What are SEPA Payments?

If you are an e-money institution seeking a means of effecting cross-border euro transactions in a simplified and harmonized manner with minimal costs, then this is the goal to pursue: getting an EMI license from a national regulator within the EEA and consequently accessing the Single Euro Payments Area schemes. For EMI licensees, SEPA has been a driver for operational efficiency and international growth; ensuring regulatory compliance and, importantly, cements them as key players in the European financial services market.

What Is SEPA?

SEPA is an integrated market for electronic payments in euro within the EEA with no differentiation between national and cross-border payments. The EU launched SEPA in 2008 to give citizens and businesses of the EEA secure, competitively priced, user-friendly, and reliable payment services in euros.

Today, SEPA encompasses 36 members – the 27 member countries of the EU, the four members of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), and the UK. From the perspective of EMI licensees, the main elements of SEPA payments translate into an infrastructure allowing rapid, smooth and low-cost cross-border euro transactions.

The key objectives of SEPA:

• Standardize means of paying, formats, and procedures in the euro area
• Make euro payments swifter and more efficient
• Facilitate cross-border transactions within the euro area to the same extent as this is possible within national borders
• Stimulate a harmonization of legislation for the euro area
• Promote competition amongst the providers of financial services by eliminating obstacles to market entry and fostering innovation
• Favor customer-oriented payment services

How Does SEPA Work?

So basically, there are a few main components of the SEPA infrastructure of which you should be aware in order to understand how this works and how you can prepare your e-money institution for this. In general, the way SEPA works is by harmonizing the rules and standardizing the formats and processes at euro transactions across the eurozone. This involves the harmonization of time lines for transactions, clearing and settlement procedures, dispute resolution rules, and frameworks of liability. In utilizing standardized forms of payment instruments, this ensures all euro payments have a uniform format and will be processed under the same rules. This means standardized payment instruments such as SEPA Credit Transfer (SCT) for credit transfers and SEPA Direct Debit (SDD) for direct debits.

Without any need for extra compliance and adaptation, SEPA executes cross-border euro transactions to create a more effective and less costly setting for businesses and consumers. EMIs taking part in the SEPA need not suffer under the burdens of varied national systems and standards of payments anymore. Extra adaptation and compliance needs have been alleviated, and as a result of not needing to adapt to country-specific needs, EMIs can focus on their core business and therefore boost their processing capability.

SEPA depends on a network of participating banks, which may also be termed SEPA-compliant banks. These banks adhere to SEPA standards and are responsible for the processing of SEPA payments, including the relevant cross-border transactions. In order for the EMIs to connect with the SEPA network and become participants in a SEPA scheme, they need to establish links with SEPA-compliant banks. It’s also possible seeking connection through a central bank of your EMI’s jurisdiction, however this option is more expensive and complicated. That said the Central Bank of Lithuania is an exception to this general rule because it opens for financial institutions a possibility to connect to CENTROlink enabling them to provide their clients direct access to SEPA without the need of commercial banks acting as intermediaries.

Like any other financial institution willing to be part of SEPA, your EMI is able to choose two modes of participation for such: either become a direct participant or a SEPA-compliant clearing house. In case EMIs prefer the status of a direct participant, they will be directly connected to the network of SEPA in order for them to handle their payment flows internally and, meanwhile, have a high degree of operational independence by controlling the whole value chain of a payment from its initiation to settlement. EMI may also use SEPA-compliant clearing houses, which accumulate and process payments on behalf of several financial institutions and therefore would outsource parts of the process.

In principle, the transactions within SEPA are done with the use of common identifiers, which include the International Bank Account Number, referred to as IBAN, and the Bank Identifier Code, also referred to as BIC. The IBAN uniquely identifies bank accounts, while BIC refers to the banks involved in a transaction. In this way, SEPA promotes interoperability between financial institutions and payment service providers to efficiently process cross-border euro transactions.

Normally, SEPA transactions require strong customer authentication as a way of improving security. This implies many tiers of verification that ensure the identities of both the payee and the payer are verified during a transaction. This is the security feature to be developed within your EMI protection strategy and which should protect customers’ data against unauthorized access or fraudulent acts. When customers know that their transactions are guarded by robust authentication measures, then they would much more likely be trustful and keep using your services.

Benefits of SEPA Payments for EMI License Holders

Access to SEPA allows EMIs to expand in the eurozone through direct access to a huge array of advantages. From the cost and operation improvements afforded by SEPA-enabled payments to regulatory clarity and safety, there are a lot of reasons why your EMI should join this open and inclusive initiative.

