The European Commission’s (EC’s) proposals for EU-wide end-dates for the migration of national credit transfers and direct debits to single euro payments area (SEPA) instruments now gives the clear signal to all stakeholders, such as corporates, public administrations, banks, payments infrastructure providers, that they have to become SEPA-compliant within the next few years. Banks will want to complete their infrastructure changes in a timely manner in order to remove legacy payments technology, improve customer service and drive efficiencies and return on investment (ROI), by avoiding the cost of running two parallel payment systems. So, what are the main changes they should be preparing for?
Moving to New Formatting Standards
As part of the move to SEPA and the expected infrastructure refresh, the use of standardised formats is becoming compulsory and the ISO 20022 global messaging standard has been put forward as the recommended format for all payment processing steps. This also includes card processing in order to ensure interoperability of cross-border card payment systems.
The ISO 20022 standard is a meta-standard providing the financial industry with a common platform for the development of messages. The privileged syntax for these messages is XML. Banks’ current systems are often based on fixed, flat files limited to fields required for processing payments in the bank-to-bank space and are therefore inflexible and difficult to change. When changes do need to be made, for example, to add additional information on customers or to increase straight-through processing (STP) in some exceptions situations, it requires initiating fundamental system changes and introduces a certain level of risk. If this risk is not managed properly, it can lead to transactions being processed erroneously.
If banks move to a standardised XML syntax, the amount of information exchanged per order is less limited and the nature of the exchanged information is not linked to the place in which it appears in the message. With its embedded description of data and its variable length capabilities, XML allows greater flexibility and ultimately greater payments agility. The value attached to payments agility today is highly significant as it provides an opportunity for banks to differentiate themselves in what is a highly competitive market.
However, with the introduction of SEPA, the European Payments Council (EPC) has used just a subset of ISO 20022. As a result, banks must be careful not to limit compliance to subsets of ISO 20022 but take a broader view and extend its use to all payment instruments, such as cheques and credit transfers, and to all payment schemes – not just SEPA schemes.
In doing so, banks will benefit from harmonisation throughout all payments methods, allowing their users to have the same experience for domestic and non-domestic payments. Migration from old siloed applications to a universal modern payments engine will reduce the global maintenance cost dedicated to payments processing.
ISO 20022 Migration Update
While the industry is generally keen to move to the new standard, there remain a large number of banks across Europe that mainly conduct payments and do business domestically and therefore do not see the need to move to ISO 20022 at this stage. Despite the fact that many of the smaller banks have already begun to migrate to the SEPA schemes voluntarily – some have already moved 70% of credit transfers from national payment schemes to SEPA Credit Transfers (SCTs) – many have been waiting for the SEPA end-dates to be announced before substituting their local standards with the ISO 20022 one.
With regard to card processing, Gertrude Tumpel-Gugerell from the European Central Bank (ECB) recently recommended, “that the processing of card transactions should use the same set of message standards as the processing of direct debits and credit transfers – i.e. the ISO 20022 standard.”1
The ISO 20022 standard mainly affects the authorisation of card payments as well as the clearing and settlement process, which is where the standard adds the most value. The clearing and settlement process is currently very fragmented as it is conducted differently in each country. The implementation of ISO 20022 would therefore make it easier for banks and card processors across Europe to achieve true interoperability.
Preparing for Further Change
SEPA, like most pieces of regulation, is an evolving compliance process rather than a tick-box exercise. Since future changes and developments to the regulation cannot be predicted, banks must have flexible payment systems in place that can help respond to these evolving initiatives. SCTs, for example, which were launched just three years ago, have already undergone two evolutions and a third is on the cards. In regards to SEPA Direct Debits (SDDs), originally, only one scheme was anticipated. Since 1 November 2009, however, there have been two schemes running (SEPA Core Direct Debit Scheme and SEPA Business to Business Direct Debit Scheme) with a third (SEPA Direct Debit Fixed Amount) in the pipeline.
So-called ‘e-SEPA’ is the next significant step in the SEPA project. In response to the rapidly increasing volume of e-commerce, the EPC has committed to providing a Framework outlining the specific rules and standards relating to e-payment schemes making use of the SCT. The Framework will create a situation where a number of e-payment schemes existing in the market today can migrate from a national environment to a SEPA environment. E-payment schemes are facilities that allow online buyers to have payments debited from their own current account. Many of these e-payment schemes, however, only work within national borders at present, for example, giropay, a fast and secure online payment method in Germany, or iDEAL, a Dutch online payment concept that allows customers to use direct online transfers from their bank account.
An e-payment scheme compliant with the SEPA e-Payments Framework will enable a buyer using the internet to visit the web shop of an online merchant regardless of where they are located in the SEPA and to pay the merchant using both their own internet banking service and their current bank account. The EPC will define minimum criteria, including legal and security aspects, which must be fulfilled by an e-payment scheme in order to be ‘SEPA-compliant’.
The ability for a consumer residing in one SEPA country to buy goods and services on the internet from another SEPA country fulfils the SEPA ideal. The existing payment schemes therefore do need to become interoperable, at the very least, to ensure that everybody has access. However, it is likely that standardisation and interoperability discussions for SEPA-wide e-payment services will take time and may experience delay along the way. While iDEAL and giropay are good examples, the issue remains whether other countries wait until a European or worldwide e-payments standard is properly implemented. As such, it is the banks which will take the lead here that will be able to learn from the experience, become a benchmark for others to follow and therefore be in a stronger position to adopt it once a global standard is in place.
In light of these anticipated developments, as well as many more associated with SEPA, many banks have come to the conclusion that a payments infrastructure refresh is necessary. For banks, it has become vital that they have agile payment systems in place that can easily handle future change and adapt to regulatory requirements to reap the full benefits that SEPA – current and future – has to offer.
1 ‘Sepa – where do we stand’, Gertrude Trumpel-Gugerell. Finextra, 18 October 2010.
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