What is SEPA?
The single euro payments area (SEPA) is a payments industry -led initiative that is designed to establish a framework of rights and obligations for creating a standardised process to allow for harmonised payments processing in Europe. In basic terms, SEPA allows individuals, businesses and banks to make payments across Europe as easily – and as cheaply – as if they were making a domestic payment.
While one of the aims of SEPA is to make retail payments more convenient for customers, it is about much more than that. The greater objective is to strengthen the internal market through enhanced competition and greater efficiency – which was an integral part of the Lisbon Agenda.
There are three types of SEPA payment instruments:
- SEPA Credit Transfer (SCT) Will provide customers with a single means for transferring funds regardless of whether it’s within the country or involves a cross-border payment.
- SEPA Direct Debit (SDD) Will make it possible to charge directly an account in one country within Europe for services by a company based in another country. SDDs are divided into the SDD Core Scheme (SDD Core) and SDD Business-to-Business Scheme (SDD B2B).
- SEPA for Cards Will enable consumers to more conveniently use their cards for purchases anywhere in Europe. For retailers, accepting cards will become easier and more attractive.
In the beginning…
The vision for a harmonised area for payments within the EU can be traced back to the discussions that took place during the early 1990s, preceding the establishment of the monetary union.
But it was only subsequent to the introduction of the euro that the first concrete plans were drafted for a fully integrated, harmonised payments area. The expectation was that the introduction of the single currency would bring about a substantial increase in intra-community trade, and in order to support this there would need to be a system in place to allow all Eurozone members to offer cheap, fast and reliable services for individuals and businesses who wish to make cross-border payments within the EU.
Progress had already been made during the 1990s on the matter of large-scale wholesale payments typically used by large multinational corporates, but there was not yet any mechanism in place to facilitate smaller day-to-day transactions or retail payments.
The first serious indication that EU policy-makers were intent on reforming payment systems within the internal market came on 31st January 2000. The European Commission, concerned that cross-border retail payments remained expensive and time-consuming, circulated an official communication in which it demanded – rather optimistically with hindsight – “a significant improvement in the efficiency of small value cross-border payments, and substantial reductions in charges to customers, by 1st January 2002”.
Three months later that goal would be formally approved and incorporated as a part of the Lisbon Strategy, the objective of which was to make the European single market the most dynamic and competitive knowledge-based economy in the world by 2010. To demonstrate just how serious they were about pursuing their payments objectives, the European Commission followed up the decree with new legislation – the introduction of Regulation No 2560/2001, which demanded that banks end the practice of price discrimination between cross-border and domestic payments under a specified threshold, initially €12,500, then raised to €50,000.
Developing SEPA
Now the banks, confronted with the choice of either building a new payments infrastructure and process or making continual losses on cross-border transactions, began to take the first tentative steps towards the development of SEPA. But as Ruth Wandhöfer, Head of Regulatory and Market Strategy at Citi Transaction Services, describes, this was merely the beginning of a very complex and protracted negotiation process.
“At the time of Regulation No 2560/2001 we didn’t really have a cross-border retail payment system for euro transactions,” says Wandhöfer. “We were able to process high value payments with TARGET – later TARGET 2 – but for day-to-day retail payments, we didn’t have anything at a pan-European level. This is why the industry came together – to create a scheme that is more efficient and borderless.
“But as you can imagine, creating a harmonised scheme that works in the same way for domestic and cross-border retail payment types would also mean that banks open themselves up to competition from outside their home markets – and, of course, that was going to be challenging for many players.”
The principle difficulty, explains Wandhöfer, was that with a few exceptions the majority of Europe’s banks operate at the domestic level. “Most customers in Europe are consumers and SMEs, because that is how Europe is structured. Therefore most European banks were concerned about potentially losing their customer base if the market opened up,” she says. The thinking was that for a bank to maintain a competitive edge it needed to retain aspects of its domestic flavour of payment.
Another area of significant disagreement centred on how the new SDD scheme should be designed and implemented. Compromise, Wandhöfer argues, was more straightforward with SCTs “where you just push the money out of the door”.
“But on the direct debit side it was a much larger challenge,” she says, largely because of the flow and responsibilities around mandates, which varies considerably between European countries. “Some countries, such as Slovenia or Greece, have the debtor bank holding on to the mandate, while in many other countries it is the creditor, for example the UK. Some countries, like Italy for instance, even have a mixed model. And depending on who is holding the mandate, the liability and ability of intervention if there is a wrong transaction debited to an account is, of course, very different.”
