SEPA: A New Beginning?
After years of talking the single european payments area (SEPA) talk, the market is now being asked to walk the SEPA walk. Against the slow migration pace of SEPA, the EU provided us all with a present just in time for Christmas by setting a migration deadline for SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs) of 1 February 2014. Great news it seems, given that the continuation of parallel legacy processes, systems and standards in the payment space would involve significant ongoing costs and inefficiencies, which in the current time is neither sustainable by the banks nor in the interests or their customers.
But what does this landmark December decision, shortly to be officially signed off by the European Parliament (EP) and then to enter into force, really mean for the payments industry, corporate customers, citizens and indeed the single market? This article will examine what is affectionately referred to by some as the SEPA migration end date regulation (SMED) – in terms of the different requirements, timeline and the current state of play around taking on the challenges that will follow in the coming months and years.
During 2011 the EP, European Council and Commission negotiated and finally agreed on a regulation that has the objective of moving SEPA, and therefore euro payments integration, forward at a much faster speed than the market had been able to deliver on its own. The fact that we now have this as a regulatory requirement also reflects the reality – that the self-regulatory industry efforts that initially envisaged a market-led-migration have not been strong enough on their own to transform the market. While this outcome has often been attributed entirely to the supply-side (the banks), the demand-side (consumers, small to medium-sized (SMEs), public sector and corporates) has also been involved in the debate. Yes, bank-led communication has not necessarily been as intense and clear as it could have been in all eurozone countries in order to fully explain the large scale transformation ambitions that the SEPA project embodies. However, many stakeholders were – and in some cases still are – at something of a loss to understand why changes were really needed, given that national payment processes and infrastructures were anyway working to the satisfaction of many.
Change is painful for everyone and while the banking industry has made great strides towards delivering the project, which will be a key pillar in bringing more competition between providers and greater efficiency, politicians in many eurozone member states have not fully embraced the need for this transformation despite consensus at EU level. This conundrum finally left the industry in a position where only a regulatory push was seen as a powerful enough solution to move this key component of the further integration of the single market forward.
The next big question to ask then is: will this regulation deliver what is needed – noting that a regulation was chosen due to its characteristics of being binding on all Member States and not requiring national implementing legislation (in contrast to a directive, which usually leads to gold-plating and hence a non-harmonised outcome)? This in turn leads to an even more fundamental question: what is needed anyway?
In order to deliver competition and integration the ideal would be that all eurozone payments and receivables move from today’s local processes, formats and standards to the SEPA schemes and standards. This then should mean that all domestic and cross-border (intra-SEPA) euro flows – excluding only high value payment systems traffic such as target2 – would transform into a standardised process, which would then underpin the looked for and much needed boost of competition between providers of payment services and deliver the integration of currently fragmented payments markets.
However, when looking closely at the detail of the regulation, it seems that there could be a significant risk of some payments remaining fragmented going forward, at least for a period of time. At the same time, even the theoretically harmonised component – those credit transfers and direct debits moving onto the SEPA schemes – is threatening to incorporate an increasingly seasoned mix of ingredients to suit individual national tastes. One irony here is if barriers to cross-border competition were to be maintained after all, justified by the neat excuse of needing to respond to customer needs (which as we know can have an understandably high element of ‘no change please’).
Looking at the regulation, the obvious questions are what are now the agreed end dates, and what exactly is it that will be ending (or beginning) as a consequence?
In fact, the regulation contains many dates, but the key ones to focus on are 1 February 2014 and 1 February 2016. The first of these is the most significant, as this is the date by which all payments falling under the scope of the regulation (essentially all non-urgent intra-EU credit transfers and direct debits denominated in euro) must be executed via SEPA-compliant payment schemes. It is important to note that, for political reasons, the approach of the regulation is a somewhat convoluted one which requires banks/payment service providers (PSPs) and the payment schemes that they use to adhere to a long list of detailed principles and rules, rather than just to ‘use the European Payment Council’s (EPCs) SCT and SDD schemes”, which would have been simpler.
The relevance of the other big date 1 February 2016 – is that this is by when any ‘niche schemes’ (representing less than 10% of national SCT or SDD payment volumes) that have been exempted from the initial 1 February 2014 deadline through the use of one of the regulation’s transition provisions must fall into line. These ‘niche schemes’ have yet to be identified by the respective national authorities, with the exception of the ELV scheme in Germany, which has been singled out in the regulation as qualifying for this special treatment.
