Impact of the SEPA Credit Transfer
The clearing of single euro payments (SEPA) Credit Transfer (SCT) payments is one of the most important elements of the SEPA initiative. The Euro Banking Association (EBA) Clearing Company introduced a Pan-European Automated Clearing House (PE-ACH) called STEP2, which provides clearing and settlement mechanisms required for banks to exchange SEPA Credit Transfers and Direct Debits. SEPA is an historic milestone in itself but banks are also looking diligently at the stand-alone Clearing and Settlement Mechanisms (CSMs) through which pan-European payments can be processed to support the SEPA schemes and formats.
A CSM basically allows corporations participating in pan-European electronic payments to transmit and confirm payments of different types, establish a final settlement and reconcile the requirements created through the clearing process between participating SEPA scheme participants. CSMs may include the services of an automated clearinghouse. Each CSM is different and some have limited processing capabilities, geographic scopes or functions. The following is an overview of each of the key players in the CSM business:1
The EBA CLEARING Company was established in 1998 by 52 major European and international banks as a separate entity to operate EURO1, the CSM for large-value payments and STEP1, for low-value payments. Since 2003, EBA CLEARING has been managing and operating STEP2, the first pan-European ACH-service for mass payments in euro. Currently, over 290 banks throughout Europe use the high-value and low-value clearing and settlement services offered by EBA CLEARING.
Equens is a pan-European, full-service payment processor. Equens has an annual volume of 7 billion payments and 1.9 billion POS and ATM transactions. Its market share within the eurozone is well over 10%.
Iberpay is the Spanish service provider specialising in payment processing. Iberpay manages the SNCE, the retail payments system of Spain created in 1987. Iberpay processed more than 1.3 billion interbanking transactions in 2006, two-thirds of them being direct debits. The value of the transactions processed by Iberpay in 2006 amounted to €1.9 trillion with peak days of 21 million transactions processed amounting to €16bn.
Seceti uses the ‘QuiMultibanca’ network to link over 8,000 ATM machines throughout Italy. In the POS field, Seceti handles the processing of more than 230,000 terminals and manages all the back-end processes. In the card sector, Seceti covers the entire range of infrastructural, applicative and operative services. Equens and Seceti are considering the establishment of a joint new company for further co-operation and growth. Together, they would annually process 8.7 billion payments and switch 3 billion POS and ATM transactions.
STET is a European service provider that is taking over the processing and clearing of French national payments, which represents about 12 billion payments annually. STET processes all payment instruments. The STET system provides flexible services to handle both SEPA-compliant transactions and legacy payments from different countries.
VocaLink is a specialist provider of transaction services to banks, their corporate customers and government departments. The VocaLink payment platform processes around 80 billion transactions annually.
For a truly pan-European ACH to be achieved, there needs to be interoperability between the CSMs. Banks choose a CSM through which their SCTs can be best delivered – whether it is by location, volume, convenience or value of transactions. A CSM framework provides the operation of processing but does not always provide interoperability with other CSMs.
Without interoperability, banks and corporations looking to clear and settle payments may be faced with complicated operational processing for basic and additional services requiring multiple-party interoperability (direct debit, e-invoicing, STP, clearing and settlement). There are many other issues that may result from CSMs non-interoperability, such as longer time intervals due to the handling of exceptions or the increase in link-up costs for each CSM.
With the introduction of SEPA, competition has been created between CSMs for the volumes of transactions based on the same standardised payment products. The CSM that offers the most services will reap the best results. As such, the SEPA market will lead to a healthy processing industry that is not monopolised but instead is more consolidated than the current state.
For competition between payment processors to be possible, interoperability between CSMs is needed. At the same time, common technical interoperability allows the payment processor to be able to reach new markets. The CSMs are trying to expand their operations and reposition themselves in an effort to become more pan-European and less regional with increased interoperability. While some of these CSMs are limited in terms of their geographic compass, they are all looking to realise their potential market shares by enhancing their clearing capabilities.
Equens, Iberpay, Seceti, STET and VocaLink announced at SIBOS2 2007 that they will establish levels of interoperability for the exchange of SEPA payments. This is a significant event as these CSMs handled over €18bn in direct debit and credit transfer payments in 2006. This landmark agreement will create a competitive market for CSM services by allowing banks to choose the processor or processors that best meet their needs thus increasing efficiencies in payment processing. Interoperability agreements will enable the simple and efficient exchange of SEPA payments between the CSMs to better serve their customers across many countries. This creates a fast, accurate, less expensive way of transmitting SEPA payments.
According to the EBA’s document ‘Achieving Reachability in SEPA’, a bank may use any CSM for processing SEPA payments as long as it meets the requirements set by the relevant European Payments Council documentation and EU legal texts. The EBA-recommended practices formulated by the PE-ACH/CSM Framework for the use of CSMs in SEPA are as follows:
It is important to stress that being reachable in the banking community for SCTs via a PE-ACH on all sides of the payment spectrum is imperative for payment processing. Each bank will therefore have to make individual arrangements for becoming directly or indirectly reachable through a PE-ACH.
As SEPA has created a more competitive marketplace, banks wishing to participate will find themselves in a somewhat more complicated atmosphere for making transactions across borders. While SEPA is trying to make those barriers non-existent, it is through interoperability between CSMs that transparency can be achieved. Furthermore, interoperability between CSMs will help make significant strides in realising a more consolidated payment infrastructure for euro payments. SCTs are effectively a SEPA scheme that provides banks with an efficient way to process payments increasing the speed of transactions and reducing costs.
1Obtained from direct sources including company website(s) and a press release distributed at SIBOS 2007 entitled: ‘Five Leading CSMs Announce Interoperability Ahead of SEPA’.
2SIBOS is SWIFT’s annual banking conference.