Update 2008: The Year SEPA Went Live

28 January 2008 was the first major milestone in the introduction of the single euro payments area (SEPA) with the launch of the SEPA Credit Transfer (SCT) – the new file format for mass euro payment transactions. Four thousand banks throughout 31 countries have committed to delivering the SCT to their corporate clients and have demonstrated this through the EPC adherence agreement they have signed based on legally binding business rules and global ISO 20022 XML standards.

SCT: The Story so Far

In the six weeks since the launch of the SCT, the pan-European payments processor, Equens, has processed 500,000 SCT payments while SIA-SSB, which provides the EBA STEP 2 platform, processed 200,000 European credit transfers with a total value of €1.36bn in the first week of the SCT’s launch.

For most payments users, however, the introduction of the SCT has made no practical difference to the payments they want to make. “This should come as no surprise because, despite SEPA originally being created primarily with corporates and consumers in mind, it is the banks that have ended up defining the detail behind the SEPA framework,” explains Jonathan Williams, principal market strategist at Eiger Systems in his article, SEPA 2008 Priorities for the Payments Industry. “Consequently, most banks will be offering the SCT to their customers without explicitly advertising the fact, mainly because the SCT was always meant to be a ‘business as usual’ service.”

The results of a recent gtnews poll on SEPA reflect this point1. Seventy-eight per cent of the corporate respondents – compared to just 41% of the bank respondents – said that the introduction of the SCT had not affected their payments business.

According to Jeremy Light, senior manager, banking practice at Accenture, it is clear that the SCT is being used for serious payments and, with volumes apparently growing steadily, he claims mass adoption could happen sooner than many banks expect. “Anecdotal evidence suggests that the take up of SCT volumes has been driven as much by retail customers transacting online (domestic and cross-border) as by corporate activity, an encouraging indication that SCTS have broad appeal,” he says.

This prediction was supported by a spokesperson from Equens who said that they believe the volume of SCT transactions will increase in the coming months. “We have experienced much higher volumes than expected and, from April onwards, we expect much stronger growth,” he told gtnews. “Banks and their customers are switching their cross-border credit transfers to the new SEPA instrument. A good example of this is in Belgium where it has been announced that public institutions will soon transfer to SEPA.”

With around 50-75 million credit transfers daily in the eurozone, Accenture’s Light acknowledges that there is still a long way to go before SCTs replace national schemes but it has certainly made a positive start. Read more about how the SCT is working in practice as well as developments in European clearing and settlement in the article, Impact of the SEPA Credit Transfer, by Robert McKay, managing director of business development at Accuity.

Migration to SEPA

Banks operating in Europe have known that the creation of SEPA was going to be a huge undertaking right from the start and the experience of the last few years has underlined this. SEPA is a major catalyst for change across IT, operations and commercial relationships within the European payments industry, and it is the banks that have had to make the investment in this transformation and drive it forward.

In 2008, the commercial challenge for banks – and their most significant hurdle – is encouraging their corporate customers to adopt the SEPA instruments. In order to do this, they must migrate their national credit transfer schemes to SCTs and identify how best to compete in an increasingly competitive payments environment. According to Light at Accenture, this includes working out which eurozone customer segments to target, how to retain and acquire new customers, what cross-selling will work, what new payments products and services to offer based on the SCTs and SEPA direct debits (SDDs) including additional optional services (AOS), what changes to existing banking products and services are necessary, and what new banking services could be attractive, e.g. pan-European consumer loans.

In his article, AOS: The SEPA Value Add for Banks and Corporates, Paul Styles, business solutions manager, at ACI Worldwide explains that: “By differentiating one bank from its competitors, and by helping establish the business case for corporates to migrate to SEPA, AOS can deliver significant benefits for banks and help them get over the hurdle of increasing SEPA adoption.” Read his article to find out more about AOS and the migration challenge facing both banks and corporates.

Outsourcing: The Bank’s Dilemma

In order to keep on track with their SEPA plans, banks must make some critical decisions in the next few months. This includes whether or not to upgrade or replace existing systems; how to manage the parallel running of old national and new SEPA schemes and the migration from old to new (in particular, how to manage direct debit mandates); and how to manage customer communications, especially for corporate direct debit mandate management.

The most fundmental decision, however, will be whether to stay in the payments business or outsource. “Outsourcing payments is a big decision and many banks may be forced to consider it if the scale of in-house investment is too high, or the business case is not compelling,” says Accenture’s Light. “Given the SEPA migration timescales, this is the year when many banks need to make a firm decision on payments outsourcing.”

