Recap: the rationale for the introduction of harmonised payment schemes for electronic euro credit transfers and direct debits
The Single Euro Payments Area () is a European Union (EU) integration initiative in the area of payments. With the introduction of the euro currency in 1999, the political drivers of the SEPA initiative – EU governments, the European Parliament, the European Commission (the Commission) and the European Central Bank (ECB) – have focused on the further harmonisation of the euro payments market. In 1999, the ECB commented: “Despite the introduction of the euro, however, there is still a clear gap between the service levels of domestic and cross-border retail payment systems (...). The substantial disparities between domestic and cross-border services ought now to be reduced, and should ultimately disappear. Indeed, the single currency environment argues strongly in favour of a single payment area.”1 In 2000, the Commission reiterated: “The Commission’s political objective is exactly that: a modern Single Payment Area for the entire EU where there is no frontier effect for cross-border payments.”2
When the EU governments and EU institutions first launched the SEPA process in the late 1990s, they expected the banking industry to contribute the resources required to develop European instruments for electronic euro payments. In 2001, the ECB commented: “Like the Commission and the [European] Parliament, the ECB is fully committed to the objective of creating a single payment area for the euro. We therefore share the view that pressure should be kept on the banking industry to obtain the necessary improvements.”3 (For more information on the expectations articulated by the political drivers of the SEPA programme, refer to the Newsletter article, entitled ‘SEPA Fact Check: The SEPA Benefits Projected by EU Governments, the European Parliament, the European Commission and the European Central Bank (1999 - 2013)’ included in the ‘related articles in previous issues’ below.)
In response to these expectations repeatedly articulated by the EU authorities, the European banking sector created the European Payments Council (EPC) in 2002. In close dialogue with the stakeholder community, the EPC developed, among other things, the SEPA Credit Transfer () and SEPA Direct Debit (SDD) Schemes which help to realise SEPA.
In essence, a SEPA payment scheme can be compared to other frameworks, which prescribe standardised processes to be observed by actors operating in network industries. Such standardisation or integration initiatives enable the provision of services by service providers in a two-sided market across traditional boundaries (for example, national borders). The SCT and SDD Schemes represent integration at a European level of the multiple sets of single national payment schemes that existed in the pre-SEPA era. The purpose of migrating from a multitude of national euro payment schemes for credit transfers and direct debits, to a single set of harmonised SEPA Schemes can be compared to implementing standardised ‘railroad tracks’ for the exchange of payments across the EU. (For more information, refer to the EPC Website page, entitled ‘What is a Payment Scheme?’ included in the ‘related links’ below.)
Recap: everybody supports EU integration – in principle. An overview of optional features, additional optional services, variations and transitional arrangements possible in SEPA
The SEPA payment schemes as defined in the SCT and SDD Rulebooks contain sets of rules and technical standards defined by standards bodies such as the International Organization for Standardization (ISO) for the execution of SEPA payment transactions. Simply put, the rulebooks can be regarded as instruction manuals which provide a common understanding on how to move funds from account A to account B within SEPA. Strictly and formally speaking, the rulebooks set out the rights and obligations of all institutions bound by their terms, i.e. the scheme participants, (payment service providers () that have formally adhered to the schemes), and the EPC. The rulebooks bind each scheme participant “to comply with their obligations to the EPC and to all other scheme participants pursuant to the rules set out therein.”4 The rulebooks include mandatory elements that must be observed by all scheme participants as well as optional features. The inclusion of optional features in the rulebooks reflects the following considerations:
The SCT and SDD Schemes must contribute to an optimally efficient, systemically stable and competitive payments market and, ideally, incentivise innovation. They must also respond to the requirements of stakeholders in 34 countries5. PSPs operating in a competitive market must distinguish their services and performance to acquire payer and payee customers (the end users). Hence, it is of vital importance that the SEPA payment schemes developed by the EPC enable PSPs to design SEPA products and services that meet specific customer needs.
(In this context, it should be recalled that SEPA payment products and services offered to the customer are developed by individual PSPs operating in the competitive environment. The development of payment products and services, based on the SEPA payment schemes, including all product-related features is outside the scope of the EPC.)
