INTRODUCTION TO SEPA

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 Introduction


Since the inception of the European Union and the introduction of the EURO currency, there was a big gap as far as payments were concerned. There wasn’t a unified payment method or framework for the unified market. SEPA was created to resolve this problem in the year 2008.

What is SEPA? Single Euro Payments Area is a payment scheme introduced by the European Union to simplify and harmonize payment transactions in EURO. Remember!! SEPA payment can only be done in EURO. Let us understand this through an example. If you are someone living in Germany and want to send 10000 Eur to your friend in Norway then you would send this payment Via SEPA.

Usually, books start with the history of the topic in hand. Let us start with Geography and create history(see what I did there ? 🙂 ). When I was trying to understand SEPA I was not able to clearly distinguish between the key entities mentioned below and it is very important to understand these as it will provide a really good bird’s eye view of where SEPA stands.

  1. Europe
  2. European Union (EU)
  3. European Economic Area (EEA)
  4. European Free Trade Association (EFTA)
  5. Eurozone
  6. SEPA

Europe – It’s a continent that we are familiar with. It is a geographical area with close to 50 states in it. SEPA is implemented in this region but not all countries in Europe are a part of SEPA and an example of such a country is Ukraine.

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European Union (EU) – It is a political and economic union on 27 states that are located in Europe. Not all the countries in Europe are part of the European Union. An example of this is Switzerland. All the members of EU participate in SEPA.

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European Economic Area (EEA) – This is an agreement between the European Union (EU) and 3 members of the European Free Trade Association (EFTA). It consists of 30 states and only some of them are a part of SEPA. Switzerland is not a part of the EEA.

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European Free Trade Association (EFTA) – It is a trade organization that consists of 4 states Iceland, Liechtenstein, Norway, and Switzerland. Three of these states are a part of EEA. All 4 states are part of Europe and SEPA. Switzerland here is an exception. They are not part of EEA but are part of SEPA.

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Eurozone – These are EU states which have adopted Euro(€) as their home currency. There are a total of 19 states as of today. The European central bank is the central bank of the Eurozone. All of them are part of SEPA.

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SEPA – Finally, the SEPA area consists of 27 EU states, 4 EFTA states, and 4 microstates with a monetary agreement with the EU and UK, which has exited the EU. There are some additional territories as well that are part of SEPA. The total count of states and territories is 52 that are part of SEPA. An example of an autonomous state is Åland Islands which is counted as a separate territory.

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If your head is spinning at this point then don’t worry, I am there with you. After collecting all these details, I was walking upside down 😊 but it was worth it. It provided a lot of clarity for me as well.

Countries that participate in the SEPA payments scheme can exchange messages freely across borders in Euro. It is important to note that not all states have Euro as their home currencies.

I wanted to keep this article a short one as it is stuffed with a lot of information. I have listed below some of the things that you can expect from this series (and more)

  • The governing bodies
  • Payments schemes
  • Clearing and Settlement mechanisms (country wise)
  • Payment messages overview
  • Payment Flows for the different schemes
  • Features of SEPA
  • In depth analysis of the payment messages
  • Payment timelines
  • And more

Countries List: (If you need a copy of this in excel format pls reach out to me)

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Key Stakeholders:

Let me be honest here. This article is for me 😊. Someone asked me how the different stakeholders in Europe contribute to SEPA? I tried finding the answer. After some serious reading, I wanted to summarize my understanding in such a way that it’s easy for me and others to refer to. The scope of this article is only the major bodies involved in SEPA’s implementation/function and I have not included sub-committees and branch organizations.

We should remember that the original objective of SEPA is to make all cross-border payments within European Union as a domestic payment. I mean that if someone from Germany initiates a payment to a friend in Finland, it should be considered a domestic payment and not a cross-border. It also aims to replace the different national clearings with a pan-European clearing.

The major stakeholders of SEPA

  1. EU parliament
  2. Council
  3. European Commission
  4. ECOFIN
  5. Euro Retail payments board
  6. European Central Bank (ECB)
  7. European Payment Council (EPC)

They basically fall in one of these three categories

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EU Parliament and Council:

It is the only elected body in the EU and in this list, representing the member states. The Council of the European Union, also known as the Council, comprises ministers from each member state. European laws are made by these two organizations and of course, the laws related to SEPA are made by these bodies.

They take into consideration recommendations from ECOFIN and the European Commission.

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European Commission:

This is the political driver of SEPA right from its inception. The European Commission represents the interest of the EU and proposes legislation related to SEPA. It has the power to amend the technical requirements of SEPA.

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ECOFIN:

The Economic and Financial affairs council is part of the Council mentioned above and it consists of the economic and financial ministers of the EU member states. It proposes laws related to SEPA and it monitors the economy of the EU member states in very layman terms.

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Euro Retail payments board:

It has replaced what was formally called as the SEPA council. It is headed by the European central bank and promotes innovation, integration and the competitiveness of the euro retails payments in the EU. It has contributed to several SEPA initiatives like instant payments and has tried to remove any countries national characteristic in SEPA.

European Central Bank (ECB)

It is the central bank of the eurozone i.e., the countries that have adopted the Euro as their currency. The central bank of each of the countries is represented here. It monitored the SEPA transition closely and published annual reports. It is one of the main stakeholders in the creation of SEPA.

It provided the directions, requirements, and timetables for the inception of SEPA. To date, it monitors various aspects of SEPA.

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European Payment Council (EPC):

Established as a Non-Profit organization, It is the most famous one on the list. It’s responsible for coordinating the decision-making bodies of the European banking industry. Its members include Banks, banking communities, and payment institutions. The development of the SEPA payment scheme and the framework falls upon the EPC and it has adopted the ISO20022 format for the payment messages development.

The most important deliverable of EPC is the yearly rule book which contains the latest changes to the SEPA rules. EPC consults with its members and tries to identify the new changes required for the market and proposes changes to the rule book.

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As an honorary mention, another organization called Euro Banking Association (EBA) runs pan-European clearinghouses like STEP1 and STEP2.

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