In the pre-single euro payments area (SEPA) euro payments market, dozens of different data formats are in place to process payments across different national and pan-European clearing systems. The realisation of a harmonised euro payments market therefore requires agreement on a common set of data to be exchanged in a common syntax.
The SEPA data formats specified by the European Payments Council (EPC) are detailed in the implementation guidelines released by the EPC with regard to the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) Rulebooks. The SEPA data formats are binding for the exchange of SEPA payments between payment service providers (PSPs) which are SCT and/or SDD Scheme participants. These data formats are based on the global ISO 20022 message standards developed by the International Organisation for Standardisation (ISO).
Today, around hundred different specifications based on the EPC implementation guidelines are available. This fragmentation poses a serious obstacle in achieving the SEPA objective of market harmonisation.
Going forward, the focus should be on further aligning the interpretation of the ISO 20022 messages rather than translating the specifics of existing national formats into this global format. ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009′ (the SEPA Regulation) details the use of the ISO 20022 message standards by PSPs and payment service users (PSUs).
Provisions in the SEPA Regulation Regarding the Use of ISO 20022 Also Impact PSPs
The EU SEPA Regulation came into force on 31 March 2012. It defines 1 February 2014 as the deadline in the euro area for compliance with the core provisions of this Regulation.
Article 5 of the SEPA Regulation details the use of the ISO 20022 message standards developed by the ISO, PSPs and, under some circumstances, payment service users (PSUs). Article 5 (1) (b) specifies that PSPs must use the ISO 20022 message standards when transmitting credit transfer and direct debit transactions to another PSP or via a retail payment system. Article 5 (1) (d) states that PSPs “must ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission, the message formats specified in point (1) (b) of the Annex are used.” (Point (1) (b) of the Annex to the SEPA Regulation specifies that such message formats are the ISO 20022 XML message standards.)
The Differences Between Two-wheelers and the Need for Multi-lane Highways
A bicycle path is only meant for bicycles. That seems obvious enough – the clue is in the name. What happens however if someone drives along the path on a motorbike? Nobody really cares enough to try to stop them. Why? Because the motorbike also has two wheels and, given that not many cyclists have discovered this particular path yet, the risk of a serious accident seems small.
While any observant onlooker would say: “Yeah, but that’s not a bicycle”, others might retort that the traffic authorities only determined that a vehicle must have two wheels in order to use this path. Nobody told the motorcyclist that they were not allowed to add extras to the bicycle, such as a motor.
The situation for SEPA transactions is broadly comparable. The general idea is that SEPA payment transactions are processed based on a common set of data to be exchanged in a common syntax, i.e. the SEPA data formats. The SEPA data formats are detailed in the SEPA implementation guidelines, released by the EPC, with regard to the SCT and SDD Rulebooks. The SEPA data formats do not constitute an exclusive European standard; rather, they are based on the global ISO 20022 message standards.
It is expected that there should be a common understanding on the use and interpretation of the ISO 20022 message standards, as specified in the EPC implementation guidelines (i.e. only bicycles are allowed on this path). This is however, not the case. The market reality is that multiple specifications based on the EPC implementation guidelines are in use, which has resulted in subtle (and sometimes less subtle) differences in the application of the standard. So, the bicycle path is increasingly dominated by motorcycles and other types of vehicles which only very remotely resemble what is commonly considered a bicycle.
Insufficient attention is being paid to the fact that a wide variety of message formats are currently being used in the PSP-to-PSP domain, despite the fact that the EPC has clearly defined the inter-PSP SEPA format. Were this to continue to be the case as SEPA migration continues to gain momentum, there would be major risks to efficiency, interoperability and competition. So far however, many PSPs and clearing and settlement mechanisms (CSMs)1 have been unable to resist the urge to adjust these when implementing their own solutions.
Vision Versus Reality
Why is that? The role of the EPC in defining the SEPA data formats involves identifying all necessary data elements for making SEPA payments, as defined in the SEPA Scheme Rulebooks within the global ISO 20022 messaging standard. These ‘core’ data elements are indicated by yellow shading in the EPC’s implementation guidelines, released with respect to the SCT and SDD Schemes.
To allow communities of banks participating in the SEPA schemes to provide additional optional services (AOS) based on the schemes, the EPC has also identified data elements within the global standard that can be used for this purpose. These data elements are indicated by white shading in the SEPA implementation guidelines.
The implementation guidelines could therefore be regarded as a framework, rather than as a prescriptive solution, which allows a degree of interpretation. As a result, many market participants felt able to take the basic SEPA format and modify it – often according to the information included in their former domestic formats. Examples of the types of modifications that have been witnessed include:
- The interpretation and usage rules of fields in the mask are different.
- A field that was optional in the SEPA Rulebook is made mandatory by that local implementation rule or, in the other extreme, is no longer allowed.
- Something is added as a file header.
Specifications of the ISO 20022 message standards developed by national CSMs also often seem to aim at perpetuating local habits, i.e. differences, rather than embracing harmonisation and therefore competition.
