The state of SEPA

How is SEPA faring now that migration deadlines have passed, and could banks be doing more?

Finally, after a 15-year wait, and a delayed 1 August migration deadline, the Single Euro Payments Area (SEPA) has achieved full implementation of SEPA-compliant credit transfers and direct debits in the euro area- reports Victoria Conroy.

The milestone means that over 500 million consumers and 20 million businesses can use a single bank account for all euro-denominated credit transfers and direct debits in Europe. Countries outside the euro area – including the UK – now have until 31 October 2016 to migrate.

European regulators are understandably in celebration mode as the migration means that euro-wide payments can be effected without extra costs, enabling businesses across the euro region to expand into new markets. According to the European Central Bank (ECB), more than 2 million payments a month in the new standardised formats will be made in the region.

Speaking about the migration, Yves Mersch, executive board member of the ECB, said: “The successful completion of SEPA further accelerates Europe’s financial integration. It removes barriers to credit transfers and direct debits which will no longer impede businesses or consumers.”

According to the quantitative SEPA indicators published by the ECB, the share of SEPA credit transfer (SCT) transactions amounts to 97.6% as of June 2014 and the share of SEPA direct debit (SDD) transactions has reached 95%.

The quantitative SEPA indicators measure the share of SCT and SDD transactions as a percentage of the total volume of credit transfers and direct debits generated by bank customers in the euro area. As of July 2014, 4,612 payment service providers (PSPs) offered SCT services, while, 3925 PSPs have signed up to the SDD Core Scheme.

What it means for banks

Whilst SEPA migration is good news in the war against cash and for the promotion of electronic payments across Europe, there is still much work to be done. And banks in the region, which by and large are now mostly SEPA-compliant, should not settle into complacency.

Banks have made huge efforts to overhaul legacy payment systems to prepare for SEPA and standardised SEPA payments will pave the way for them to offer a full range of transaction banking capabilities in every country in which they operate. True interoperability could also likely lead to a consolidation in banking as banks seek to expand into markets in which they are not present. 

Banks are also aware that a standardised SEPA should generate a reduction in costs and increased cost-effectiveness of cash management and other treasury and transaction processes.

However, there are still significant gaps in their insight, such as the impact of routing and the number of B2B transactions being undertaken in differing markets. It’s clear that banks in the region cannot afford to take their eye off the ball if they are to make the most of SEPA, and must conduct ongoing evaluations of their business models, practices, services and costs in order to optimise their operations and service their corporate customers effectively.

According to Barclays of the UK, the biggest issues that have been identified so far are the conversions from domestic account identifiers for BBAN into BIC and IBAN. A key challenge in this area is the adoption of the new SEPA-compliant file format; although a standard has been set (ISO XML) some countries have opted for SEPA flat files, while others have different versions and flavours of XML.

On the direct debit side there are similar challenges, particularly in relation to mandate information. Under the new regulations, corporates will have to manage the new migrated mandate information by handling first and recurrent transactions with different timelines. With direct debits, the return files are crucial as they provide all of the information on the status of collections.

Barclays has developed a range of solutions based on the different segments and the types of corporates. For larger companies, it has tailor-made products, for example, its mandate management service, where it converts the clients’ high volumes of direct debits, enriches mandates and does the conversions on BIC and IBAN.

On the other side, for smaller companies, it’s building converters into its European branches. These will allow clients, who today are carrying out credit transfers in a domestic format, to download simple software and convert their files into separate compliant files. Barclays has also updated its internet banking systems to allow clients to complete one-off compliant conversions.

Bank Austria has launched an all-in-one SEPA service, with payment orders and SEPA payment slips replacing domestic payments and old-style payment slips. On its online banking site, payments within Austria must be made using payment orders (transfer with IBAN and BIC). 

Additionally, self-service terminals in many Bank Austria branches automatically read off the customer’s IBAN from their bank card, meaning that, here too, using the IBAN to transfer money will be no problem.

Meanwhile, the pan-European online banking scheme MyBank has announced the imminent launch of its electronic SEPA mandate service covering SDD Core and B2B.