Some of the ways in which EMIs can get returns with SEPA payments:

• SEPA introduces a smooth and efficient process for cross-border payments. This can enable EMIs to minimize their cost and efforts, and focus on core business operations and growth. The streamlined processes for payment result in less delay in receiving the cash, for which EMI license holders can immediately invest or use the money in time for investments and other operational work.
• With the same smooth processes, SEPA gives faster fund transfers, ensuring EMI licensees will be able to provide fast and timely services to their customers, which results in increasing customer satisfaction, making the EMIs more competitive in the market.
• Since the payment formats are standardized and there is no currency conversion involved, this therefore means the EMI licensees will have greatly reduced transaction costs and thus improve profitability.
• SEPA often includes direct debits and regular, scheduled payments, which allows the EMI license holder to more accurately anticipate their receipt of funds and, therefore, plan financially and maintain cash flow accordingly.
• Since 36 countries come under the ambit of SEPA, by leveraging the infrastructure, EMIs will be able to expand services to a very broad clientele, leading to the new markets being explored and diversified in customer bases.
• SEPA follows strict security standards and data protection regulations that minimize, for EMIs, the risk of unauthorized access, data breaches, and fraudulent activities.
• SEPA is in compliance with legal and regulatory frameworks within the eurozone, therefore assuring EMI license holders of the possibility to conduct their activity based on legal clarity and predictability, which reduces compliance-related challenges and uncertainties often associated with international transactions.

SEPA Regulations

Complying with the rules set out by the SEPA is what you want to do for your long-term success in EMI. Only when you are able to master the regulatory framework and ensure compliance with SEPA will you be able to take advantage of the benefits offered by SEPA and make sure all transactions are done with limited risk. You should, therefore, pay attention to what are the applicable legal acts and what results are brought about by non-performance.

SEPA is mainly governed by the following essential EU regulations and directives:

• Regulation (EU) No 260/2012, also known as the SEPA Regulation, that defined the technical and business criteria of credit transfers and direct debits in euro in the EU, providing, among others, the basis for the SCT and SDD schemes;
• Directive 2007/64/EC, or the 1st Payment Services Directive (PSD1), set the principal framework for SEPA. It provides general provisions on payment services in the European Union, with definitions of various types of payment services, including credit transfers and direct debits, and lays down a set of rules regarding their governance.
• Directive (EU) 2015/2366, or 2nd Payment Services Directive (PSD2), didn’t directly revise SEPA rules but brought in some serious changes to the regulation of payment services in the EU that influenced the entire financial services market – e.g., introduced payment initiation and account information services relevant to SEPA.
• Regulation (EU) 2019/518, or Cross-Border Payments Regulation, had the purpose of making cross-border payments in the EU transparent and non-discriminatory and thus reinforced the principles of SEPA when it comes to making cross-border euro payments efficient, easy, and cost-effective as domestic transactions.

Regulatory authorities can impose fines and penalties that are hefty and directly affect the financial stability of your EMI. Non-compliances can also affect your EMI’s reputation and eliminate customer, partners and investor trust that leads to business losses and long term damage to your brand.

Non-compliance will lead to functional interference whereby you stand to be excluded from using the SEPA network, and therefore can’t ultimately serve your clients. In severe levels of non-compliance, there are also possible legal consequences against EMIs. This could be a time-consuming and expensive case in court that may, in some cases, end up with the shutting down of operations altogether.

Our team here at Regulated United Europe would be happy to help you reach all the benefits SEPA has in store and, simultaneously, make sure that your EMI is not exposed to any kind of legal risk while focusing on the development and day-to-day operations of e-money products and services. Our team of experts can assist you through the compliance process, enabling you to understand the regulatory framework and plan your operation accordingly. We invite you not to leave your business up to chance but to contact our team today.

SEPA Payment Schemes Relevant to EMI Licensees

There are various different SEPA payment schemes applicable to EMIs, each targeted at various transaction types and scenarios. These schemes can offer your EMI a wide range of the instruments needed to meet the payment requirements of its customers in an effective and secure manner. By using the relevant SEPA payment schemes, your EMI will be able to develop its operational capabilities further and offer more of a complete suite of payment services.

The main types of SEPA payment schemes are:

• SEPA Credit Transfer – SCT – is another alternative for single and repetitive credit transfer, aptly fitting all kinds of payment scenarios, including salary payment, vendors’ payment, and customers’ refund with various advantages such as time efficiency, cost efficiency, and transaction simplicity.
• SEPA Direct Debit enables both one-off and recurrent debiting transactions; hence, it is befitting for EMI use cases in the form of subscription payment and utility bill collections, thus cash flow predictability, customer convenience, and reduced payment administration since payment collections are automated.
• SCT Inst: real-time or near-instant credit transfers, as an answer to real-time settlement of cases. It allows EMIs to match the growing demand for immediate fund transfers, thereby strengthening their value proposition.
• SEPA Business to Business: SCT B2B for euro transactions between businesses, benefiting enterprises in need of more data and information in their transactions. It allows EMIs to answer with solutions to specific requests from B2B customers, thus helping them manage their financial workflows.
• SEPA Direct Debit Business to Business (SDD B2B) is designed for euro direct debit transactions between businesses, offering the same benefits of enhanced data and reconciliation as the SCT B2B scheme but focusing on direct debit transactions between businesses; it allows EMIs to streamline collections and payment processes for B2B clients.

