SEPA – Single Euro Payments Area
Elin Amundsen, Payment Systems
INTRODUCTION
The European banking sector is currently in the process of establishing a Single Euro Payments Area, SEPA, where citizens and business enterprises can use a single set of European payment instruments for payments in euro all over Europe. It is planned that the banks will begin to offer their customers the new instruments in 2008.
The Danish banks have participated in the development of SEPA via the Danish Bankers Association and also plan to offer the new payment instruments. Danish citizens and business enterprises will thus be able to use SEPA instruments for payments in euro. Since SEPA comprises payments in euro only, the project will not influence Danish payments in kroner.
Today, settlement of payments by citizens and business enterprises in Europe is characterised by a high degree of national fragmentation, despite the introduction of the euro. SEPA will make it simpler and less expensive to make cross-border payments in euro, which will support the single market for goods and services in the EU. In addition, SEPA offers a number of other potential efficiency gains and economies of scale for the European banks and their customers.
Within SEPA, there will be no distinction between domestic and cross-border payments in euro. Consumers will be able to make euro payments throughout Europe from one single bank account using a single set of payment instruments as simply and securely as they currently make domestic payments. Business enterprises will also benefit from the uniform handling of payments in euro and will no longer have to hold accounts in several countries in order to remit and receive such payments.
This article first describes the background to SEPA. Then follows a summary of the key elements of SEPA, including the new payment instruments, as well as the project structure and timeline. Some of the key issues pointed out by the European Central Bank, ECB, and the European Commission are also described. Finally, the plans to develop additional optional services, AOS, for the SEPA payment instruments are outlined, as well as the Danish banks' work to introduce these instruments in Denmark.
BACKGROUND TO SEPA
Payments involving citizens and business enterprises are known as retail payments.[1] They can e.g. be consumers' payments for goods purchased in shops or via the Internet. Such payments may be effected in cash or electronically using various types of payment instrument. Examples of electronic payments include credit transfers, direct debit (such as Betalingsservice in Denmark), and card payments, cf. Box 1.
ELECTRONIC RETAIL PAYMENTS |
Box 1 |
When consumers buy goods and services on a day-to-day basis, money is transferred from the buyer to the seller. Such payments are known as retail payments. Cash is still in widespread use for retail payments, but many such payments are now effected as electronic transfers, i.e. card payments, credit transfers or direct debit. In connection with electronic retail payments, the consumer's (debtor's) account is debited, while the shop's (creditor's) account is credited. The overall process from the purchase to the crediting of customer accounts is known as settlement and requires a well-functioning payments infrastructure with firm agreements between all parties involved. The payments infrastructure is a collective term for the accounts, payment systems and networks involved when money is transferred from the payer's to the payee's account. First, a payment card must be issued. The issuer is usually the bank where the consumer holds an account. When the card is subsequently used for a purchase, money must be transferred from the consumer's to the shop's account. Crediting of the card payment to the shop's account is known as acquiring and is usually also undertaken by a bank. There are various types of payment cards, of which the best known are debit and credit cards. A debit card is linked directly to the cardholder's bank account. When the card is used, the money is typically withdrawn from the account on the following banking day. The Dankort is an example of a debit card. A credit card, on the other hand, gives the cardholder access to credit. The credit limit and credit period are subject to agreement between the cardholder and the issuer. With a credit transfer the consumer, via a payment order, transfers money from his own bank account to the payee's account. This can be done via the consumer's web bank or at a branch of a bank and requires the payee's account number to be known. When the transaction has taken place, the consumer's account is debited, and the payee's account is credited. If the two parties do not use the same bank, the respective banks exchange payment data and amounts via the payments infrastructure. In connection with direct debit the payment transfer is instead initiated by the payee on the basis of permission from the consumer. Direct debit is typically used for recurring payments such as rent, telephone and newspaper subscriptions, etc. In Denmark, Betalingsservice is an example of direct debit. By registering a bill with Betalingsservice, a consumer permits the payee to withdraw an amount from the consumer's account. Prior to the payment date, the payee submits data to PBS, which forwards the reconciliation data to the consumer's and payee's banks. Until the 7th calendar day of the month, the consumer may reject a payment. At present national rules and procedures for settlement of payments using the above payment instruments differ considerably. One of the key objectives of the SEPA project is to harmonise these rules and procedures, thereby eliminating the distinction between domestic and cross-border payments in euro. |
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The introduction of the single currency, the euro – initially as a unit of account on 1 January 1999 and subsequently as banknotes and coins on 1 January 2002 – was in principle a major step towards the realisation of a single payments area in Europe. Within this area no distinction is made between the processing of domestic and cross-border payments, i.e. national borders are of no significance to the settlement of payments. This applies to both payers (debtors) and payees (creditors).
