorting the EC to issue an end-date.

The reason for the Commissions’ reluctance to issue draft legislation on the subject is believed to have been due to its reservations on the subject of competitiveness in the payments arena if SEPA were the sole pan-European payments system. It has apparently overcome its scruples.

There are also issues surrounding the piece of legislation that underpins the SEPA project, the Payment Service Directive (PSD). It was issued in 2007 and has since been ushered through the national legislatures of the majority of the countries participating in the scheme. However, it has not been without problems of its own and some believe it is more a question of when – not if – the directive is replaced.

Low adoption

The SEPA initiative has stuttered its way through a number of milestones. SEPA Credit Transfers (SCTs) were the first payment instrument to be introduced in January 2008. The EPC followed that up with the release in the same year of a framework for SEPA Cards, the SEPA Cards Framework (SCF). The third and final pillar of the payments architecture was erected in November 2009 when SEPA Direct Debits (SDDs) were introduced.

Corporate response to all three initiatives has been decidedly unenthusiastic. As the EPC website says, “existing payment services are generally viewed to be efficient, secure and cheap.” As such, there has been little incentive for corporates to switch to the new system while the legacy systems still exist.

As Morten Kristiansen, Manager Cash Management, Norske Skog commented before the end-date announcement: “If SEPA was fully rolled out and implemented then of course one of my goals will be to get rid of a lot of accounts in Europe and just have one or two. But I don’t want to be the first one to make the move. In any case, we have a fairly good solution in Europe already and the improvements SEPA will bring are limited to the bank account administration, the transaction costs and admin costs on the bank account and the internal costs related to reconciliation.”

To give some idea of the lack of corporate enthusiasm, European Payment Area (EPA) SCTs totalled a disappointing 9% of total credit payments in the last quarter of 2010. At this rate, it would take around 27 years for credit transfers to become the industry standard in the Eurozone.

Chart 1: Direct debit transactions processed in SEPA format in the euro area
Chart 1: Direct debit transactions processed in SEPA format in the euro area


Corporates have fought even shier of the SDD. The European Central Bank (ECB) has released figures that show that less than 1% of all euro area direct debits were made using the SEPA direct debits system in 2010. This is for the most part due to corporates’ reluctance to shelve their legacy systems, but the fact that banks didn’t need to be fully reachable for the full gamut of SEPA SDD payments instruments until November 2010 didn’t help the project’s cause either.

Corporate uptake of the direct debit scheme wasn’t helped by tardiness on the banks’ part in embracing the scheme. Just 2,600 of Europe’s 8,000 lenders were ready for its launch in November 2009. However, as of November 2010, all of the EEA’s financial institutions are obliged by European law to be fully SEPA ‘reachable’ – that is, ready to process SEPA credit transfers and core direct debits.

Some place the responsibility for the slow take-up of SEPA instruments on the economic downturn. With IT budgets cut to the bone, it has been suggested that the new system has been put on the back burner. Equally, the approach the EC has taken to its brainchild has been cited as causing delays in the progress of its deployment.

PSD: the directionless directive?

The end-date issue may have been resolved, but there remain a number of issues with many aspects of the SEPA prospect – not least the European directive that underpins the project: the Payment Services Directive (PSD, 2007/64/EC).

In 2005, Internal Market Commissioner Charlie McCreevy launched a legislative initiative that would make the transfer of funds across national borders ‘as cheap and secure as making national payments’ in the EU payment markets. The Payment Services Directive (PSD) was the result of the ensuing deliberations and was subsequently adopted by the EU Council of Ministers in March 2007. A deadline of November 2009 was set for its domestic implementation.

All but two of the 31 participating countries managed to pass the legislation before the deadline. Iceland, with a banking crisis and an active volcano to contend with, has been afforded extra time to see the legislation through its parliament.

The situation in Poland, on the other hand, has met with less understanding by SEPA bosses in Brussels. The country’s finance minister, Jan Vincent-Rostowski, was summoned before the European Court of Justice (ECJ) in September 2010 to explain his country’s tardiness in passing the legislation.

