SEPA: Everything You Need to Know

Executive Summary

2005 was a year of progress towards the Single Euro Payments Area (SEPA) as it came to the forefront of challenges facing the European financial services industry. What is SEPA and why does Europe need it? What were the main achievements and challenges of 2005? What progress has the banking industry and corporate sector made in their preparation and strategy? And what are the milestones ahead in 2006? All these issues are covered in this report: everything you need to know about SEPA.


In 1999, the Economic and Monetary Union (EMU) and the euro were introduced to help achieve the EU Commission’s political and economic goal of a single European market. One particular objective was to create a single market where currency could move as ‘freely and cheaply in the new eurozone as it had within previous national borders’ (EPC’s SEPA – Whitepaper Summary, May 2002) – hence the introduction of the euro. However, the euro did not encourage the change necessary to drive forward harmonization of payments processes, and integration of payment facilities across borders to create the single financial services market the Commission envisioned.

It became clear that further regulation was needed to restructure Europe’s financial markets into one single market. The Commission launched the Financial Services Action Plan (FSAP) in 2000 with the objective of creating a single payment area ‘in which citizens and businesses can make cross-border payments as easily, safely and efficiently as they can within their own countries and subject to identical charges’. The FSAP comprises 42 measures including the new international accounting standards (IAS), the Markets in Financial Instrument Directive (MIFID), which sets new securities trading rules, and the new capital adequacy rules under Basel II.

To move the FSAP forward, and establish a single eurozone payments infrastructure, key financial market players held a meeting in Brussels in March 2002. Those present included members of 42 European banks, the European Banking Federation and the Euro Banking Association (EBA). It was at this meeting that the plan for SEPA was launched as well as the creation of the European Payments Council (EPC) to provide the governance structure to guide and implement SEPA. The EPC is composed of banks or banking associations and credit institutions.

The fundamental issue SEPA focuses on is the current divide between the way domestic and cross-border payments operate and are priced. With SEPA in place, end-users (consumers and corporates) should be able to execute any payment within the euro area as easily and at the same cost as they would in their existing domestic payments system.

Progress in 2005: SEPA Scheme Rules and EU Payments Directive

At the beginning of 2005, there was a critical lack of certainty about the framework for SEPA and the rules to define how the new payments system would work. To address this, in March 2005, the EPC said it would deliver the much-awaited Scheme Rulebooks for electronic credit transfer and direct debit, and also design the cards and cash framework to define the single market for cards and cash by the end of 2005. (All services to be made available from January 2008 and national instruments phased out by 2010.)

Transforming multiple national payments systems, as well as the cross-border systems, into a payment structure similar to that of a single country is no easy task and the EPC has made great strides towards this goal. Indeed, Gerard Hartsink, the EPC’s chairman, admits, “Getting commitment on the two rulebooks, the SEPA cards and cash frameworks was the biggest challenge of 2005”.

The EPC finalised the frameworks for cash and cards by the end of 2005 as proposed, while the credit transfer and direct debit schemes will be finalised at the EPC’s plenary in March 2006 (see diagram below – The EPC’s Roadmap’).

Another fundamental milestone in 2005 was the EU Commission’s formal adoption of the EU Payments Directive (also known as the New Legal Framework) in December, which defines the conditions under which payment services can and will be offered to end-users. The Directive has been submitted to the European Council and Parliament, and it could be approved by the end of this year.

EPC’s Roadmap

Source: EPC

Significance of the EU Payments Directive

The Payments Directive is a significant document because, for the first time, Europe has a legislative text that harmonises the basic rules and responsibilities within its payment systems. Originally, the Directive was written with the EU consumer in mind, but it has been adapted to take into account the scope and requirements of the corporate community as well. “The Directive provides a number of exceptions and waivers for corporates within provisions that initially applied to just consumers,” explains Leo Lipis, market advisor in the business development division at Voca, the UK’s transactions processor, formerly BACS. “For instance, there is an issue of liability for unauthorised transactions being limited to €150 for consumers but corporates above a certain size can negotiate conditions on an individual basis rather than accepting the typical terms and conditions of a given bank.”

According to Lipis, the Directive is absolutely essential for SEPA. “Without it there is no legal basis for a cross-border direct debit, for example, and that’s one of the reasons why it is so rare today,” he says. One of the main building blocks of the Payments Directive, adds Lipis, is the right to provide payment services to the public. It establishes a licensing regime for payment service providers so that if they are licensed in one EU member state they can offer those services in another member state.