Dialogue with stakeholders across SEPA frequently demonstrates that the requirements of bank customers, with regard to the SEPA payment schemes, differ widely
Dialogue with stakeholders across SEPA frequently demonstrates that the requirements of bank customers, with regard to the SEPA payment schemes, differ widely across and within the various customer segments and SEPA countries. As regards the latter, it has to also be kept in mind that 98 percent of all retail payments are made within national borders. Payment service users are not only divided into payers and payees (whose payment needs are different). Bank customers encompass a wide range of interest groups including consumers, public administrations, corporates and small and medium-sized enterprises (SMEs). Corporates and SMEs may be active domestically, regionally or globally. In a multi-country environment such as SEPA, even within a specific customer segment, there exist very different schools of thought as to which specific features should be included in a payment scheme or not.
Consequently – and not surprisingly – expectations with regard to payments among and within various customer segments and SEPA countries are often contrary or even mutually exclusive. The scheme change management process leading to the release of updated versions of the SCT and SDD Rulebooks, which provides all stakeholders with the opportunity to propose suggestions for modifications, demonstrates the fact. The EPC has often received very different suggestions for changes to the SCT and SDD Rulebooks from specific interest groups representing a particular customer segment or customers of a particular SEPA community. (For more information on the scheme change management process, refer to the EPC Website page, entitled ‘SCT / SDD Rulebook Release Management and Scheme Development’ included in the ‘related links’ below.)
The EPC has frequently commented that the process of SEPA scheme development can be compared to designing a car model: the basic model must meet key market requirements. At the same time, the model must be flexible enough to include options to add extras on demand. This concept provides maximum choice to customers while avoiding that a majority of customers has to buy features they do not need. The SEPA payment schemes, developed by the EPC in close dialogue with the entire payment community, to date are based on this concept. In other words, the schemes today include mandatory elements to be observed by all PSPs as well as optional elements allowing PSPs to offer specific features in response to market demand.
Example: optional elements included in the Rulebook
Considering widely different practices and models established with the multitude of direct debit schemes that previously existed at national level, the task of developing the harmonised SDD Core Scheme was particularly challenging. To help bank customers (payers and payees) in all SEPA countries to adapt to the requirements of the harmonised European direct debit scheme, the SDD Core Rulebook provides PSPs participating in the scheme with the opportunity to offer the following optional scheme features:
Shorter SDD Core time cycle: the standard time cycle of the SDD Core Rulebook is: the payer’s bank must receive the request for a first direct debit collection or for a one-off direct debit collection at least five business days prior to the due date (‘D-5’). For subsequent direct debit collections, the payer’s bank must receive such a request at least two business days prior to the due date (‘D-2’). The due date6 (‘D’) is assigned by the biller and should be agreed with the payer in the contract underlying a direct debit collection (a newsletter subscription, for example)7. The SDD Core Rulebook includes the possibility of using a shorter time cycle for the presentation of first, recurrent and one off direct debit payments by allowing the biller’s bank to send the payments to the payer's bank at least one inter-bank business day8 prior to the due date (‘D-1’). This option, (which is often referred to as ‘SDD COR1’), caters for the needs of certain businesses which require a shorter time cycle for direct debit payments than the standard cycle. It allows for time critical business transactions, e.g. security related transactions and insurance collections, for example. (It should be noted that all PSPs participating in the SDD Core Scheme must continue to support the standard time cycle of the SDD Core Scheme, irrespective of any agreements to use the optional shorter time cycle.)
Electronic mandate: the SDD Core Scheme includes the option to issue a mandate electronically.
Advance mandate information (AMI): this optional feature enables the debtor bank to widen its mandate management options allowing, for example, more time for the debtor bank to validate whether a payer (debtor) authorised a direct debit collection. AMI applies only to paper mandates and allows the biller (creditor) to provide mandate related information to the debtor bank by sending a separate message to the creditor bank independently of a collection, from the moment that the mandate has been signed by the payer and dematerialised by the biller.
(For more information, refer to the EPC Website, entitled ‘Use of SDD Core Options’ included in the ‘related links’ below).
Example: SCT and SDD Rulebooks allow for additional optional services
The SCT and SDD Schemes recognise that individual scheme participants (PSPs) and communities of participants will provide complementary services based on the schemes so as to meet further specific customer expectations. These are described as additional optional services (AOS). The following two types of AOS are identified:
- AOS provided by scheme participants to their customers as value-added services which are nevertheless based on the core payment schemes. These AOS are purely a matter for scheme participants and their customers in the competitive space.