The Polish Bank Association cited the laboured consultation process that has attended the directive’s national implementation. The banking sector has since provided the Ministry of Finance with its statement and it remains to be seen what its timescale for passing the bill will be. On its part, the bank association has said that it expects the directive to be passed before the end of summer 2011.

Countries that have passed the PSD have reported a number of problems with the directive. These include:

  • Problems with handling and charging options – namely, OUR, SHA and BEN options. The problem has arisen because of the way the PSD allows individuals to interpret its charging option requirements. The SHA option, which splits the cost of making the payment between the two transacting parties, is default on all SEPA credit transfers.

  • It is not unknown for beneficiary banks to apply unexpected charges or ‘lifting fees’. In theory the banks are obliged to agree beforehand what charges are to be applied, but this isn’t always the case in practice. In such cases the debtor and creditor have been left to come to an agreement over who pays the fees.

  • ‘SHA claims’ and ‘non-STP’ charges are sometimes levied by beneficiary banks. The European Payments Council (EPC) has said suggested that: “With regard to so-called ‘SHA-claims’ levied back up the payment chain by some beneficiary or intermediary banks, it needs to be recalled that the PSD intends to establish transparency of pricing for customers and banks and the idea is not to re-introduce the same principle under SHA as used to exist for OUR. With regard to so-called ‘non-STP’ fees it may serve the interests of transparency and predictability to have a common definition of the term “non-STP”in the PSD context”

OUR, BEN, SHA are SWIFT payment codes and can be found at field 71A of the message.

  • An OUR instruction indicates that the payer will pay all the costs associated with the payment.

  • A SHA (shared) instruction indicates that both the payer and payee will contribute towards the cost of making the payment.

  • A BEN (beneficiary) code indicates that the payee pays all the costs associated with the payment transfer.

The PSD Expert Group, which consists of bankers from across the continent, has suggested that payers use the SHA option as best practice – even if the payment involves a currency conversion – so that both the payee and payer take a hit when the payment is being processed. It has also recommended that banks and other Payment Service Providers (PSPs) provide a ‘health warning’ to those users who persist with the OUR option.

The PSD also stipulates a 1st January 2012 end-date by which banks must introduce the so-called ‘next day rule’ (D+1). This will significantly reduce the time recipients are expected to wait before they receive payment. As things stand, a SEPA payment can take up to five working days to pass through the system.

Second time lucky?

It remains to be seen if these are teething troubles or indicative of deeper problems with the directive. The PSD Expert Group is set to review the directive in 2012, at which time these issues will need to be addressed. It has been suggested by some market players that the PSD will be overhauled during the review and be replaced by a PSD II.

A survey carried out by the Financial Services Club (FSC) in October 2010 indicated that public opinion was moving in that direction. When asked to describe how successful they believed PSD transposition had been in their country, 85% of them said they that they had been impressed by the process. Over half of bank respondents and 36% of non-bankers, however, said that derogations had hindered the transposition process and over two thirds (68%) said they expect a replacement directive to be issued.

Problems with SDDs

The problems with SEPA direct debits are manifold, but most arise from the project’s overseers desire to make the system as country un-specific as possible.

“The SEPA Direct Debit system was created by taking the best bits of the various direct debit systems around Europe. Which means ultimately it matches no system. A direct debit is used very differently in UK than, say, Italy – in UK it’s a consumer proposition around budgeting; in Italy, it’s more a form of factoring for a corporate,” says Gareth Lodge, Senior Consultant, Cashless Payments at Secura Monde.

On a related topic, there remains the issue of tailoring the credit transfer and direct debit scheme to national requirements. As it stands, both the SCT and SDD schemes are unable to handle national-specific payments such as tax payments that use particular identifier codes; for example, in the UK where the VAT number must be entered in a certain field.

In accordance with EC regulation EC 924/2009, all Eurozone banks that offer domestic DD transfers have – since November 2010 – had to be reachable for cross-border core SEPA direct debit payments. However, they are free to choose whether or not they will offer the B2B variety.

With the latest announcement on end-dates now released, treasury departments must decide when is best for them to make a start on readying themselves for the switchover. Although the path to SEPA migration is littered with obstacles for corporates, the new system sports a number of features that are designed to facilitate the transition.

