Single Euro Payments Area (SEPA)
What is SEPA?
The Single Euro Payments Area initiative (or SEPA), covers all of the EU member states, together with Iceland, Liechtenstein, Norway, Switzerland and Monaco.
SEPA has created a single market for euro-denominated retail payments, allowing payment services users to make cashless, euro-denominated payments to payees located anywhere in the area that it covers under the same basic terms and conditions, using just one payment account and a single set of payment instruments.
In simple terms, anyone who holds a payment account with a bank or other payment services provider (PSP) located in the countries covered by the SEPA initiative will, regardless of where in SEPA they are themselves located, be able to send euro-denominated payments to, and receive such payments from, accounts anywhere else in SEPA.
The European Central Bank (ECB) has published some useful general background information on SEPA, such as this ‘SEPA Brochure’ and this short video on SEPA.
The legal background to SEPA
Implementation of the SEPA concept required a common legal framework covering retail payments to be put in place in all participating countries. This legal framework ensures that the terms and conditions applicable to SEPA payments are the same regardless of the countries in which the parties involved in any transaction are located. The legal framework underlying SEPA takes the form of EU Directives and EU Regulations.
The European Commission can propose laws for adoption by the European Parliament and the Council of the EU, which collectively represent the individual EU member state governments. These laws take the form of EU Directives and EU Regulations.
EU Directives set legislative goals that have to be achieved in every EU member state, but while national authorities have to adapt their laws to meet these goals they have a degree of flexibility in relation to how they do so (i.e., they have to implement an EU Directive, but have some freedom to decide how best to do so). National measures are adopted by the individual member states governments to incorporate the provisions of an EU Directive into national law.
On the other hand, EU Regulations are a more direct form of EU law. As soon as an EU Regulation is adopted it has binding legal force throughout every EU member state on a par with national legislation - national governments do not themselves need to take any action to implement an EU Regulation.
The principal EU legislation covering SEPA is Regulation (EU) No. 260/2012 (its full title is Regulation (EU) No. 260/2012 of the European Parliament and of the Council establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009), which set 1 February 2014 as the deadline in the euro area for replacement of national credit transfer and direct debit payments with SEPA equivalents (although this was subsequently postponed to 1 August 2016); the deadline for non-euro area member states was 31 October 2016.
Regulation (EU) No. 260/2012 also requires the use of common standards and technical requirements, such as the use of International Bank Account Numbers (IBAN) and the ISO 20022 XML financial services messaging standard for credit transfer and direct debit payments in euro. In addition, Regulation (EU) No. 260/2012 amends and replaces some of the provisions contained in the earlier Regulation No 924/2009, for instance by extending that Regulation’s equal charging principle for cross-border and national payments in euro to all transactions, irrespective of the payment amount.
The Payment Services Directive (generally referred to as the PSD – the full title is Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC) is also relevant in the context of SEPA. The purpose of this Directive was to harmonise the laws covering payment services in EU member states, particularly with regard to (a) the rights and obligations of payment services providers (PSPs) and consumers and (b) facilitating greater pan-European competition and participation in the payments industry.
What does SEPA cover – what are retail payments?
Retail payments could perhaps best be described as the normal, ‘everyday’ payments that we are all familiar with. They are generally of relatively low value, are usually not time-critical and can be made by either companies or private citizens. For example, payments made by consumers to retailers or to utility or media providers would be classified as retail payments.
Retail payment methods
The retail payment methods most used in the euro area are credit transfers, direct debits, payment cards (credit or debit), cheques and cash – the latter two payment methods are outside the scope of SEPA, which only covers electronic payment methods.
A credit transfer is a payment initiated by the payer. The payer issues a payment instruction to his/her PSP (typically a bank). The payer’s PSP then moves the specified amount to the payee’s PSP.
Direct debits are typically used for recurring payments such as utility bills. A direct debit payment is initiated by the payee via its PSP. A direct debit requires the consent of the payer, given to the payee in the form of a mandate. Direct debits can also be used to make ‘one-off’ payments, but this practice is not widespread in Ireland.
Payment cards exist in two basic types – debit cards and credit cards. Debit cards allow the cardholder to charge purchases directly to his/her bank account, while credit cards provide the cardholder with a certain credit limit, within which he/she can make purchases. The cardholder can either pay off the balance in full by the end of a specified period or just pay part of the outstanding balance and take the remainder as extended credit (on which interest must be paid).
The SEPA payment schemes
Currently, at a practical level, SEPA comprises two payment schemes, the SEPA Credit Transfer Scheme (or SCT) for credit transfer payments and the SEPA Direct Debit Scheme (or SDD) for direct debit payments.
Both SEPA payment schemes were developed, and are owned, by the European Payments Council (or EPC). The EPC is an alliance of European banking/payments industry representative bodies, which was established in 2002 to deliver SEPA. The EPC’s constitution gives it decision-making status on behalf of its payments industry members. The EPC draws its representation from the three categories of banks in Europe – commercial banks, savings banks and co-operative banks.
Each of the SEPA payment schemes has a rulebook that sets out the applicable rules for participation and the technical standards for the execution of SEPA payment transactions. These rulebooks are updated annually (in November) following a public consultation process, and the current versions must be followed by all users and participating PSPs. The SCT and SDD rulebooks are essentially instruction manuals that provide a common understanding among all interested parties on how to move funds from one account within SEPA to another.