For Tom Buschman, treasury development manager of Shell International and chairman of TWIST, the Payments Directive is the main theme-setter for SEPA. “The Directive enables customers to automate their supply chain processes, including invoicing and payment processing, which means corporates can reduce their reconciliation processes,” he says. “Coupled with transparent pricing, the Directive is filling gaps in the payment system that corporates could not have filled themselves.”

SEPA Milestones to Date

SEPA Scheme Rulebooks: The credit transfer and direct debit rulebooks were approved for consultation at the EPC’s plenary on 21 September 2005. The feedback of the consultation with industry participants was discussed at the plenary on 15 December 2005 and final approval of the two rulebooks is on the agenda for the EPC plenary in March this year. Once these are approved, implementation and plans for rollout will begin in 2006. The standard for credit transfer, Credeuro, which will be complemented by a standard for same-day value payments, Prieuro, and direct debit should all be available in the euro area from 2008 at the latest.

Card and Cash Frameworks: On 21 September 2005, the SEPA cards framework was approved at the EPC plenary and is now subject to a legal review. Publication of the framework is expected in Q1 2006. In order for cardholders to use their cards in the same way nationally and under SEPA, the European Central Bank expects interoperability between card schemes before 2010. On 15 December 2005, the EPC approved the SEPA cash framework.

EU Payments Directive: In December 2005, the European Commission formally adopted the EU Payments Directive (also known as the New Legal Framework), which as the name suggests, provides the legal basis for the new payments system SEPA will introduce. It has been submitted to the European Council and Parliament for comment, and it could be approved by the of 2006.

PE-ACH and TARGET2: The first pan-European automated clearing house (PE-ACH), STEP2, went live in 2003. In 2008, national automated clearing house (ACH) infrastructures should start the conversion to other such pan-European schemes. TARGET2, the new EU high value payment infrastructure, is expected to be launched towards the end of 2007 and is being driven by the European Central Bank and national central banks.

Conflict Between Scheme Rules and Payments Directive

The Payments Directive and Scheme Rules are SEPA-enablers but how do they compare and what is the relationship between the two in terms of progress for SEPA? As described above, the Directive sets out the conditions under which payment services can be offered, whereas the Scheme Rules define which services will be offered and under what terms. They both cover a lot of the same ground but there is contention over the scope of what the Directive covers and what the Scheme Rules include.

Martin O’Donovan, technical director at the UK’s Association of Corporate Treasurers (ACT), says the European Commission has introduced higher specifications for payments services in the Directive than the banks have included in the Scheme Rules. For example, if a direct debit has been initiated by a recipient and the payer refutes the payment, the Scheme Rules allow 90 days to complain and demand a refund. Under the Directive, the recipient has only got 30 days to claim a refund.

According to TWIST’s Buschman, the fact that the Directive is more stringent than the Scheme Rules is a reflection of the banks not responding to corporate requirements as put forward by associations, such as the European Association of Corporate Treasurers (EACT). He argues that the Scheme Rules have so far only focused on inter-bank processing and not how to ensure end-to-end straight through processing (STP) or deliver easier connectivity between corporate customers and their banks, for instance.

Gianfranco Tabasso, chairman of the EACT’s payment commission, is also critical and makes it clear that corporates will not commit to SEPA as interpreted by the banks in the EPC’s Scheme Rules. “In its reply to the EPC, the EACT indicated that the proposed schemes, especially direct debit, did not allow electronic STP of the financial value chain as it only covers the inter-bank space and offers substantially fewer functionalities than payment schemes currently available,” he claims. “SEPA should include not only payments but also standardisation of other key components of the financial value chain and more generally e-business – digital identity, security/digital signature, remittance advice and electronic invoicing.” He adds that the EPC’s scheme rules must incorporate the ‘business rules’ set out in the Payments Directive (e.g. maximum execution time, mandatory information to payer and payee, ban on value dating, rights of refund and revocation).

In response to suggestions that the EPC has not taken corporate requirements into consideration, the EPC’s Hartsink affirms that the EACT is involved in the design phase for SEPA and that the EACT’s comments on the Scheme Rules received in December 2005 will be discussed at a workshop this month (January 2006). For Tabasso, the biggest challenge in 2006 is to make sure the EACT’s recommendations for “fundamental changes” in the SEPA process are accepted and to mobilise its best resources to work effectively with banks on the suggested agenda.

The ACT’s O’Donovan also hopes the Scheme Rules will be refined further in accordance with the Directive and take into account input from the corporate treasury world. “The Commission has the customer’s interest at heart and is pushing the banks to deliver a best of brand product. Jean-Claude Trichet [president of the European Central Bank] has made the point that SEPA must deliver something that is equivalent to the very best, or better than, existing domestic systems today otherwise why would anyone want to use it?”

