Understanding SEPA to Leverage Its Payments Infrastructure in Europe

Two decades ago, Europe’s fragmented payments markets merged into a single clearing and settlement framework called SEPA.

It has radically simplified trade between the pan-European economies and unlocked new growth avenues for the European Union as well as anyone willing to do business throughout the area.

Since 2008, SEPA (Single Euro Payments Area) has become one of the key institutions governing payments in Europe. It synchronized the flow of cross-border retail transactions, standardized all local eurozone banking spaces, and brought clearing and settlement processes to a single norm.

Now, well over 500 million people in 36 countries use SEPA as the standardized system for all euro payments.

What is SEPA (Single Euro Payments Area)

SEPA is a set of regulatory standards and technical infrastructure that harmonizes the vast majority of euro-denominated debit and credit payments across participating countries. The European Union created it in 2008 as a shared financial ecosystem for all eurozone citizens.

This made cross-border payments among participant countries as simple and cheap as domestic transactions and enabled standardized, direct, account-to-account transfers for all payments in euros.

But beyond that, it became instrumental for scaling international trade since payment providers and business owners could now enter 36 jurisdictions with just one set of payment standards and regulations.

The European Central Bank provides macro-level oversight and guidance for the SEPA project. On the operational level, SEPA payment standards and schemes are managed by the European Payment Council, owned and operated by its 77 members, banks, and other major payment service providers across the EU.

Understanding SEPA payment schemes

SEPA manages the key ways to transfer money in the EU. In 2021, SEPA Credit Transfer and SEPA Direct Debit Core accounted for 96% and 99% of all credit transfers and direct debits, respectively, within the eurozone in terms of volume.

The four key payment schemes by SEPA are:

1. SEPA Credit Transfer – The most common type used for bank transfers between accounts. Transferring money from one IBAN to another this way usually takes one business day.
2. SEPA Instant Credit Transfer – A newer, faster version with instant (up to 10 seconds) settlement designed to be available 24/7.
3. SEPA Core Direct Debit Transfer – Authorization for a company to charge you standalone payments or a subscription. This method is for business-to-consumer transactions, usually delivered within three business days.
4. SEPA B2B Direct Debit Transfer: Recurring or standalone transactions are charged directly from a business account, so business-to-business transactions take three business days to settle.

While these cover the vast majority of all eurozone payments, SEPA is introducing some new advancements, including the SEPA Request-to-Pay scheme that allows a recipient to request a payment from someone.

All this extends to 36 jurisdictions to cover all possible euro payments. If you’re an official financial institution in the SEPA zone country, you can use any of these payment schemes in the network.

You can even access and use this functionality yourself if you can follow all the SEPA regulatory and technical standards. So let’s talk about that.

How to make a SEPA payment – SEPA clearing and settlement mechanisms

If you’re planning to work with payments in euros, you’re going to work a lot with SEPA payments either through a correspondent bank, as a corporate customer, or as an indirect participant.

Transactions initiated within the area need to be first verified by a clearing house compliant with the required SEPA payment scheme. Then, the settlement happens either through the recipient’s central bank and the TARGET2 system or through one of the alternative settlement solutions used.

The specific order of events depends on the payment scheme used. But generally:

1. Customers or businesses initiate SEPA payments by providing their payment service provider with the recipient’s IBAN and the amount they want to transfer.
2. A payment provider makes sure the IBAN is SEPA-reachable and generates a SEPA message (standard ISO 20022) with all the transfer information.
3. This message is sent to one of the authorized clearing houses that operate within the SEPA mechanism. There it’s confirmed that this payment is legitimate and you have enough funds to make this payment. European Payment Council details all clearing and settlement systems compliant with their SEPA regulation and payment schemes.
4. Once confirmed through the SEPA process, the clearing house instructs the sender and recipient banks to make the transfer, which gets settled most commonly using TARGET2 – a settlement structure by the European Central Bank that ensures quick money movement by using funds held at the central bank for the transfer.

The two dominant SEPA settlement mechanisms are TARGET2 (operated by the European Central Bank) and EURO1 (operated by the private bank consortium EBA CLEARING).

For reference, in 2021, EURO1 settled 45 million payments with a total value of €37 trillion, while TARGET2 settled 97 million payments with a total value of €494 trillion.

How to start processing SEPA payments

There are several ways to use SEPA payments as a company.

1. You can be a corporate customer of payment service providers already approved by the authorities.
2. Partner with a correspondent bank that is already a part of the network.
3. You can also become an indirect SEPA participant to gain credibility and control your business’s payment management.

However, only regulated electronic money institutions, payment institutions, or credit Institutions can apply to participate in SEPA. To become a payment services provider in the SEPA network, you typically need to obtain licenses and permissions from local regulatory authorities, including:

• License as a financial institution
• Authorization from the national central bank
• Compliance with GDPR and other more niche regulations

Alternatively, you can establish correspondent banking relationships with banks that are members of the SEPA payment network and can provide you access to SEPA schemes under their umbrella.

