SEPA – Another milestone in payment centralisation and localisation across Euro zone

                                          With the introduction of the euro currency in 1999, people across the euro zone countries could easily pay for goods and services in cash using the single currency system. But to make cross border payments still remained a challenge due to prevalent political, legal and markets conditions in each European Union (EU) country. To overcome this challenge – EU governments, the European Parliament, the European Commission and the European Central Bank (ECB) came together with the idea of a centralized one payment system that would integrate the euro payments market. This payments integration initiative came to be known as ‘SEPA’

SEPA IS - an area in which consumers, companies and other economic actors will be able to make and receive payments in euro whether between or within national boundaries under the same basic conditions, rights and obligations regardless of their location.

                                       

Fig 1.1 SEPA Countries

SEPA aims to - 

• Make euro a single and fully operational currency through the integration of multiple existing euro credit transfer and euro direct debit schemes,
• SEPA for cards to bring in consistent customer experience while making or accepting payments,
• common technical standards,
• common business practices,
• have a harmonized legal framework,
• incentivise increased use of electronic payment instruments.

SEPA Building Blocks:

Credit transfers, direct debits and payment cards are well-known payment instruments that for decades have proved their efficiency and popularity throughout the European countries. A detailed common scheme for SEPA credit transfers was developed and the first payment transactions based on this new scheme took place on 28 January 2008. The main instruments in SEPA are around which banks can develop SEPA payments products are:

• SEPA Credit Transfers
• SEPA Direct Debits
• SEPA Card Payments

SEPA Credit Transfers is an inter-bank payment scheme that defines a common set of rules and processes for credit transfers denominated in euro. The scheme defines a common service level and a time frame under which financial institutions participating in the scheme must as a minimum conduct SCTs.

SEPA Direct Debits is an instruction from a customer to their bank or building society or payment provider, authorizing an organisation (known as an Creditor) to collect variable or fixed amounts from their account, as long as the customer (known as the Debtor) is given advance notice of the collection amounts and dates.

SEPA Card Payments – SEPA compliant use of payment cards is the “SEPA Cards Framework” issued by the European Payments Council.

ISO 20022 XML format:

To provide for the more efficient operation of the single euro payments area in the European Union, the European Parliament adopted Regulation 260/2012, according to which by 1 February 2014, at the latest, the data interchange between the client and the bank must use the message formats based on the ISO20022 XML standard.

The BIC, the IBAN & the BBAN:

The BIC  - Banks use the SWIFT network for the exchange of financial messages. In order to route a message to a certain bank or branch office, a Business Identifier Code (BIC) is used. A BIC consists of a four character business entity identifier followed by a two character country code followed by a two character location code i.e. in total eight characters. BIC may also be extended to 11 characters where the last three characters then identify a certain branch office. The BIC is represented by ISO Standard 9362

IBAN - Stands for International Bank Account Number. It identifies an individual account, at a specific financial institution, in a particular country and is used to process financial transactions between institutions in different countries. An IBAN consists of 34 alphanumeric characters. IBAN is represented by ISO Standard 13616

BBAN - Basic Bank Account Number (BBAN) format is decided by the national central bank or designated payment authority of each country. There is no consistency between the formats adopted.

SEPA Migration: Challenges and Benefits

Inefficiencies in the present banking and payments, if rectified, could save the EU economy between €50 billion and €100 billion a year. Banks across Europe has come up with many improvements towards payments such as TARGET2, innovations within the national ACHs; as well SEPA has indeed helped reduce costs.

The silo structure within the banks payments systems is indeed a challenge evolved in response to many years of different national and international standards and regulations, rules and practices, and mergers and acquisitions. Hence, implementing unified payment architectures and processes becomes all the more difficult and the best suggested approach could be a phased approach.

Banks typically face three options in restructuring –

1). Migrate existing domestic platforms to SEPA

            - XML implementation becomes difficult for older applications and they require modifications to become more efficient

2). Migrate international platforms to SEPA

            - These systems are usually not scalable to sustain the combined domestic  and international volumes as migration to SEPA gains momentum

3). Create a new SEPA platform

            - With the flexibility required to process all payments on a more modern scalable architecture.

What changes in the existing payments system help SEPA compliance? The new SEPA Credit Transfer and DD schemes require the use of the International Bank Account Number (IBAN) and Bank Identifier Code (BIC) as well as the XML ISO 20022 standardized file format to exchange bulk payment and DD files between banks and corporates.

It's also essential t determine the scope of the SEPA migration challenge. Key factors to be determined are the current and predicted payment volumes, values and types of euro payments versus receipts; Credit Transfers versus DDs, domestic versus cross-border, business to business versus business to consumer transactions, as well as which bank accounts and banking relationships are affected by SEPA. It is also important to determine the SEPA readiness of the key payment partners - both banks and technology providers.

IBANs are longer than domestic bank account numbers and sort codes, so some system field lengths are too short to hold enough characters to comply with SEPA. This may require a system upgrade, a new bolt-on solution or even a complete system replacement. For large corporates the real challenge would be when they start the implementation process, though they are aware of what SEPA can bring in for them, especially when the migration of both SCT and SDD are to take place in parallel. There is also the huge costs of migration associated towards achieving SEPA compliance. 

The realization of SEPA lies in it's implementation. Strong cooperation among all stakeholders is crucial in achieving this dream with both banks and technology vendors having a clear business case to carry this migration with minimal disruption, cost overruns, data loss or system failure. The benefits can be harvested only when this migration is complete.

                                                           Courtesy: European Central Bank