Despite criticism that the Scheme Rules have not gone far enough in addressing corporate requirements, it must also be recognised that the EPC has made progress that should be commended considering the range of payments systems and requirements it is attempting to harmonise across Europe. The consultation this month with the EACT, and also finalisation of the Scheme Rules for credit transfer and direct debit at the EPC’s plenary in March, should help the industry move closer to much-needed consensus on the direction and scope of SEPA.

Corporate Involvement in SEPA

In 2005, while SEPA was high on the agenda for banks, this was not the case for the majority of the corporate community. This was reflected in a gtnews poll sponsored by LogicaCMG on SEPA in August 2005 where one in five corporate respondents said they didn’t yet understand the impact SEPA would have on their business and 66 per cent said they hadn’t started their SEPA strategy yet; despite the fact that almost three quarters (74 per cent) expect a positive business impact from SEPA (see Are Banks Ready for SEPA?). There were 155 respondents to the poll with 100 based in western Europe.

As the ultimate end-users and beneficiaries of the services SEPA will introduce (apart from European consumers), corporates do have a vested interest in being involved in the SEPA process and making sure their opinions are heard. “This year, we will see whether the pressure from corporates increases as awareness builds about what SEPA means to them as major users of payments services,” says Simon Bailey, director of payments, global financial services at LogicaCMG. “Corporates can start pressuring banks for what they want available from 2008 and, as they become aware of the commercial benefits, there will be more pressure from a wider community of corporates. End-users have yet to be properly engaged in the process and that will have to change in 2006.”

The commercial benefits of SEPA for corporates are varied and include: faster payments, improved cash flow, consolidation of bank accounts, ease of treasury management and, because there will be more competition among banks for business, lower prices. For Diane Barker, treasury systems and back office manager at Fujitsu, the ability to pay efficiently with minimal bank charges and the certainty of when the beneficiary is going to receive money are key benefits of SEPA. “I see advantages with cross-border direct debit because that gives us more certainty about when we should receive money because we are initiating the transaction. It means we can set up those arrangements without having accounts dotted about in-country to actually collect that money,” she says. “This extends into the whole process of how we can pay and collect money more efficiently within the eurozone and that covers many different areas in terms of the efficiency of the process.”

She believes the company will also gain improvements in working capital. “When things do go wrong and money doesn’t get to the beneficiary, or you try and collect money and it doesn’t arrive, the fact that the process is more automated will give us the opportunity to identify more quickly where the problem is,” she claims. “It will be easier for people in the accounts payable area to make sure they structure payments properly with one rule for the whole of the eurozone.”

The benefits of SEPA are filtering through to corporates but why is there a perceived lack of awareness and corporate involvement generally with SEPA? According to some industry opinion, the EPC and banks have not gone far enough in engaging corporates in their plans for SEPA. This is evident from the section earlier on the conflict between the Scheme Rules and Payments Directive. The ACT’s O’Donovan believes the EPC has not involved corporates as much as it could have in the SEPA process. For instance, he points to the fact that, at the end of October 2005, the Scheme Rules for credit transfer and direct debit were released for consultation but the content was not published by the EPC.

“Instead, each national banking association presented the key points to their user community. APACS [the UK’s payments association] invited users and representatives of users to take part in a consultation in November 2005,” explains O’Donovan. “They provided a presentation on how SEPA was proposed to work. In some European countries there was no user consultation at all.” O’Donovan says this is indicative of the extent to which the EPC consults with the public though he admits it is uncertain whether the corporate community would want to read or even understand the detailed rulebook even if it was released.

It is also true to say, for some corporates, SEPA has been lower down the ‘to do’ list with other priorities taking precedence. “For corporates generally, some issues do have higher visibility than others, IFRS and Sarbanes-Oxley, for example, which if corporates don’t prepare for they can breach regulations. With SEPA, if we end up with a higher bank charge it’s not the end of the world,” claims Fujitsu’s Barker.

In addition, the lack of clarity on the rules and legal framework last year meant, to some extent, there wasn’t a clear picture on SEPA for corporates to influence the process in the first place. This is set to change in 2006 and it is important for the corporate community to understand what the European Commission, and corporate associations like the EACT, are doing in their favour and become proactive in supporting them.

“Corporates must realise that payment processing is a crucial element for effective open markets. This affects not only the banking industry but also any corporate’s supply chain,” argues TWIST’s Buschman. “The Commission’s proposals enable companies to conduct business anywhere in Europe in an easy way with direct access to customers in the whole EU market and efficient access to suppliers anywhere in Europe.”