- AOS provided by local, national and pan-European communities of scheme participants, such as the use of additional data elements in the ISO 20022 XML standards: any community usage rules for the use of the SEPA core mandatory subset of the ISO 20022 XML standards should also be mentioned in this context, although they are not per se AOS. Other AOS may be defined, for example relating to community-provided delivery channels for customers. (For more information on the implementation guidelines, based on the ISO 20022 message standards, released by the EPC with regard to the SCT and SDD Schemes, refer to the next section in this article.)
Scheme participants may only offer AOS in accordance with the following principles:
- All AOS must not compromise interoperability of the scheme nor create barriers to competition.
- AOS are part of the market space and should be established and evolve based on market needs. Based on these market needs, the EPC may incorporate commonly used AOS features into the scheme(s) through the change management processes set out in the Scheme Management Internal Rules9.
- There should be transparency in relation to community AOS. In particular, details of community AOS relating to the use of data elements present in the ISO 20022 XML standards (including any community usage rules for the SEPA core mandatory subset) should be disclosed on a publicly available website (in both local language(s) and English).
These AOS are not further described in the SCT and SDD Rulebooks as they are generally to be considered as specific offerings provided by both individual scheme participants and communities of participants and are out of scope of the rulebooks.
(To learn which PSPs, or communities thereof, have advised the EPC of AOS offered, refer to the related EPC Website pages included in the ‘related links’ below.)
Example: variations with specifications of the implementation guidelines pertaining to the SCT and SDD Schemes
In the pre-SEPA era, dozens of different data formats were in place to process payments across different national and European clearing systems in SEPA. The realisation of an integrated euro payments market therefore requires agreement on a common set of data to be exchanged in a common syntax when executing a SEPA payment.
The SEPA data formats as detailed in the implementation guidelines for the customer-to-bank and interbank space, respectively, released by the EPC with regard to the SCT and SDD Schemes are based on the global ISO 20022 message standards. The ‘Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro’ (see ‘related links’ below) (the SEPA Regulation) details the use of the ISO 20022 message standards by PSPs and payment service users.
In the ISO process, business requirements are defined for all markets across the globe. Different markets have different data needs. Thus, they may need to define their own version within the global standard, specific to their own situation. In this respect, the ISO messages have been adjusted to meet the SEPA requirements. The SEPA data formats as set out in the EPC implementation guidelines are a subset of the global ISO 20022 standards. The role of the EPC in defining the SEPA data formats therefore consists of identifying all necessary data elements for making SEPA payments as defined in the SCT and SDD Rulebooks within the global standard.
In a commentary contributed to the EPC Newsletter October 2011 edition, entitled ‘ISO 20022 Message Standards: Too Many Flavours? Domestic specifications of the SEPA data formats risk preventing market harmonisation’ (see ‘related articles in previous issues’ below), the authors Ruth Wandhöfer, Michael Steinbach and Matthias Haberkorn say: “It is expected that there should be a common understanding on the use and interpretation of the ISO 20022 message standards, as specified in the EPC implementation guidelines (...). This is however, not the case. The market reality today is that multiple specifications based on the EPC implementation guidelines are in use, which has resulted in subtle (and sometimes not so subtle) differences in the application of the standard.”
Transitional arrangements in EU Member States permissible under Regulation (EU) No 260/2012 (the SEPA Regulation)
SEPA compliance requirements are determined by the EU co-legislators, i.e. the European Parliament and the Council of the EU representing EU Member States. In February 2012, the European co-legislators adopted the SEPA Regulation. The SCT and SDD Schemes have to comply with the technical requirements detailed in Article 5 and in the Annex to the SEPA Regulation. (For more information, refer to the EPC Website, entitled ‘SEPA Legal and Regulatory Framework’ included in the ‘related links’ below).
The SEPA Regulation illustrates the fact that EU integration rarely follows the fastest possible trajectory, but relies on incremental progress over time. (More than 14 years of SEPA in the making, based on several EU legislative interventions aimed at promoting the harmonisation of the euro payments market, is a prime example in this context.) The SEPA Regulation effectively mandates migration to SCT and SDD in the euro area by 1 February 2014. At the same time, the SEPA Regulation – in an attempt to respond to a broad range of requests for flexibility articulated by various parties throughout the legislative process – has introduced several exemptions regarding the use of the International Bank Account Number (IBAN), the Business Identifier Code (BIC) and the ISO 20022 XML message standards by the February 2014 deadline. EU Member States have discretion as to whether they will use any or all of the options to derogate from the 1 February 2014 deadline (until 1 February 2016) with regard to the use of the IBAN, the BIC and the ISO 20022 XML message standards by payment service users.