Not least of these is the provision in the PSD that allows corporates to transfer their existing direct debit mandates to the new format without having to issue new ones to each of their customers. The creditor must simply reissue the payment form in the correct format – XML ISO 20022 – and remember to include IBAN and BIC numbers.

As the tenor of the mandates have changed as a result of the transition to the new direct debit system, a new SEPA mandate will usually need to be issued. This has given rise to a number of problems in certain countries – not least Germany, where, as it stands, it is not possible to use the legacy direct debit mandates under SEPA.

Gerhard Bystricky, Head of Product Development Payments at UniCredit, has suggested that there was a solution in the offing which would save the country’s corporates having to issue fresh mandates to replace the 600m currently in the system.

“Automatic migration of the current mandates is not available. There seems to be a solution in the near future if the banks will change the terms and conditions, allowing the mapping of the current mandates to SEPA direct debits. The lawyers will find a way of incorporating this. We expect to see progress by mid of 2011.”

Although not as severe as those faced by Germany, Belgium has experienced similar problems with migration to the new mandate format. Legacy B2B schemes have traditionally allowed debtors to claim a refund. SEPA B2B direct debits do not allow them to do so, and this has meant Belgians have had to complete new mandates to adhere to the new rules.

Payments made via the B2B system require a little more co-ordination on the part of both transacting parties. New mandates must be re-sent and signed by the debtors before they can be introduced into the SEPA system. The rules and regulations governing both core and B2B direct debit systems can be found in the European Payments Council (EPC) rulebook.

The core SEPA scheme goes over and above the rules laid out in the PSD and entitles payers to a ‘no-questions-asked’ refund during the eight weeks following the initiation of the debit. During this period, funds transferred using the core scheme can be re-credited to the payer’s account upon request. In the event of unauthorised direct debit collections, the payer’s right to a refund extends to 13 months, which – again – is set down in the PSD.

The banks involved in processing the SEPA direct debits do not need to be provided with a mandate, but, under the rules, they have the right to ask for a copy should a problem arise. When a collection is to be performed, the information must be sent in the XML format and conform to the ISO 20022 standard.

In addition, much of the data held on the mandate has to be provided with each collection request, as this information is not held by any of the banks involved.

The next step

The road for corporates is now clear. SEPA adoption is no longer an option – it is a must. As such they will be obliged to issue SEPA compliant credit and direct debits over the next 12 to 24 months and need to start preparing now.

Anthony Richter, Head of Business Development for Payments and Cash Management in Europe at HSBC, says: “By virtue of their size, corporates are likely to have significant reach and interaction with several markets across Europe, and while that means many corporates will benefit from potential cost savings as part of the SEPA system, they need to prepare for the implementation of the new regulations. Many corporates will have centralised treasury operations which will help with implementing new systems, although businesses will still have to decide whether they want to simply meet minimum compliance standards or to take the opportunity to overhaul the way they manage their European commercial payments.

“All SEPA payments will need to conform to a set of technical requirements, which are laid out in an annex to the proposed regulation, and businesses need to familiarise themselves with these. Another important first step that corporates can start to take in preparing for SEPA implementation is to start gathering the International Bank Account Numbers of their customers (and include their own IBAN on invoices). SEPA payments need to be processed without re-keying or manual intervention, and while further clarity is needed on what this means for payments featuring formatting errors or incorrect data, potentially these will have to be returned, and so businesses will need to have appropriate monitoring systems in place alongside processes to ensure the accuracy of payment data.

SEPA short cuts

  • Collate your customers’ IBAN and BICs. It will ease the migration process when the time comes.

  • Always use BIC and IBAN numbers when making a SEPA payment. They are mandatory and banks may charge you to ‘repair’ an incomplete or incorrectly filled-out SEPA mandate.

  • Check your BIC numbers are in the correct format. These are used to identify the beneficiary bank for a payment and comprise an ISO code that is eight or 11 digits in length.

  • Remember to format your IBANs, or International Bank Account Numbers, correctly. They are a maximum of 34 digits long and include a country code, unique check number, bank code, sort code and account number.