November 2022 - Payment Topics

What is SEPA?

SEPA stands for Single Euro Payments Area. It was created to simplify international euro transfers between EU member states. It allows you to send and receive payments in euros between two cross-border bank accounts in the eurozone. You can read more about Single Euro Payments Area from the ECB here.

The Single Euro Payments Area ensures that payments made across the eurozone are as simple as domestic transactions. This promotes economic integration and the mobility of people within the eurozone. A single market for payments services increases competition thereby reducing costs of moving money throughout the eurozone.

The primary instrument for making payments in the Single Euro Payments Area is the SEPA Credit Transfer or SCT.

In order to make an SCT Payment, you need:

IBAN of the person you want to pay
The bank receiving the payment must be a SEPA member
The payment must be in euro

The Single Euro Payments Area is regulated by the European Payments Council (EPC).

Advantages of SEPA

Four types of SEPA payment

There are four different types of SEPA payment. All of these payment types have their message definitions defined in the ISO 20022 framework.

SEPA Credit Transfer

Usually used for one-off transfers, while PSPs move payments from one bank account to another within the eurozone. For more information, please see here

SEPA Instant Credit Transfer

Unlike an SCT, an instant credit transfer can move money from one account to another in less than ten seconds.

SEPA Direct Debit Transfer Core

Used for subscription services as well as monthly items like utility bills. These are fundamentally different to credit transfers, as it is the recipient that requests the money transfer from the sender rather than the other way around. For more information, please see here

SEPA Direct Debit Business-to-Business

Available if you are collecting Direct Debit payments from other businesses

What is ISO 20022?

ISO 20022 logo

ISO 20022 is a common language and model for financial messages across the world.

It covers five financial areas:

Payments
Securities
Trade services
Cards
FX (Foreign Exchanges).

More information can be found here

A key part of the SEPA is the use of the ISO 20022 messaging standard using XML during payment processing.

The ISO 20022 payments standard will apply to domestic, ACH, high value and cross-border payments and by 2025 it will be the universal standard for high value payment systems of all reserve currencies.

The standard breaks down to the following areas:

Account Management (acmt)
Cash Management (camt)
Payments clearing and settlement (pacs)
Payment initiation (pain)

Over 70 countries have adopted the standard including Japan, China, and India. Currently over 200 payment types are supported. This facilitates harmonisation between different payment methods and systems around the world.

Messages are available within the standard for the complete end-to-end payments chain: customer to bank (payment), bank to bank (payment clearing and settlement) and reporting (cash management).

Advantages of ISO 20022

Improved Straight through processing rates through the use of common language and format among payment systems.
Facilitates better analytics. This leads to better AML more effective claims and investigations.
More enriched data should lead to improved understanding of customer needs and new sources of revenue such as Request to Pay.
Supports a much larger character set than that of MT messages. This is very important in countries such as China.
Greater protection against Anti Money Laundering (AML) and other financial crimes.

What is its relationship to SEPA?

All banks operating within the Single Euro Payments Area must adhere to the SEPA payment standard which conforms to the ISO 20022 standard. All SEPA payment messages are compliant with ISO 20022. However SEPA payment messages will be more restrictive in applicable business rules than their ISO 20022 counterparts.

What is the difference between ISO 15022 and ISO 20022?

ISO 15022 is an ISO standard for securities messaging used in transactions between financial institutions across the SWIFT network. ISO 20022 will replace the ISO 15022 standard.

Life-cycle of a SEPA Direct Debit (SDD) Message

SEPA Direct Debit (SDD) is a Europe-wide Direct Debit system that allows merchants to collect euro payments from accounts. Regular payments, such as subscriptions and bills, use SDD (SEPA Direct Debits).

SDD works as follows: the merchant issues a mandate with all the details about the direct debit. Once the debtor agrees, the merchant pulls the payments on a regular basis, notifying them 14 days before the payment is due.

The merchant controls the entire payment process. They issue the SEPA Direct Debit mandates, they notify the customer and they are the ones to pull the payments whenever they are due.

The European Payments Council has created two SDD schemes, one designed primarily for consumers (SDD Core), one exclusively for businesses (SDD B2B).

SDD Core. Designed primarily for consumers. Mandatory for all banks offering Euro-denominated Direct Debits
SDD B2B. Optional scheme offered exclusively for business. Not all banks are able to offer it.

The following describes the flow of messages between debtor and creditor

Pain.002 – is a payment status report indicating acceptance or rejection of SEPA Direct Debit
Pacs.003 – a direct debit request posted by a client to a direct participant.
Pain.008 – direct debit initiation request.
Pacs.002 – Status Report message – is sent by an instructed agent to the previous party in the payment chain. It is used to inform this party about the positive or negative outcome of a payment instruction.