The SEPA Regulation also stipulates that credit transfer and direct debit transactions with a cumulative market share of less than 10 percent in an EU Member State must comply with the provisions set out in this legislative act only by 1 February 2016.
Last but not least, in February 2014, the European Parliament and the Council of the EU, respectively, adopted the new ‘Regulation (EU) No 248/2014 amending Regulation (EU) No 260/2012 as regards the migration to Union-wide credit transfers and direct debits’ (see ‘related links’ below). This new EU Regulation states, among other things (italics added): “PSPs may continue, until 1 August 2014, to process payment transactions in euro in formats that are different from those required for credit transfers and direct debits pursuant to this Regulation.” Different euro area countries have decided on different timelines during which they will make use of the option to continue processing non-SEPA formats, i.e. some countries do so during the full six months transition period agreed by the European Commission, the European Parliament and the Council of the EU while others have opted for a shorter timeline.
The ECB makes available country-specific fact sheets providing information on Regulation (EU) No 260/2012 including transitional arrangements chosen by individual EU Member States. Also the European Commission has published a list detailing the ‘Usage of Member State Options’. (See ‘related links’ below.)
(Please note: the EPC, representing the European banking industry in relation to payments, is not an EU legislative body. More generally, the EPC is not part of the EU institutional framework. The EPC has therefore, no role in the adoption or modification of any EU laws.)
Have your say on the further evolution of the SCT and SDD Schemes: less flexibility, more harmonisation?
The bottom line is: up to this point it has been recognised that achieving an integrated market for electronic euro payments, (i.e. the transition of millions of payment service users and thousands of providers executing billions of payments), to harmonised SEPA payment schemes and technical standards, requires allowing for a degree of flexibility.
At the same time, it is arguable that flexibility breeds confusion and risks translating into a prolonged patchwork of national variations. Constantly adapting systems and operations to ensure the capabilities required to handle a multitude of options and variations, (which may differ from country to country across SEPA), is a strain on resources of, in particular, payment service users and providers operating across borders. The experience of SEPA pioneers on the demand side who reported on their successfully concluded SEPA migration projects in the EPC Newsletter also indicates that the benefits arising from the migration are proportionate to the level of harmonisation achieved. (For more information, refer to the case studies included in the ‘related articles’ in this and previous editions below.) However, as outlined above, it has to be emphasised that the degree of flexibility existing today reflects the requests articulated by a wide range of stakeholder groups in the past.
With migration to SCT and SDD in the euro area nearly complete, the question is whether a majority of stakeholders is willing to relinquish – at least in the mid-term – any (or even all) of the options, exceptions, exemptions and variations currently available in favour of further harmonisation. If this were the case, the SCT and SDD Rulebooks could be adapted accordingly. To illustrate the point: elements in the rulebooks which are currently optional could be made mandatory. As mentioned above, based on market needs, commonly used AOS features could be incorporated into the scheme(s).
The SCT and SDD Schemes evolve based on a transparent change management process adhered to by the EPC. The next generation rulebooks and associated implementation guidelines will be published in November 2014. These rulebook versions will then take effect in November 2015. The scheme change management process provides all stakeholders with the opportunity to introduce suggestions for changes to the schemes.
All gathered suggestions for changes to the rulebooks will be released for a three-month public consultation between May and August 2014. Proposed changes to the schemes that find broad acceptance in the entire stakeholder community are taken forward. Proposed changes that lack such broad support are not – regardless of whether such a change is proposed by a payment service provider or by a user representative. This ensures that the SCT and SDD Schemes evolve in line with the requirements of the majority of all market participants.
The EPC encourages all stakeholders to engage in the scheme change management process. For more information, refer to the article, entitled ‘Next Generation SCT and SDD Rulebooks: Three-Month Public Consultation Starts on 19 May 2014. All stakeholders are invited to provide feedback on possible modifications to the SCT and SDD Rulebooks’ in this edition of the EPC Newsletter. Incidentally, this article shows that several stakeholders have made suggestions aimed at achieving further harmonisation of the SCT and SDD Schemes.