The transition to the euro was, however, not immediately followed by greater integration of the settlement of retail payments in Europe. This lack of integration was e.g. reflected in continued high costs for transaction of cross-border payments. A survey by the Commission showed that in 2001 the average cost of settling a cross-border credit transfer of 100 euro in the EU was approximately 24 euro, cf. Chart 1. Moreover, there were no indications that such costs had fallen in the preceding years.[2]
TOTAL COSTS TO THE PAYER AND PAYEE OF A CROSS-BORDER EURO PAYMENT IN THE EU, 2001 |
Chart 1 |
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| Note: The data is sourced from a survey in which a total of 1,480 cross-border credit transfers of 100 euro each were sent from various bank accounts in the 15 EU member states at that time. Source: Retail Banking Research (2001). |
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Political attempts had previously been made to increase the efficiency of cross-border retail payments in Europe. In 1997 the Council and the European Parliament adopted a Directive on cross-border credit transfers in the EU, cf. Box 2. The Directive laid down a number of requirements for information on such transfers and their execution. In addition, it contained details of the complaint and redress procedures available to customers in the event that the banks did not meet their obligations.
EU LEGISLATION ON RETAIL PAYMENTS |
Box 2 |
Directive on cross-border credit transfers (97/5/EC) In 1993 and 1994, at the initiative of the Commission two surveys of cross-border payments in the EU were undertaken. They showed that little progress had been made. In the light of these findings, the Commission in 1994 tabled a proposal for a directive on cross-border credit transfers. Following a number of minor amendments, the proposal was adopted by the European Parliament and the Council in January 1997 as Directive 97/5/EC on cross-border credit transfers. The Directive was aimed at ensuring that cross-border credit transfers in the EU were secure, inexpensive and fast. Among other things, the Directive set minimum requirements for the data supplied with and the execution of cross-border credit transfers in the EU. In addition, the Directive included details of the complaint and redress procedures available to the customer in the event that the bank did not meet its obligations. The Directive had to be transposed into national law by August 1999 at the latest. In 2001, a survey showed that there was a lack of compliance with the Directive in practice, cf. Retail Banking Research (2001) and the European Commission (2002). The provisions on a maximum settlement time of six days were by and large observed, but this did not apply to the requirements concerning information to customers, distribution of charges, and the customer's right to compensation for interest on delayed transfers and refund of unlawful charges. In addition, the survey showed that there were no indications that the costs of cross-border payments had fallen, despite the Directive and the introduction of the euro. Regulation on cross-border payments in euro (2560/2001/EC) The Regulation covered payments of up to 12,500 euro (50,000 euro as from 1 January 2006) as credit transfers, card payments and cash withdrawals. In addition to the above provisions, the Regulation set out requirements for information about charges and use of the International Bank Account Number, IBAN, and Bank Identifier Code, BIC. Moreover, the Regulation stipulated that in future EU member states may not require reporting to balance-of-payments statistics of payments below 12,500 euro. The Regulation entered into force on 1 July 2002. However, for credit transfers the date is 1 July 2003. The Regulation contained a provision enabling non-euro area member states to apply the Regulation to their national currencies. The Swedish government has chosen to do so in respect of the Swedish krona. The Commission plans to publish an evaluation of the Regulation and any proposed amendments in mid-2007, cf. the European Commission (2007). |
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As a consequence of the lack of progress, the European Parliament and the Council in 2001 adopted a Regulation on cross-border payments in euro, cf. Box 2. The Regulation stipulates that charges levied by banks for cross-border payments in euro must not be higher than the charges for equivalent domestic payments. The provisions of the Regulation apply to card transactions, including via ATMs, and credit transfers.[3]
For the European banks, the Regulation meant that in many cases it became unprofitable to execute cross-border payments on behalf of customers since the banks were no longer able to charge a fee that was sufficient to cover the actual costs of such payments.[4] The Regulation gave the banks a strong incentive to build up the payments infrastructure required to reduce the costs of cross-border payments.
