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SEPA – transforming the payments business in Europe Back  
SEPA is a major project currently being undertaken on a voluntary basis by the European banking industry, to integrate and harmonise payment systems in the Eurozone in particular, and Europe generally. By 2010 SEPA is expected to be the dominant payment mechanism for both cross-border payments, and payments within Ireland. Tom Conlon describes the challenges ahead.
Imagine a Europe where you can have a full range of banking services across Europe – from a single bank account. If you have a villa in Valencia, a cottage in Connemara, or a penthouse in Paris, you can pay your bills from your Irish bank account by direct debit. You can use your Laser Card (or equivalent) to buy shirts in Brussels, Berlin, or Ballina . If you are a pan-European business, you can pay your expenses in Munich, Mullingar, or Milan with equal ease; you can charge out your services by direct debit to Athlone, Amsterdam or Aachen. These are some of the possibilities presented by SEPA, the Single Euro Payments Area.
Tom Conlon



SEPA is a major project, being undertaken on a voluntary basis by the banking industry, to integrate and harmonise payment systems in the Eurozone in particular, and Europe generally. The European banking industry has established the European Payments Council (EPC) as a decision-making body at European level, and the Irish banking industry has charged the Irish Payment Services Organisation (IPSO) with responsibility for delivery within Ireland. Before it is completed, the SEPA project will likely rival in terms of scale the introduction of the Euro currency.

The commitment
Within SEPA, the banking industry has committed to deliver by 1st Jan 2008:

1. A new proposition for cross-border credit transfers in Europe

2. A Pan-European Direct Debit (PEDD). The PEDD differs from the Irish concept of Direct Debit in a number of ways – one of those will be its capability to service one-off payments as well as recurring payments

3. A new proposition for cards, particularly for debit cards, which will make cards issued in any European country more widely usable throughout Europe

The industry is ‘convinced that a critical mass of transactions will naturally migrate to these payment instruments by 2010 such that SEPA will be irreversible through the operation of market forces and network effects.’ In practice, this means that by 2010 SEPA is expected to be the dominant payment mechanism for both cross-border payments, and payments within Ireland.

The delivery
The first deliverable part of SEPA, the Pan-European Automated Clearing House (PEACH) commenced operations in 2003, and currently is confined to credit transfers under €12,500. But it is a start. And many cross-border payments to/from Ireland currently pass through it.
By the end of 2005, the rulebooks on which the SEPA schemes and the card framework will operate will have been agreed across the industry. These will define the broad shape of the services of the future. Planning and construction can then move to a much more intensive stage.

To support SEPA, the infrastructures for clearing of payments will have to be changed. Pan-European clearing systems will replace domestic clearing systems. For Ireland, this means changing from an infrastructure with 7 direct participants and about 20 participants in total to an infrastructure which can reach over 8,000 participant banks in the Eurozone, and others in non-Euro countries in Europe.

SEPA provides core structures on which banks will build and deliver their services to their customers. There will be lots of opportunity for differentiating of services and for bolt-on services to create new levels of competition in the market-place. That competition will extend beyond national boundaries. So each bank must consider how it will deliver SEPA services to customers.

The impact
From an operational point of view, one of the most significant changes will be the more widespread use of IBAN and BIC as the routing and account numbering conventions for payments. IBAN and BIC are the international account numbers which you will have seen on your bank statement for the past few years. These will be required for all SEPA payments, and so progressively, they will become the norm for payments both domestic and cross-border. And IBAN and BIC will be only part of the change required to operate direct debits in the future SEPA environment.

The other operational impact will be the increased adoption of European ways of doing business. Frequently, we do not realize how different our payment behavior is from the rest of Europe. At a personal level, we are probably the highest users of cash in the Eurozone; witness the massive growth in ATMs to feed that demand. Only two other Eurozone countries (France and Portugal) use significant numbers of cheques – and the French have embedded free cheque services into their legislation for many years. European businesses, large or small, normally use credit transfers to pay bills and settle invoices. In Ireland, although personal cheques have greatly reduced nowadays, cheques are still heavily used for business-to-business payments.

There is a massive difference between payment by cheque and payment by electronic credit. On the one hand, there are obvious differences in the efficiency of paper-handling. Much more important as we progress to greater efficiency is the question of certainty of payment. Payment by credit transfer is immediate and complete when it shows in the beneficiary’s statement. When one receives a cheque, one frequently does not know for many days whether one has received a payment or a worthless piece of paper.

The SEPA project is silent on the matter of cheques; but its silence is not interpreted as indicating that there should be no change in relation to cheques. The more appropriate interpretation is that it regards cheques as an historical anachronism, used in a small number of Eurozone countries (note that UK is not in the Eurozone). Cheques have no significant place in the SEPA world of efficient straight-through-processing of payments and their usage will decline significantly. Indeed, we have a real window of opportunity to replace the cheque in the run-up to the fully integrated SEPA in 2010.

From a national and a corporate perspective, SEPA is considered as a contribution to the Lisbon agenda to improve competitiveness, efficiency, and economic performance generally. It will provide opportunities for consolidation of payment operations for multi-national corporates. It will also provide pan-European opportunities for selling of services from Ireland into Europe, where to date such services cannot easily be sold without a Pan-European Direct Debit. And conversely, it will create competition whereby Irish customers can more easily purchase services from Europe.

Legislative and regulatory support
In developing SEPA, the banking industry is supported by both regulators and legislators. Charlie McCreevy, in his current capacity as EU Internal Market Commissioner, is charged with the responsibility to develop and introduce the appropriate Pan-European legislation to support SEPA, and legislation will be presented to the European Parliament in that respect in the Autumn. This legislation, called the ‘New Legal Framework for payments in the internal market’ (NLF for short) will standardise many aspects of payments legislation across Europe. And as an ardent supporter of the SEPA concept, McCreevy has clearly indicated that he will not hesitate to legislate further as required. Clearly the voluntary approach by the banking industry to implement SEPA will be preferable and is the approach which IPSO fully supports.

The European Central Bank regards SEPA as a necessary follow-on to the introduction of the Euro currency. Indeed, they view the currency project as being incomplete until funds can move across borders as easily as notes currently do. The Eurosystem, composed of the ECB and Central Banks of the Eurozone and the European System of Central Banks (ESCB) fully support the SEPA concept and the co-operation model on which it rests.

The broader view
Payment mechanisms are the veins through which the life-blood of commerce flows. Their scale and complexities are massive. The surrounding infrastructures to preserve security, resiliance and continuity of payments are essential to the operation of the economy. And change in such systems does not come easily. The development cost will be very substantial; the bottom-line benefits for banks will be hard to achieve. A similar conundrum was presented to the banks in the situation of the introduction of the Euro. The significant difference was that the Euro was mandated by law. SEPA is a self-regulated initiative by the industry, co-operating across Europe.
It is a massive challenge, and little will remain as it is today. But the benefits to society may be significant. We look forward to working with all parts of the business community to deliver a true transformation!

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