At first sight, this might even look like a positive thing to do if the motivation was to meet existing user needs in, for example, a national community. Maintaining this position of flexibility and variation at the PSP-to-PSP level in the future however, would exact a heavy price – in terms of severely limiting the benefits of enhanced efficiency, cross-border competition between all SEPA PSPs and more choice for customers. After all, a standard can only deliver competition and enhanced efficiency for the market if implemented in a harmonised and consistent way.
At a time when the need to complete the EU single market has never been greater, it would be a huge irony if the SEPA initiative were to result in additional fragmentation rather than the harmonised environment it is meant to deliver. Indeed, a harmonised SEPA outcome is a key contributor to the broader EU agenda as set out in the EU 2020 Strategy and the EU Digital Agenda.
As a consequence of the lack of harmonisation, multi-country payment processing at a PSP-to-PSP (or PSP-to-CSM) level currently requires the handling of multiple domestic SEPA formats, which effectively replicates the legacy environment where every country had different local rules and formats for their payment process. Were this situation to continue, the upgrade to the open ISO 20022 XML standard framework would therefore add little value to the efficiency and integration of the European payment market.
A Global Perspective on ISO 20022
Moving briefly away from the European story, let us take a look at what is happening with the ISO 20022 message standards at a global level. In addition to enabling a more streamlined way of processing transactions between PSPs, ISO 20022 is fast establishing itself as the ‘best of breed’ when it comes to simplifying customer connectivity to PSPs. As a result, corporate customers are increasingly embracing these message standards.
This tangible success has been brought about through the international collaboration within the Common Global Implementation initiative (CGI), a global industry forum which brings together leading corporate customers, banks, service providers and standard bodies. Created in October 2009, CGI currently includes 47 members and has recently published implementation guidelines covering payments, collections and reporting (note that reporting is not addressed in the SEPA environment).
The CGI approach to ISO 20022 XML enables the user to benefit from a common business process to improve payment initiation and accounts receivable automation. It includes reliable transfer of the remittance advice or the remittance advice reference through the banking/PSP chain. In practice, this means that customers can take their cash management to the next level with the help of a single global implementation. Customers can make use of a single common global template to send and receive all their payments around the world, including reporting. The concept of ‘data overpopulation’ allows customers to effectively provide all of their information to the bank/PSP using ISO 20022 XML, removing the requirement to follow local business rules.
Therefore the complexity of the country-rule led payments process, which customers are usually subjected to, is instead pushed on to the bank/PSP side. The bank/PSP that is part of the CGI then ensures that only the relevant information is passed to the respective clearing in order to execute the transaction. This delivers a very simple and efficient approach for the customer, facilitating the integration process with banks/PSPs, reducing implementation cost and at the same time enabling the customer to switch bank/PSPs easily – between those that are part of the CGI – which is an important benefit from a competition as well as risk management perspective.
While the EPC customer-to-bank implementation guidelines would require customers to follow the SEPA business rules and only send the information that is defined therein, the CGI approach, by enabling ‘overpopulation’, allows the elimination of any requirement on customers to specifically filter the data for such a process.
Additionally, the PSPs supporting this initiative see an increased benefit in achieving more global coherence among payment systems standards and formats with a view to aligning around the ISO 20022 XML message standards, as this would simplify their task immensely. This is a different approach to that being followed by some European players and communities as described above, which instead see benefit in a more fragmented and locally flavoured approach to ISO 20022 XML, even in a SEPA context.
Original SEPA Objectives and Lessons Learnt
Suffice to say that in Europe, as much as at a global level, the true value that can be provided by PSPs to their customers lies in a coherent standard approach that leverages the ISO 20022 message standards as much as possible. Therefore SEPA should move to the next level, i.e. a situation should be created which allows PSPs to process ISO 20022 transactions and enables their customers to access these services in a harmonised way. This would result in more customer choice and competition in both the domestic and cross-border payments market, to the benefit of all types of users of all sizes. The initial track record of SEPA in this regard leaves room for much improvement.
Will Motorbikes be Banished from the Bicycle Path in the Future?
Coming back to our introductory analogy, the question at this point is whether we will manage to get motorcycles off the bicycle path. In the European context, the answer needs to be a firm ‘yes’. In the interests of road safety and traffic management, motorbikes and bicycles cannot be allowed to share the same lane. Similarly it is crucial that the SEPA supply side wakes up quickly to the need to adopt a much more consistent and harmonised approach to the use of the ISO 20022 message standards in the PSP-to-PSP domain as well as the customer-to-PSP space. Otherwise SEPA will fall prey to accidents and breakdowns.
This article was first published in the EPC Newsletter in October 2011. The text was updated to reflect the final text of Regulation 260/2012, as published in the Official Journal on 30 March 2012.
1In the SEPA context, a payment system in the meaning of a ‘funds transfer system’ is referred to as a ‘Clearing and Settlement Mechanism’ (CSM). A funds transfer system enables the exchange of funds (money) and messages between two PSPs executing a payment transaction. These funds transfer systems can be PSPs as well as separate business – public or private – entities (which may or may not be owned by PSPs). CSMs are also referred to as infrastructures.
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