Jean-Yves Jacquelin is the Chair of the EPC SEPA Payment Schemes Working Group.
Related articles in this issue:
SEPA 2.0: Reflections on Realising the Potential of SEPA Going Forward. SEPA roll-out so far suggests that there is room for improvement as regards alignment of policies and coordination among the EU institutions and governments driving EU integration in the area of payments
AkzoNobel: “We Have Already Seen a Return on Our Investment into SEPA Migration through the Benefits We Have Received”. AkzoNobel began using IBAN in 2010 and fully launched its SEPA implementation programme in October 2012 in readiness of the February 2014 deadline
Related articles in previous issues:
SEPA Fact Check: The SEPA Benefits Projected by EU Governments, the European Parliament, the European Commission and the European Central Bank (1999 - 2013). SEPA is an EU integration initiative driven by EU governments and the EU institutions. Note: the European Payments Council is not part of the EU institutional framework (EPC Newsletter, Issue 20, October 2013)
The Long Road to Harmonisation: Transitional Arrangements in European Union Member States Permissible Under Regulation 260/2012 (the SEPA Regulation). European Commission and European Central Bank provide information on national derogations (EPC Newsletter, Issue 18, April 2013)
ISO 20022 Message Standards: Too Many Flavours? Domestic specifications of the SEPA data formats risk preventing market harmonisation (EPC Newsletter, Issue 12, October 2011)
The Good, the Bad, the Ugly and a Knight in Shining Armour? European Commission requests unprecedented powers to determine payment functionalities (EPC Newsletter, Issue 9, January 2011)
1 European Central Bank press release (13 September 1999): ‘Improving cross-border retail payment services in the euro area - the Eurosystem's view’. (http://www.ecb.europa.eu/press/pr/date/1999/html/pr990913_2.en.html).
2 Frits Bolkestein, then EU Commissioner in charge of the Internal Market and Taxation. Speech (9 November 2000): ‘Establishing a single payment area’. (http://europa.eu/rapid/press-release_SPEECH-00-424_en.htm?locale=en).
3 Tommaso Padoa-Schioppa, then Member of the Executive Board of the European Central Bank, at the EU Commission conference Payments in euro in the Internal Market Brussels. Speech (24 September 2001): ‘Towards a single payment area’. (http://www.ecb.europa.eu/press/key/date/2001/html/sp010924.en.html).
4 Guide to the Adherence Process for the SEPA Core Direct Debit Scheme and for the SEPA B2B Direct Debit Scheme (EPC329-08) http://www.europeanpaymentscouncil.eu/index.cfm/knowledge-bank/epc-documents/ guide-to-the-adherence-process-for-the-sepa-core-direct-debit-scheme-and-for-the-sepa-b2b-direct-debit-scheme/ and Guide to the Adherence Process for the SEPA Credit Transfer Scheme (EPC125-07) http://www.europeanpaymentscouncil.eu/index.cfm/knowledge-bank/epc-documents/guide-to-the-adherence-process-for-the-sepa-credit-transfer-scheme/.
5 The jurisdictional scope of the SEPA Schemes currently consists of the 28 EU Member States plus Iceland, Norway, Liechtenstein, Switzerland, Monaco and San Marino. For details, refer to the EPC list of SEPA Scheme Countries included in the ‘related links’ underneath this article.
6 The SDD Schemes allow payers and billers to anticipate the precise date (due date), when their account will be debited or credited, respectively. The due date may be later than the date agreed between the payer and the biller if the due date is not a banking business day or in case of other exceptional circumstances.
7 The technical terms used in the SDD Rulebooks refer to the payer as ‘debtor’ and the biller as ‘creditor’.
8 An inter-bank business day is when banks are open for business between banks. The 'Trans-European Automated Real-time Gross Settlement Express Transfer System' (TARGET) calendar is used to identify inter-bank business days. To avoid frequent changes to TARGET closing days, due to national holidays for example and thus the introduction of uncertainties into financial markets, a long-term calendar for TARGET closing days has been established and applied since 2002. This calendar is published by the European Central Bank. Settlement of funds, resulting from direct debit payments always takes place on an inter-bank business day.
9 Scheme Management Internal Rules (EPC027-07) http://www.europeanpaymentscouncil.eu/index.cfm/knowledge-bank/epc-documents/sepa-scheme-management-internal-rules-version-40/.
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