In May 2002, the European banking sector agreed on the strategy for a project aimed at creating a Single Euro Payments Area – known as SEPA. The strategy was described in a white paper entitled " Euroland: Our Single Payments Area" [5]. In the summer of the same year, the banks defined the project management structure and set up the European Payments Council, EPC, to undertake the task of establishing SEPA.
In the first few years the SEPA project made only little progress. Both the ECB and the Commission on several occasions expressed their concern about the project and emphasised the possibility that they could take on a more active role if the process was not speeded up.[6] In the last few years, SEPA has, however, progressed according to plan, and the European banks' support for and commitment to the project has been increasing.
THE SEPA-PROJECT
The objective of SEPA is not only to resolve the issue of cross-border payments, but in a wider perspective also to establish a single retail payments area where no distinction is made between domestic and cross-border payments in euro. To put it simply, it should be of no consequence to a Frenchman in Lyon whether he is making a payment in euro to a fellow Frenchman in Nice or to a German in Hamburg, regardless of the type of payment (credit transfer, direct debit or card payment).
As stated, the SEPA project is managed by the EPC, whose 66 members are European banks and banking associations. The Danish Bankers Association is a member of the EPC on behalf on the Danish banks. The EPC's supreme, decision-making body is the " Plenary" , a Board that meets on a quarterly basis. In addition, the EPC comprises a number of working groups that undertake the technical aspects of the project, and a small secretariat.
In order to create a single retail payments area, the national procedures must be harmonised so that payments are settled according to the same principles. The EPC has so far focused on establishing the framework for three payment instruments – payment cards, credit transfers and direct debit – which are the cornerstones of SEPA, cf. Box 3. Within this framework it is up to the banks to develop payment products that customers may use for euro payments.
PAYMENT INSTRUMENTS IN SEPA |
Box 3 |
SEPA credit transfers SEPA direct debit The EPC has prepared rule sets for both models in euro, but at present only the first model, the creditor model, has been adopted by the Board of the EPC. In order to comply with the EPC rules, a direct debit transaction must as a minimum (i) be settled within five banking days for the first payment and within two days for subsequent payments, (ii) include the International Bank Account Numbers (IBAN) of both the payer and the payee, as well as the Bank Identifier Codes (BIC) of both banks, and (iii) be able to reach all creditors in Europe. In addition to the two models aimed at consumers as debtors, the EPC is also working on a business-to-business model for direct debit, corresponding to Leverandørservice in Denmark. SEPA card payments |
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In connection with the development of the single set of payment instruments the technical standards for payment messages have also been laid down. It is necessary to have uniform standards in order to ensure a high degree of automated processing of interbank messages and customer payment messages. The EPC has decided that payment messages in SEPA must be based on international standards.[7] This will be a mandatory requirement when banks transmit messages to each other.
The single set of payment instruments in SEPA also requires a degree of alignment of retail payments legislation in the individual member states, especially in respect of direct debit. In order to support SEPA and the development of the single market for payment services in general, in December 2005 the Commission tabled a proposal for a Directive on payment services in the EU, cf. Box 4. In 2006, the proposal was considered by the Council and the European Parliament, where the debate has continued in 2007.