Other key points to note are that:
The payment of a multilateral interchange fee (MIF) by the payee’s bank to the payer’s bank in relation to the execution of a SDD collection (an existing practice in some EU countries) must cease – by 1 November 2012 for cross-border direct debits and by 1 February 2017 for national direct debitss.
Non-consumer payers will themselves have to start using the XML ISO 20022 message standards when initiating batches/files of payments (this could be as early as 1 February 2014 depending on which countries choose to use the user-friendly option in the text of postponing this requirement until 1 February 2016).
The current requirement on users to provide the bank identifier code (BIC), as well as the individual bank account number (IBAN), as part of their payment instructions is being phased out (by 1 February 2016 at the latest) in a somewhat contentious late change in the final stages of negotiation of the regulation.
In a couple of linked changes which the SEPA regulation makes to another existing piece of payments law (regulation 924/2009), those countries still maintaining settlement based balance of payments reporting requirements on their PSPs for payments over €50,000 will have to phase these out by 1 February 2016; and cross-border payments in euro over this amount are being brought under the existing regulation 924 requirement under which they must be charged the same as the corresponding national transfer.
As explained above, the bulk of the changes that SEPA brings about will fall to banks/PSPs to execute, given the fact that not all banks are ISO 20022 XML ready as of yet. It is however also clear from the nature of the final text of the regulation that corporates (and by that we mean any non-consumer customer that sends bundled payment instructions for execution to their bank/PSP) will be required to do something. While for some decision-makers it may have seemed liked a small effort, I am sure that most observers would agree that the implementation of ISO 20022 XML SEPA standards is not necessarily going to be a simple move. Options exist or are being considered by large enterprise resource planning (ERP) providers but small proprietary solutions will need individual adaptations in order to upgrade to ISO. Regulators did not in the end accept the arguments for the alternative option of making banks/PSPs responsible for connecting their clients to SEPA, which may suggest that bank/PSP-provided support for format conversion could be challenging under the forthcoming SEPA regulation (which would rather counter intuitively remove an existing area of competition between banks/PSPs and reduce their ability to meet their customers’ individual needs in this area).
To add a little bit more complexity, this requirement obviously only applies for SEPA transactions. So the practical question that remains for corporates and their banks/PSPs is how to address the non-SEPA payments (whether these are intra-European or international)? Getting ERP systems ready for SEPA could therefore mean that existing procedures for non-SEPA flows will need to continue even within the corporate treasury. It can hence be reasonably assumed that existing processes may become more complex than they are today.
In anticipation of the formal endorsement of the regulation in a few weeks time, the banking industry (via the European Banking Federation’s Payments Regulatory Expert Group) is already preparing to work on an industry implementation guidance document for SEPA, which – similar to the guidance prepared previously in relation to the Payment Services Directive (PSD) – is intended to provide clarity on a range of practical questions for both banks/PSPs and corporates alike.
With regard to handling the practical consequences of the political decision on ‘IBAN only’, 2012 will be the year of establishing which stakeholders should work on that project and hopefully a solution as to the ‘how’ can be found. For the consumer segment – noting that consumers make very few payments cross-border – some sort of ‘bridge’ solution may be found, under which national IBAN/BIC data bases could potentially be created to address national payments, while for cross-border payments a more complex inter-bank dialogue would be needed every time a consumer wants to make such a payment. However, the requirements of the corporate client segment with traditionally high volumes of cross-border flows could seemingly only be satisfied if a pan-European IBAN/BIC database were available and soundly managed by an independent third party (preferably a European institution), a proposal which was not found to be attractive by the EU regulators and hence got dismissed in the course of the SEPA regulation negotiations. Hence, a key recommendation for the time being to all corporates in the interest of ensuring that payments arrive at the right destination is to continue collecting/updating IBAN and BIC data.
Despite the many ongoing challenges and complexities the overall message is very positive. A deadline has at last been established and both providers and users will now have to start working towards it. In terms of clarifying some of the remaining uncertainties, the other positive news is that – as mentioned above – work is already starting to provide practical guidance for banks/PSPs and users in SEPA.
The current phase 1, which is focusing on spreading the news to all stakeholders, is soon going to be taken over by phase 2 – implementation. With the opportunities for lawyers, consultants and IT vendors already clear, there is also an occasion for banks/PSPs and their clients to use this transformational change to improve efficiency, streamline processes and ensure that overall client needs are addressed.
In conclusion recommended practical next steps include:
After a long wait the starting gun for SEPA has finally been fired and while there will be challenges along the way, the ultimate benefits of this new beginning are at last poised to be realised.