Moving forward
With the October 2011 announcement that the SEPA migration deadline is 1st February 2014 for countries within the Eurozone and 31st October 2016 for non-Eurozone states, migration to the new payment instruments has now become driven by regulation, and banks and corporates are engaged in preparations for the transition. Although the SCT and SDD schemes were originally introduced in 2008 and 2009 respectively, the scheme failed to attract quite the level of voluntary adoption the European Payments Council (EPC), among others, was hoping for. It soon became evident to the European Commission that unless the Eurozone wanted to be left with a legacy of independent national systems along with a side-lined SEPA system it would have to introduce legislation to force banks, companies and public administrations to begin the migration process.
The imminent end-date has definitely helped to focus minds on the necessary steps involved in migrating to SEPA. Demonstrable progress has been made as a result – on the SCT side at the least. For example, as of October 2012 the share of SCTs, as a percentage of the total volume of credit transfers in the euro area, stood at 30.18%, according to European Central Bank’s (ECB) statistics. But corporate migration to SDD continues to crawl along at a sluggish pace, with the scheme presently accounting for only 1.85% of direct debits in the euro area.
“I think the direct debit has been a bit of a disaster,” admits Wandhöfer. The reason for this, she argues, is about much more than the different ways in which direct debits operated in euro nations previous to the introduction of SEPA; there are also, she believes, significant security issues yet to be satisfactorily addressed. The problem is a lack of a pan-European risk management scheme. “If you think about local processes, you usually have domestic scheme rules in place that enable, for example, a bank to automatically get the funds returned if a collection goes wrong or if it is fraudulent,” she says. But at the present time there is no such recourse available for SEPA users at a pan-European level, meaning that any unwinding of problematic transactions may take longer and be more complicated. This could bring a much greater risk to the parties involved.
The upshot of this, Wandhöfer says, could ultimately be less harmonisation. “So we’ve got a brilliant solution on paper – one which would bring a lot of benefits to corporates, particularly on the cross-border side,” she says. “But it is exactly that cross-border side where it suddenly gets very scary for some people. And that could be where the local direct debit inside SEPA suddenly starts looking very different. They will probably come up with local risk mitigation models, but I can’t conceive of a pan-European model being introduced from where we are today.”
Brian Hanrahan, Executive Vice President Sales and Marketing at specialist provider of SEPA payment solutions, Sentenial, agrees that the progress on migrating to the new direct debit scheme has, to date, been rather disappointing. “SDD was a much bigger project,” he says. “Traditionally it has been a domestic instrument – people weren’t doing cross-border direct debits before SEPA. Credit transfers, on the other hand, were already operating cross-border – people were just using more expensive payment mechanisms. So you could say that, unlike SDDs, SCTs have naturally replaced something.”
The transition to the SCT, he says, has been faster because these instruments present less of a technical challenge for banks and corporates. “If you think of a credit transfer,” he notes, “it is usually a one-off event. You capture your beneficiary details, which are now required in the IBAN format rather than a legacy format, but other than that it is a push instrument – you just send the message to your bank and they will execute the transfer.”
“But with direct debit there is a lot of back and forth involved. The corporate will send out a collections message to thousands of their customers and then over the next few days a variety of exception messages could come back. There is a lot more traffic and it is a more interactive process, which considerably multiplies the complexity.”
Getting ready for 2014
SEPA principally began as a politically-based project rather than a business initiative. European policy-makers saw it as a natural next step to the introduction of the single European currency – an essential component of the internal market which legislators hoped would foster greater levels of pan-European trade.
SEPA’s origins as a political project may explain why many banks and companies have not been in any rush to migrate early. But while the above-mentioned drawbacks may undermine the business case for SEPA, at least with regard to the direct debit, notice of the looming February 2014 deadline means that migration is no longer an option – it is now, unquestionably, a matter of compliance.
In light of this, nearly all banks and companies operating within the Eurozone have started taking steps to tackle the various technical and contractual changes required to prepare themselves and their customers for the switchover. “I think up until the deadline was announced SEPA had a few niche users. These were mostly companies with large volumes of cross-border payments who had seen a business opportunity in SEPA and adopted early for their own benefits,” says Hanrahan. “But they were in a very small minority. However, since the regulation passed into law most large corporations are now undertaking an impact assessment and many are in a vendor selection process.”