THE PAYMENT SERVICES DIRECTIVE |
Box 4 |
In December 2005 the European Commission tabled a proposal for a directive on payment services in the EU. One of the main purposes of the directive is to support SEPA by harmonising the EU member states' legislation on retail payments. However, the directive not only addresses euro payments, but also payment services in other EU currencies, e.g. payments in Danish kroner in Denmark. The Commission proposes a full harmonisation directive, which eliminates divergent legislation in member states. The proposed directive is subdivided into four main sections: (i) scope of the directive, (ii) access to the provision of payment services, (iii) information requirements, and (iv) general terms and conditions for execution of payments. As regards the scope, the directive will regulate various types of retail payments, including credit transfers, direct debit and card payments. In addition, payments using more modern means of payment, e.g. e-money products1 and mobile phones, will be included. The scope of the directive has been the subject of intense discussion in connection with the member states' consideration of the Commission's proposal and has not yet been fully agreed. In the section on access to the provision of payment services, the Commission envisages the introduction of a new type of payment intermediary in EU legislation, known as payment institutions. On the basis of approval by the supervisory authorities of their home countries, such institutions will be able to offer payment services throughout the EU, i.e. to acquire a " European passport" . Examples of payments institutions could be issuers and acquirers of payment cards that are broadly used, such as PBS in Denmark, or enterprises that transmit money, e.g. Western Union and Moneygram and mobile phone companies. The proposed information requirements and general terms and conditions will apply to all types of payment intermediaries, i.e. not only payment institutions, but also banks (credit institutions) and e-money institutions1. Among the terms and conditions proposed are rules for amendment and termination of payment contracts, e.g. an agreement on the use of a payment card, the distribution of losses on misuse of a payment instrument, cancellation of payment orders, number of settlement days, value days, charges and responsibility for transaction of the payment. The Commission's proposal was discussed by the European Parliament and the Council in 2006, and the debate has continued into 2007. In relation to payment instruments in SEPA, the provisions of the directive primarily affect direct debit. In view of the SEPA timeline, it is essential that the Payment Services Directive – or at any rate the relevant sections – is adopted as soon as possible. At the meeting of the Ecofin Council on 10 October 2006, the ministers emphasised the importance of a speedy adoption of the Payment Services Directive, in view of SEPA. |
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| 1 E-money – or electronic money – is funds stored on an electronic medium, e.g. a chip card or a computer. Issuance of e-money in the EU is regulated by Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions (the E-Money Directive). The Directive introduced a new type of financial institution in the EU, viz. e-money institutions, which is subject to more restrictive limitations on activities and other supervisory requirements than a traditional credit institution. | |
Most European countries today have their own systems for settlement of retail payments. With the introduction of the single set of payment instruments in SEPA, it will be possible to harmonise settlement of payments across national borders. This creates the basis for integration, and to some extent consolidation, of the retail payments infrastructure in Europe. The EPC has chosen only to define the overall framework for this infrastructure and to leave it to the market forces to chart the course. The European settlement industry is currently working on various plans for the future settlement of payments in SEPA.[8]
The SEPA project is broken down into a number of steps, cf. Chart 2. The Design phase, which focused on laying down the principles for the three payment instruments in SEPA, was completed in 2006. The project is now at the Implementation phase in which the banks are developing new products that meet the requirements for the SEPA payment instruments. According to the timeline, the Migration phase will commence at the beginning of 2008 when the national payment products are gradually replaced by the new products. By 2011 the legacy payment products are expected to have been more or less phased out.
TIMELINE FOR SEPA |
Chart 2 |
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| Source: ECB (2006a). | |
Issues
In 2005 and 2006 the ECB and the Commission expressed concern about the progress of the project. The reason is that focus has mainly been on cross-border payments. The ECB and the Commission therefore fear that the project may result in a " mini SEPA" , in which only cross-border payments are harmonised, while domestic payments maintain the status quo.
Moreover, both the ECB and the Commission find that the development within payment cards is going in the wrong direction. The previous vision was that Europeans would have one single debit card that could be used all over Europe. This has proved to be a complex matter, and the ECB and the Commission now fear that the well-functioning national payment cards will disappear, only to be replaced by the international payment cards from VISA and MasterCard, which will thus control the market.[9]
The reason for this development is that high costs are involved if the national payment cards are to comply with the principles for payment cards in SEPA, as defined by the EPC, cf. Box 3. Since the payments infrastructure for settlement of domestic card payments is often more efficient than the infrastructure for settlement of international card payments, a transition to the international cards can entail that in future it will be more expensive for shops to accept card payments. In many cases this expense will be borne by the consumers, since the shops will often either pass on the cost to their retail prices, or cease to accept card payments.