With pressure from corporate associations like the EACT and the ACT, it will be hard for the EPC to move forward on SEPA without taking their requirements into account. Even more so, in the light of the EACT’s Tabasso’s warning that corporates will not commit to the current Scheme Rules that define SEPA.

The blame for lack of awareness and involvement among corporates does not just lie with the EPC and European banks though. It is just as important that corporates take initiative and influence the SEPA process themselves without waiting to be engaged by the industry. As Fujitsu’s Barker says, “I am only involved because I involved myself” – this is the attitude that all corporates should be adopting.

Corporate Perspective – Diane Barker, treasury systems and back office manager, Fujitsu

“Preparation for SEPA within Fujitsu has been limited. On behalf of treasury, I have been finding out what’s going on to determine what we need to do to make the necessary changes within the company to take advantage of SEPA and also make sure we are not disadvantaged by not being ready. As a member of the ACT, we are kept informed about developments. For example, in December 2005, I attended a meeting in conjunction with the ACT to discuss the legal framework that will need to be introduced in the UK to support the new Payments Directive. This gives us the opportunity to voice our opinion as well.

In 2006, within Fujitsu, we need to increase the knowledge levels of what’s happening and therefore what will need to change. It’s still a bit early to figure out exactly what we need to do but, of course, if budget is involved then it is important to make sure people understand what is going to happen and what the benefits are so that the necessary projects can start. We need to make sure people input BIC (bank identifier code) and IBANs (international bank account number) correctly and that they understand their importance. We need to make sure that the processes are in place to collect that data and ensure that feeds from the ERP systems into the banking software. SEPA will introduce the requirement to pass on payment details – we need to make sure that kind of information is also flowing through the ERP systems. SEPA is a STP challenge and we are looking at it from the perspective of ‘yes, we’ve got to implement new technology but also we’ve got the opportunity to change processes around it’.”

Corporate Technology Challenges

Apart from influencing the Scheme Rules, corporates can also start preparation for SEPA in terms of technology and operational requirements. The initial focus has been IBANs and BICs and, for many corporates, this has been the first step in SEPA implementation. All euro payments (cross-border) up to €50,000 (as of 1 January 2006) should cost no more than domestic payments provided they are formatted properly, i.e. they have the correct IBAN/BIC on invoices, otherwise penalty charges for non-compliance can be incurred (see SEPA: What Do Corporates Need to Do?).

By the end of March 2006, the final design for SEPA will be decided. Once it is clear what will be delivered by the banking sector, corporates can start the process of adjusting their payment and collection processes. Corporates could use this advance knowledge to think about system upgrades in 2006/2007 – whether they want to use their existing systems/banks or change, how best to implement and use the new instruments if they choose to do so. The new instruments defined by the EPC are meant to replace all domestic instruments by 2010; this will mean an inevitable change for any corporate in Europe at some point in the near future.

Migration Period: 2008 – 2010

The migration period (2008-2010), from existing domestic payments/clearing systems to the pan-European system, will be one of the biggest challenges for the financial services industry once the Scheme Rules are defined. National instruments are expected to be phased out by the end of 2010 at the latest but this depends on end-users accepting and using the new SEPA instruments and services. How will cohabitation between SEPA schemes and current national schemes during the migration period 2008-2010 be managed?

Each country was supposed to design and incorporate the pan-European SEPA objectives into a national migration plan to SEPA by the end of 2005. The Commission is working on an ‘Incentives Programme’ which aims to identify issues affecting the realisation of SEPA. The aim of the project is to assist the self-regulatory work of the EPC to address various market and economic barriers. Governance of standardisation processes and also making sure the products and services are attractive to end-users will be part of the analysis. This project starts without preconceived ideas about what has to happen and will involve several rounds of consultation with stakeholders in the market.

The EPC predicts that the critical mass of transactions will migrate by 2010 to SEPA payments schemes (EPC Declaration of 17 March 2005). According to the EPC’s Hartsink this is based on feedback from EPC members and the national banking associations in the 12 euro countries. “The EPC has stressed several times that public authorities (tax, social benefit and procurement) should become the early adopters from Q1 2008 to make SEPA a success,” he says. “Several corporates, in particular, multinational corporates, have expressed their interest in the new SEPA payment services from January 2008.”

The migration from domestic instruments to SEPA instruments – apart from technology compliance – will ultimately be facilitated and accelerated once end-users see the benefit of SEPA. LogicaCMG’s Bailey warns: “If, by the beginning of 2007, there still isn’t the corporate buy-in for SEPA instruments, it will be a major barrier for SEPA.” The new services have to appeal to corporates otherwise they will not migrate. This is the challenge for banks in their definition of services under the Scheme Rules and the products they decide to deliver.