SEPA Technical and Operational Requirements

The decision to join SEPA sounds like it might be in tune with the growth and expansion strategy of your EMI business. In this respect, it is of utmost importance to correctly analyze and understand the technical and operational requirements that you will need to fulfill with a view to succeeding in this strategic movement. To accomplish these tasks, you might need to look at stand-alone software that integrates SEPA or a payment processing platform that has support for SEPA, working with a software vendor or developer that is experienced in this field. If you need help making an informed decision, remember that our team has over six years of experience in helping Fintech companies grow and can assist you in looking at the various options through the legal looking glass within the context of your business model.

Key SEPA technical and operational requirements:

• As mentioned earlier, SEPA necessitates the use of IBAN and BIC in payment transactions, which implies that you must upgrade your customer files to include IBAN and BIC information.
• SEPA transactions require respective message formats for SCT and SDD messages, meaning you will need to implement message format standards in your payment systems and conduct structural and content tests of your SCT and SDD files to ensure compliance.
• You will most probably be obliged to implement SCA measures, such as multi-factor authentication, tokenization, or biometric authentication, so that the verification of payers’ and payees’ identities is duly ensured.
• Because SEPA provides uniform timelines for the processing of payments, you shall adjust your processes to ensure that the payment is initiated, cleared, and settled within the time limits so that you can avoid any delays and issues of non-compliance.
• Customer mandates for SDDs need to be created in order to provide mandate for recurring payments; you shall also be able to develop a process for capturing and managing customer mandates.
• The SEPA defined the handling procedures of the reversals and disputes, including SCT R-transactions, SDD R-transactions, and you need to create the respective procedures.
• You will have to implement extensive risk management means, including, but not limited to fraud detection, monitoring and prevention.
• You will also be tasked with proposing a workflow for communications with customers in order to make available clear informative materials regarding IBAN and BIC usage, mandate management, and other related SEPA topics to your customers.

How to Become Part of the SEPA Network

We are confident that by now you have a clear picture as to how the transition to SEPA payment methods would represent the strategic next step of your EMI seeking to expand their services within the eurozone. If so, you can start taking the steps needed for transitioning to the SEPA payments once you have a good understanding of SEPA regulations, payment schemes, standards and technical and operational requirements.

Implementation process of SEPA involves:

• Verification on whether your EMI license covers SEPA transactions since this license has to be procured from a national regulator within the EEA.
• Examine the existing payments infrastructure, systems, and procedures to identify any omissions or what has to be changed to allow SEPA compliance.
• Updating your systems and procedures, not only in terms of SEPA technical standards but also ensuring you are able to send and receive SCT and SDD files.
• Rigorous testing of the system compatibility that they are fully prepared for SEPA.
• Considering a banking partner which is compliant with SEPA, making a partnership with them.
• Inform your customers of the move towards SEPA and take them through the changes that will involve IBANs and BICs.
• A very important point is to train your staff properly in SEPA processes to support customers.
• Putting in place strict compliance and risk management methods so that you remain compliant with the regulations set by SEPA.

While there are a lot of SEPA advantages, the switch of your EMI to SEPA payments may be cumbersome and difficult; we strongly recommend you consult our team of experienced lawyers, business developers, and finance professionals here at Regulated United Europe. We offer a tailored SEPA consultation that will result in actionable insights regarding thorough planning of SEPA implementation and its precise execution, continuous SEPA compliance.

Ensuring Ongoing EMI Compliance with SEPA Regulations

In case you are successful in onboarding SEPA payments, there will be continuing mounting pile of SEPA legal compliance that your e-money institution needs to carry out in practice that would provide for smooth and secure operations of financial services within the eurozone area. Many of them are identical to technical and operational requirements your company will need to meet to become eligible for SEPA payment schemes.

Besides them, you will be bound to comply with the following in regard to the regulatory requirements under SEPA:

• Establishment of a compliance monitoring program: Monitor fully the requirement of SEPA, including ongoing operations review for the timely detection and rectification of any non-compliances, with necessary remedial measures.
• When concluding contracts with SEPA-compliant banks or payment service providers, you have to do so in a manner that is fair, compliant, and in the best interests of the EMI. That is why scrutiny of such contracts through one’s lawyer is necessary for which you can come to us.
• The regulations on SEPA might change from time to time, and all such updates must be known to you to enable running the EMI in compliance.

In case you are interested in the SEPA payment integration into the operation process of your EMI, the team of Regulated United Europe would be very keen to assist you in making sure that your company is in full compliance with the legal requirements that apply and establishing effective SEPA-related procedures. If you haven’t acquired an EMI license yet, we can definitely guide you through the license application process or lead the acquisition of a ready-made company with an existing e-money institution license. With experienced lawyers, business development professionals, and financial accountants by your side, you will find the process of compliance with SEPA regulations easy, smooth, and transparent. Contact us today and schedule your personal SEPA consultation to establish the basis for long-term prosperity.