Direct debit is also the subject of debate since all participating countries do not prefer the same model. The model adopted by EPC is the creditor model whereby the debtor's bank is not directly involved in the mandate processing, cf. Box 3. In countries such as Denmark where the mandate is currently given to the debtor's own bank, there has been a wish to continue this practice in SEPA. The ECB has therefore asked the EPC to develop schemes for both direct debit models.
It is still undecided which model will be applied, or whether it will be mandatory for banks to offer both direct debit models. Moreover, the uncertainty relating to direct debit in SEPA is increased by the fact that the Payments Services Directive has not been adopted. Consequently, the banks are currently hesitant to implement this instrument, and it is doubtful whether the time schedule for direct debit can be observed.[10]
The Commission and the ECB have also argued that users have not been sufficiently involved in the process and therefore the new payment instruments may possibly not comply with user requirements. Ultimately, this may affect the prevalence of these instruments. Transparency and ongoing development of the SEPA products have been pointed out as important factors for the success of the project.[11]
VALUE-ADDED SERVICES IN SEPA
The SEPA project can be broken down into two main stages. The first stage has been to lay the foundations for SEPA – payment instruments, infrastructure, standards and legal framework. The second stage is to ensure that the payment instruments become fully electronic[12] and to combine payments with value-added services.
In many cases the banks offer customers value-added services besides the payment instruments themselves. Value-added services comprise a broad range of services and can in principle be supplied by either banks or providers of payment services, e.g. PBS in Denmark. The value-added services are aimed at simplifying the process before and after payment for the customer. The best known services are e-invoicing and e-reconciliation, cf. Box 5.
E-INVOICING AND E-RECONCILIATION |
Box 5 |
E-invoicing is currently available to many business enterprises, particularly in the Nordic and Baltic states. Instead of receiving hardcopy invoices, the customer receives an electronic invoice in his web bank. When the customer accepts the invoice, a payment instruction is automatically generated with all the required creditor and debtor data. When combined with credit transfers, e-invoicing can in principle replace direct debit. Another value-added service is e-reconciliation of paid invoices. This service is also available to enterprises today. When the debtor has paid the invoice, the data on the invoice is compared with the payment received, and the enterprise bookkeeping systems are updated automatically. |
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Value-added services are handled by the EPC as part of its work with additional optional services, AOS. Besides value-added services, AOS includes improvements to the schemes for the payment instruments, e.g. shorter settlement time for credit transfers. The Euro Banking Association, EBA, has developed a " priority payments" product that allows customers to settle credit transfers within the same banking day.
On developing the SEPA payment instruments, the EPC has focused on bank-to-bank relations with a view to ensuring straight-through processing of interbank payments in euro. Value-added services concern the relationship between bank and customer and, when combined with electronic payments, will eliminate paper and cash in the processing of payments. This can led to considerable economic gains.
SEPA IN DENMARK
The EPC delimits SEPA to payments in euro in the EEA countries[13] and Switzerland. For the Danish banks, all cross-border payments in euro using SEPA products must comply with the standards defined by EPC. The Danish Bankers Association coordinates the Danish SEPA implementation.
The Danish Bankers Association has set up a working group to investigate how the Danish euro payment instruments can meet the SEPA requirements, and how settlement is to take place in order to reach all potential payees. On the basis of this work, the Danish Bankers Association plans to issue guidelines for the Danish banks in the spring of 2007. Among other things, the guidelines will specify the common sector initiatives as well as the areas where it will be up to the individual bank to take decisions in relation to SEPA.
One of the common sector decisions is that, unlike in SEPA, cf. Box 3, use of the International Bank Account Number, IBAN, will not be compulsory for domestic payments. Some Danish banks are contemplating offering their customers the option to use the IBAN on payment orders. The banks will then translate the IBAN into the Danish account number that is used for domestic payments.
Today euro retail payments in Denmark are part of the electronic clearing that is settled via the Sumclearing in euro.[14] As stated, one of the requirements in SEPA is the use of special standards for transmitting messages between banks. These standards are not currently used in the electronic clearing, and the Danish banks have decided that payments using SEPA instruments will not be forwarded via the domestic payments infrastructure.
Fundamentally, it will be up to the individual bank to decide how it wishes to settle euro payments effected using SEPA payment instruments. At present only the EBA has announced that it will offer a payment system that can reach all payees in Europe, called STEP2. Danish banks can connect to STEP2 as either direct or indirect members. Alternatively, the banks may opt to assign settlement of their payments in euro to another bank that is connected to STEP2.