SEPA Strategy for Banks

For European banks, SEPA is associated with reduced revenues, increased competition and the opening of markets. Take EU Regulation 2560/2001, which has had one of the most obvious impacts on banks as a result of SEPA so far by making significant changes to bank charging structures on low-value cross border payments. Under this regulation, all electronic transactions within the eurozone of €50,000 or less have to be charged at the same level as an equivalent domestic transaction. This has meant a drop in revenues for banks from previously healthy margins. It is not surprising then that banks have not been perceived as embracing SEPA wholeheartedly.

According to the Capgemini and ABN AMRO World Payments Report 2005, payments volume in the eurozone will rise between 2003 and 2010, but SEPA’s impact could reduce banks’ direct payments revenue by €13-29bn (30-60 per cent) below expected 2010 levels. It also predicts that, in the worst-case scenario, banks will need to lower their payments processing cost base by 50 per cent or more to maintain current profitability.

“The challenge is that banks and their clients understand the implications and opportunities as a result of SEPA beyond the core infrastructure changes that are being forced upon them – they can choose to simply comply or exploit the opportunity,” says LogicaCMG’s Bailey. “For banks, this means thinking through the business case as either a compliant ‘ticking the boxes’ operation or an opportunity to review the end-to-end payments business and offerings they could make to clients as a result of SEPA infrastructure changes in Europe.”

The decision to exploit will mean an aggressive examination of end-to-end processes – from profit and loss to product management and infrastructure. According to Bailey, banks have just six to nine months to build a business case and budget in order to exploit the opportunities SEPA presents, if they wish to do so. On the other hand, the decision to simply comply is a dangerous one because, Bailey argues, it is not a sustainable model in the long-term. “Banks will constrain themselves into a limited position where, without the right level of flexibility in their infrastructures, they will not be able to react to the changes in the market they operate in,” he says. “For national players, the danger of changing tomorrow and not today is that they will no longer be protected by their national borders – other players will be able to offer the same payments services to their customers in their country,” he warns.

Another issue to bear in mind is that there is a political imperative behind SEPA. The EU Commission wants real structural reform of the banking industry and improved efficiency in the European economy. Re-engineering the payments mechanisms is a critical part of this, which is why the focus has been on banks through the EPC Scheme Rules. “The banks are enablers for the Commission’s goal of greater macroeconomic efficiency in Europe,” says Bailey. “This is also why banks should look at SEPA beyond just market infrastructure change; but a change in the way economic relationships work in a pan-European way.”

See also:

SEPA’s Impact on the Profitability of European Banks

Taking Note of SEPA After the European ‘No’ Votes

How European Banks Can Prepare for SEPA

What Is The Way Forward For SEPA?

SEPA: The View from 2010.

What Are Banks Doing?

In August 2005, gtnews interviewed senior product managers with SEPA responsibility at 17 major European banks to find out more about their strategies and attitudes to SEPA (see Are Banks Ready for SEPA?). The majority of banks interviewed had established project teams or SEPA task forces handling SEPA within various product management, operations, technology, and business areas. Banks are taking strides forward and, from the interviews, most of them are working on what SEPA will mean for them and therefore what their options are. This was also reflected in the gtnews poll sponsored by LogicaCMG (referred to earlier) where 94 per cent of the bank respondents said they were underway with their strategy for SEPA with only 6 per cent not yet started.

Interestingly, despite the revenue reductions that SEPA is likely to introduce for them, 66 per cent of banks in the poll said they expected a positive business impact from SEPA. Indeed, some of the banks interviewed described the potential to develop new products and services, such as managing the treasury position and movement of funds and real-time information, and higher STP. Eighty-five per cent of banks from the poll said they expected processing efficiencies as a result of SEPA. The cost savings for banks will be in their back-office activity where they will be able to reduce their processes.

Lack of clarity about the Scheme Rules and instruments last year made it harder for banks to define their commercial proposition for corporate clients. Fujitsu’s Barker confirms this and says: “To what extent banks are helping corporates identify what they need to do to be ready is not clear but that will change. Banks are in a difficult position themselves because without knowing what’s going to happen, there’s a limit to how much they can tell customers.”

The focus for banks in 2006 will be their relationship with corporate clients in terms of SEPA-compliant product offerings and services in order to define their business case. The Capgemini World Payments Report notes that banks must simultaneously drive significant cost from their payments infrastructure, and identify and implement new payments volume/revenue growth.

“Without a business model and solutions agreed by all stakeholders or imposed by regulators – no one will start to make the subst


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