This usually works by allowing you to access SEPA payment functionality through APIs provided by banks or other payment service providers.

Corporate bank customer vs. an indirect SEPA participant

Most companies access SEPA and its payment schemes as corporate customers of established financial institutions that handle all the standardization and payment management based on your requests.

Another way to handle it is to become an indirect SEPA participant. This allows you to:

• Send and receive SEPA credit transfers, SEPA direct debits, and SEPA instant credit transfers
• Manage payment status report messages
• Confirm or reject incoming SEPA instant credit transfers
• Send and receive recalls, returns, and inquiries
• Reconcile settlements and safeguarded accounts
• Manage funds across a settlement

However, as an indirect participant, you are responsible for running all the necessary anti-money laundering checks on your customers and maintaining compliance with local regulations and your sponsor bank’s requirements.

How to become an indirect SEPA participant

To become an indirect participant, you’ll need to find a sponsor bank that will vouch for you, register you with the European Payment Council under their profile, and get you BIC (Bank Identifier Code) specific to your operation. And, of course, you’ll need to create a meaningful API connection with your sponsor bank’s infrastructure to enable smooth payment management from your side.

Importance of the SDD (SEPA direct debit) mandate

SEPA uses the SDD Mandate as the authorization document. It is a key component specific to SEPA payments, and it includes all the payment details. This code is used to provide the payer with all necessary information, get their signature for funds transfer, and then securely store this data for compliance and future reference.

Countries where you can make SEPA payments

The breakdown of the 36 SEPA participant counties goes as follows:

27 European Union countries:

🇦🇹 Austria

🇧🇪 Belgium

🇧🇬 Bulgaria

🇭🇷 Croatia

🇨🇾 Cyprus

🇨🇿 Czech Republic

🇩🇰 Denmark

🇪🇪 Estonia

🇫🇮 Finland

🇫🇷 France

🇩🇪 Germany

🇬🇷 Greece

🇭🇺 Hungary

🇮🇪 Ireland

🇮🇹 Italy

🇱🇻 Latvia

🇱🇹 Lithuania

🇱🇺 Luxembourg

🇲🇹 Malta

🇳🇱 Netherlands

🇵🇱 Poland

🇵🇹 Portugal

🇷🇴 Romania

🇸🇰 Slovakia

🇸🇮 Slovenia

🇪🇸 Spain

🇸🇪 Sweden

4 microstates have special agreements with the EU:

🇻🇦 Vatican City

🇸🇲 San Marino

🇲🇨 Monaco

🇦🇩 Andorra

4 countries from the European Free Trade Association:

🇱🇮 Liechtenstein

🇳🇴 Norway

🇮🇸 Iceland

🇨🇭 Switzerland

🇬🇧 United Kingdom (including Gibraltar and even after Brexit)

Some surprising countries don’t use SEPA for now, which is important to keep in mind when planning cross-border payments in that region:

• 🇽🇰 Kosovo and 🇲🇪 Montenegro, despite using the euro as their national currency, are not part of the SEPA zone.
• 🇫🇴 Danish Faroe Islands and 🇬🇱 Greenland.
• 🇦🇱 Albania, 🇧🇾 Belarus, 🇹🇷 Turkey, and 🇺🇦 Ukraine, however, all of those use IBAN.

SEPA works only with EUR, so in participant countries that use other currencies (🇵🇱 Poland, 🇸🇪 Sweden, 🇭🇷 Croatia, 🇨🇿 Czech Republic, etc.), a financial institution needs to handle currency exchange internally. In countries outside the eurozone, SEPA schemes are only used for euro-denominated payments.

Role of SEPA in the European and global financial ecosystem

The whole pan-European space connected in one domestic cross-border payments space would have been unimaginable before 2008, but here we are. Before SEPA, most euro-denominated payments went through Swift, and different countries had their fragmented payment infrastructures and procedures in place.

As the infrastructure made specifically for this currency, SEPA boasts undeniable benefits that ensure its ongoing growth.

• A single set of euro payment instruments – credit transfers, direct debits and card payments
• Fees are predictable and often negligible
• Efficient processing infrastructure for euro payments
• Common technical standards and business practices
• A harmonized legal basis

As a business, you now have a clear framework for working with payments for over 500 million people throughout and beyond the EU. All you need to do is find your customers and provide them with your product connected to the European payments infrastructure, which is our specialty.

At Payment Labs, we’re creating a dedicated payment system for esports prize payments, sports payments, NIL payouts, and agencies that simplify fast and compliant global payments with low, flat-rate fees. Reach out to the Payment Labs team today to effortlessly manage your cross-border payments!