Viewed in isolation, SEPA will not have any impact on Danish krone payments, and therefore consumers will not notice any difference on a day-to-day basis. For consumers and enterprises transacting cross-border payments in euro, SEPA will, however, ensure easier and faster settlement than is the case today.
LITERATURE
Danmarks Nationalbank (2005), Payment Systems in Denmark, 2005.
ECB (2006a), The Single Euro Payments Area (SEPA) – an integrated retail payments market, 2006.
ECB (2006b), The Eurosystem's view of a " SEPA for cards" , November 2006.
ECB (2006c), Towards a single euro payments area – fourth progress report, February 2006.
EPC (2002), Euroland: Our Single Payments Area, May 2002.
European Commission (1990), Discussion paper – making payments in the Internal Market, September 1990.
European Commission (2002), Report from the Commission to the European Parliament and to the Council on the application of Directive 97/5/EC on cross-border credit transfers, November 2002.
European Commission (2006), Consultative paper on SEPA Incentives, February 2006.
European Commission (2007), Commission Staff Working Document addressed to the European Parliament and to the Council on the impact of Regulation (EC) No. 2560/2001 on bank charges for national payments,January 2007.
Retail Banking Research (2001), Study on the verification of a Common and Coherent Application of Directive 97/5/EC on Cross-Border Credit Transfers in the 15 Member States - Transfer exercise, September 2001.
Retail Banking Research (2005), Study of the impact of Regulation 2560/2001 on bank charges for national payments, September 2005.
Tumpel-Gugerell, G. (2005), SEPA: Making the dream become a reality, speech held on 15 November 2005, EU/US Retail Banking Forum, Brussels.
[1] In contrast, payments between banks are known as interbank payments. Such payments are usually considerably larger than retail payments and are normally settled via the central banks' real-time gross settlement (RTGS) systems. Cross-border interbank payments in euro are typically settled in the European central banks' common payment system, Target, cf. Chapter 8 of Payment Systems in Denmark, Danmarks Nationalbank (2005).
[2] In similar surveys in 1993 and 1994, the average costs of a cross-border credit transfer in the EU were calculated at, respectively, just under 24 and 25-26 euro, cf. Retail Banking Research (2001).
[3] The Commission has recently documented that the costs of cross-border euro payments within Europe have fallen significantly. According to the Commission's own calculations, the average costs of a cross-border euro credit transfer in the euro area were only approximately 2.5 euro in 2005 (European Commission (2007)).
[4] In principle, the banks could choose to met the requirements of the Regulation by increasing charges for their domestic payments in euro. According to a survey by Retail Banking Research from 2005 there are, however, no indications that this has been the case, cf. the European Commission (2007).
[5] See the website of the European Payments Council (www.europeanpaymentscouncil.eu) under " EPC Documents" .
[6] Cf. e.g. Tumpel-Gugerell (2005).
[7] The UNIFI (ISO 20022) messaging standards.
[8] For example, the European Automated Clearing House Association (EACHA), which is the European association for clearing houses settling retail payments (such as PBS in Denmark), has defined procedures to ensure that clearing houses can transmit messages to each other (i.e. interoperability). Likewise, the Euro Banking Association (EBA) has developed the first European payment system that can reach all payees in Europe, called STEP2, cf. Danmarks Nationalbank (2005).
[9] Cf. ECB (2006b). In Belgium and Finland the banks have thus chosen to phase out their national payment cards and instead use the MasterCard debit card, Maestro.
[10] Cf. the interview with Gerard Hartsink, Chairman of EPC, in the periodical SPEED, Vol. 1, No. 3, Winter 2006/07.
[11] Cf. ECB (2006c) and the European Commission (2006).
[12] Fully electronic payments are payments that do not involve any paper in the process, e.g. card payments using a chip and a PIN.
[13] The EEA comprises the EU, Iceland, Liechtenstein and Norway.
[14] For a description of the electronic clearing and the Sumclearing, see Payment Systems in Denmark, Danmarks Nationalbank (2005), Chapter 6.
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