Large banks that are considering insourcing the payments business of other smaller banks must be mindful of the risks involved with insourcing and not let the business opportunity distract them from asking important questions about the quality of the payments systems they are insourcing as well as the credit and market quality of those transactions. To meet this challenge, Bob McDowall, senior analyst, European banking and payments at TowerGroup, advises insourcing banks to ask questions such as: How robust is the payments system we are insourcing? Will insourcing this payments system affect my risk profile? Read more about outsourcing in the following articles: SEPA: Launch of the SCT and New Year Challenges and Bank Strategies for SEPA.

In fact, risk management in the context of SEPA is an important issue to consider. According to McDowall, because the realisation of SEPA has always been a political and economic ambition with politicians and regulators instigating change, the issue of risk management, particularly systemic risk exposure as a result of opening the market to liberalised payments networks and schemes, is one aspect of SEPA that has not received the scrutiny it deserves. “Whether that scrutiny results from adverse events or from due diligence on the part of regulators, its outcome will directly affect banks’ ability to deliver on the SEPA promise,” he argues.

In an interview with gtnews, he pointed to the role of the European Central Bank (ECB) and the fact that it is a decentralised central bank that relies on national central banks in the eurozone for its sources of liquidity. “This means it isn’t politically independent and is neither its own master in terms of collateral or a lender of last resort,” he explains. “With these factors in mind, how well-equipped is the ECB to deal with any form of systemic risk that might arise within the eurosystem?”

The current credit crunch is also likely to affect the introduction of SEPA and, warns McDowall, slow it down. “The ECB won’t want to emphasise the existence of liquidity problems among banks and therefore highlight the systemic risk that exists in the eurosystem with the ensuing reputational damage to banks and the eurozone as a whole,” he claims.

The Corporate Perspective

While banks face a demanding year ahead, corporates must also get to grips with their own SEPA plans. Significantly, some corporates still need to gain a comprehensive understanding of what SEPA means for their business and the benefits they can derive from it. This was highlighted by Gerard Hartsink, chairman of the European Payments Council (EPC) in his speech at the launch of the SCT when he admitted that many corporates and SMEs in Europe are still not fully aware of the opportunities that SEPA will introduce. “We need a major information campaign, at least on par with what we did for the euro changeover. As agreed with the public sector and with our banks, this will be done at the national level,” he affirmed. “The EPC supports our banks with communication documents such as ‘Making SEPA a Reality’. The EPC has also intensified its dialogue with European customer representatives in our Customer Stakeholders Forum.”

The gtnews poll clearly reflected the current difference in attitude among banks and corporates to SEPA with 61% of the corporate respondents agreeing that preparation and compliance with SEPA was a business priority for them this year compared to 82% of the bank respondents. We must acknowledge the fact that two-thirds is a high proportion though and an indication that more corporates are developing an action plan for SEPA – a definite leap forward from last year. But what do corporates really need to do to prepare for SEPA?

In his article, SEPA & STP: An IBAN & BIC Update, Dusan Pobuda, senior product manager for reference data at SWIFT, explains that the SEPA challenge for corporates relates to the collection of IBANs and BICs. “Corporates must convert their clients’ account numbers and bank names into IBANs and BIC,” he says. “This, in principle, is a one-time activity. The official way to do this is for corporates to ask all their clients, or their banks, to provide their IBANs and BICs.”

This can be an overwhelming undertaking for larger corporates though and Pobuda outlines some of the ways in which corporates can manage this efficiently with minimum effort. Read more about the SEPA challenges corporates face and action points for 2008 in SEPA: A Co-ordinated Approach is Key the Citi articles, #gtnArticle(7213)# and SEPA: How Should Corporates Plot Their Course?.


2008 has already been a year of progress. The first SEPA instrument, the SCT, has been launched successfully and the volumes have been higher than expected. While this is a major achievement for the payments industry, it is just the beginning of this year’s challenges.

The draft version 3.2 of the SCT Rulebook – intended for rollout on 1 February 2009 – is now available for review. Following feedback from stakeholders, it will be analysed and the draft Rulebook will then be finalised and submitted for approval at the EPC Plenary meeting on 24 June 2008. If approved it will be published shortly thereafter, leaving a six-month ‘freeze’ period ahead of implementation.

There is also the Payments Services Directive (PSD) to contend with – a mammoth task for the payments industry – which must be implemented in all EU 27 member states by 1 November 2009 at the latest. To find out how ready you are for the PSD and for advice on how to prepare read Check your PSD Profile!  by Edith Rigler, associate at The SEPA Consultancy.

In addition, the industry will be focused on finalising the SDDs for introduction next year with banks defining their solution and implementation of the SDD for delivery in 2009.

The migration to SEPA will underpin all of these efforts because, as the EPC’s Hartsink has underlined on numerous occasions: “SEPA will only become a reality if corporate customers and public authorities take the next step.” And this is the ultimate challenge facing the payments industry in 2008.

1The gtnews poll was answered by over 100 gtnews readers between 4-11 March 2008.


Related reading