The first joining window for MyBank Mandates for SDD Core opened on 8 September, while the go-live date is scheduled for 27 October.  The aim of the joining window is to ensure that all participants are correctly aligned to MyBank’s standards and protocols before going live. According to MyBank, participation is particularly sought from banks in the role of creditor or debtor banks, PSPs as mandate handlers and service providers offering relevant services to banks or creditors.

MyBank is also issuing a call for participation in its mandate pilot for B2B to banks, service providers and interested corporates. The aim of the pilot is to rigorously test the MyBank mandate solution for B2B in order to ensure reliability, security and usability. Testing will involve banks, service providers and corporates working in tandem to verify that the different MyBank mandate solution components function seamlessly before the solution is rolled out in early 2015.

Attention on cards

Now, the ECB will focus its attention on the harmonisation of payment cards across the region, with the newly-established Euro Retail Payments Board (ERPB) forming two working groups to scrutinise the usage of mobile and other “innovative” payment methods. The ECB points out that the ERPB’s composition and mandate are “broader than those of its predecessor”. Seven representatives from the demand side (e.g. consumers, retailers and corporations) and seven from the supply side (banks and payment and e-money institutions) sit on the Board (compared with five each on the SEPA Council). They are joined by five representatives from the euro area national central banks and one representative from the non-euro area EU national central banks (all on a rotating basis). The ERPB is chaired by the ECB.

Meanwhile, the European Payments Council (EPC) and European regulators such as the European Commission and Parliament, emphasise that migration to harmonised SEPA payment schemes and technical standards does not conclude this EU integration project just yet. SEPA 2.0 is firmly in their sights, according to EPC chairman Javier Santamaría. SEPA compliance requirements that must be met by payment service users and providers are determined by the EU institutions in accordance with their specific competences.

The regulatory focus

In terms of ongoing regulatory initiatives related to SEPA, the EPC points to the EC’s payments legislative package, published in July 2013, including the proposals for a revised Payment Services Directive (PSD2) and a new Regulation on interchange fees for card-based payment transactions. These legislative proposals remain under review by EU co-legislators.

In relation to PSD2, the Greek Presidency of the Council of the EU published its compromise text in June 2014. The Italian Presidency, which took over the six-month rotating presidency of the Council on 1 July 2014, published a second compromise text on 23 July 2014. The Council of the EU will continue to progress its work on the payments legislative package in the second half of 2014.

In a last step, the Commission, the European Parliament and the Council of the EU will have to agree the final version of the forthcoming PSD2 and the IF Regulation, respectively. Considering that the Commission proposes that EU Member States are given two years to implement this revised EU Directive into national law, the forthcoming PSD2 could take effect at the earliest in 2016.

Etienne Gooss, EPC secretary-general, said: “Meeting the next SEPA deadlines established by the EU lawmakers requires continued and coordinated efforts by the public authorities driving the SEPA process, the representatives of payment service users as well as banks and other service providers. In euro area countries that achieved high SEPA migration rates early in the process, the following factors contributed to ensuring an overall smooth transition: engagement and leadership by public authorities, cooperation of stakeholders based on a step-by-step implementation plan and targeted communication to ensure timely launch of migration projects at the level of individual organisations.”

The impact for merchants

For merchants too, the SEPA migration has far-reaching consequences. According to electronic payment specialists PPRO Group, by sitting back and waiting for the enforced deadline, UK online merchants could be missing out on huge potential revenue from euro customers if they do not migrate to SEPA ahead of the UK deadline.

Research commissioned by PPRO shows that 53% of UK consumers choose not to complete an online purchase due to their preferred choice of payment method not being made available – and UK businesses could be missing out on valuable transactions by waiting another two years.

Speaking to PCM, Tobias Schreyer, co-founder and chief commercial officer at PPRO Group, said: “Although not bound by SEPA regulations just yet, the UK could find itself increasingly isolated by not joining its EU counterparts and lose out on pan-European trade as a result. The value of a simple and trusted payment process can’t be ignored, with our own research finding that over half of UK consumers would buy more from Europe if it was easier to use familiar payment methods.”

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