Category: SEPA

What is SEPA?

What is SEPA?
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

Advantages of SEPA
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

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.

SEPA Direct Debit Payment Scheme

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

SEPA Direct Debit Message Flow

  • 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. 

Pacs.003 Message

The creditor agent sends the Pacs.003 message to the debtor agent, either directly or through other agents and/or a payment clearing and settlement system.

The Pacs.003 is a financial institution to financial institution customer direct debit message. It can contain 1 or many customer direct debit instructions.

A creditor bank will initiate the Pacs.003 in response to a Pain.008 direct debit initiation request to collect funds from a debtor account for a creditor. You can find the XML Schema and Message Definition Report here.

Pacs.003 overview
Pacs.003 flow

The Pacs.003 will contain:

GroupHeader


All transactions in the message share a set of common elements within the GroupHeader. It will contain the following elements:

  • Message Identification – A unique identifier assigned to the entire group of payment cancellations within the message
  • Creation Date and Time – Date and time of the creation of the payment cancellation message
  • Number of Transactions – The total count of payment cancellation instructions included in the group
  • Original Group Identification – The identification of the original group of payment instructions to which the cancellation instructions belong. It links the cancellation instructions to the original payment instructions
  • Original Message Identification: The identification of the original payment instruction within the original group to be cancelled. It specifies the specific payment instruction targeted for cancellation

DirectDebitTransactionInformation

The DirectDebitTransactionInformation will contain information about each direct debit transaction.

  • Mandate Identification: A unique identifier assigned to the direct debit mandate authorizing the payment that is being canceled.
  • Creditor Scheme Identification: Specifies the scheme or system used for the direct debit payment
  • Original Debtor Account: Debtor account which the original direct debit payment debited
  • Original Creditor Account: Creditor account which the original direct debit payment credited.
  • Original Payment Information: The cancellation of the original direct debit payment includes the payment amount, payment date, and any additional payment details.
  • Cancellation Status: Indicates the status of the cancellation instruction, such as accepted, rejected, or pending
  • Cancellation Reason Information: Provides additional details or reasons for the cancellation status

SEPA Credit Transfer Overview

A SEPA Credit Transfer (SCT) is a payment instrument which facilitates the transfer of funds from the sending or originating bank to the receiving or beneficiary bank.

They generally used for once off payments and clear within a day. To send/receive a SEPA Credit Transfer, the originating and beneficiary banks must be SEPA participants.

Debtors and creditors use SCT Transfers conducted in Euro currency, which include IBANs and BICs for identification.

A SEPA Credit Transfer(SCT) involves the exchange of a number of messages between a debtor, their bank, the clearing and settlement (CSM) exchange and the beneficiary bank.

The SCT relies on 4 actors:

  • Originator, i.e the person making the payment
  • Originating bank, i.e the bank which contains the account of the originator
  • Beneficiary, i.e. the person receiving the payment
  • Beneficiary bank, i.e the bank which contains the account of the beneficiary
SEPA Credit Transfer

The originator and beneficiary use different ISO 20022 messages to initiate and complete the credit transfer. These messages are categorised as follows:

  • Payment Initiation (Pain). Sent/received between the customer and their respective banks.
  • Payment Clearing and Settlement (Pacs). Sent/received between the originating/beneficiary banks and the CSM.
  • Cash Management (Camt). Sent to the originator/beneficiary to inform them of their account balances as a result of payment transaction.

Pain.002 Message

The Pain.002 message is a status message and is part of the Payment Initiation family of messages within ISO 20022.

It is sent by an instructed agent to the previous party in the payment chain. It is used to inform the party about the success/failure of payment request.

The definition of the pain.002 schema and its message definition report can be found here

pain.002 overview

Building blocks of Pain.002

GroupHeader – contains all the common characteristics of all transactions contained within the Pain.002. The GroupHeader will contain the following elements:

  • Message Id: A unique identifier assigned to the message group or batch.
  • Creation Date and Time: The date and time when the message was created.
  • Number of Transactions: The total count of individual transactions included in the message.
  • Initiating Party: Information about the party initiating the message such as their name, address, and account details.
  • Message Id of the original Pain.001 Message: If the pain.002 message is a response to a pain.001 message, it may contain the message identification of the original pain.001 message to which it refers.

OriginalGroupInformationAndStatus – Original group information concerning the group of transactions, to which the status report message refers to. The OriginalGroupInformationAndStatus will contain the following elements:

  • Original Message Identification: The unique identifier assigned to the original message.
  • Original Creation Date and Time: The date and time when the original message.
  • Number of Transactions: The total count of individual transactions included in the original message.
  • Initiating Party: Information about the party who initiated the original message, such as their name, address, and account details.
  • Original Message Name Identification: The identification of the original message, such as pain.001, camt.056, or other relevant message types.

OriginalPaymentInformationAndStatus – Information concerning the original payment information, to which the status report message refers.

  • Original Payment Information: Includes details about the original payment, such as the payment amount, currency, payment date, payment method, and other relevant payment-related information.
  • Payment Status: Indicates the status of the original payment, providing information on whether the payment was successfully processed, partially processed, or rejected.
  • Transaction Information: Provides additional details about the specific transaction within the original payment, such as a unique identifier for the transaction, the debtor and creditor involved, and any related payment references.

Camt.054 Message

The ISO 20022 Camt.054 is a notification message sent by the originator bank to the originator informing them of a credit(s) or debit(s) against their account. It does not contain balance information.

Even though, the Camt.054 is part of the ISO20022 standard, it is optional. A bank can choose whether to send it or not.

The definition of the Camt.054, along with its message definition reports, can be found here.

Building blocks of Camt.054

Camt.054 contains two blocks:

Group Header

Contains identifying information for all of the debits/credits in the message. The Group Header may also contain:

  • message id – used to identify each message.
  • creation date and time – indicates when the payments(s) referenced were created.
  • number of transactions – count of the number of transactions in the message
  • control sum – contains a sum of the total number of transactions in the message
  • initiating party – contains information on the party who initiated the payment.

Ntfctn

Contains information about the transactions in the message. The ntfctn may also contain:

  • Notification Message Identification – contains a unique id used to identify each notification in the message
  • Notification Date – notification creation date.
  • Additional Notification Information – used to provide additional information about the notification.
  • Notification Message Name Identification – code indicating the category of notification message.
Camt.054 message

Camt.056 Message

The originating bank sends the camt.056 message to the beneficiary bank to cancel a credit transfer.

You can find the definition of the camt.056 schema and its message definition report here

One of the most common reasons for issuing a camt.056 is a duplicate payment.

Camt.056 Message

The camt.056 requires a response from the beneficiary bank within 15 working days.

This response can be:

  1. Positive response to the recall. In this case a pacs.004 is sent by the beneficiary to the originator and the money is credited to the originator
  2. Negative response to the recall. In this case a camt.029 is sent to the debtor bank. In this case stays with the beneficiary.

Building blocks of Camt.056

The Camt.056 will contain the following elements:

  • Message Identification: A unique identifier assigned to the message.
  • Related Reference: Reference to a related message or transaction.
  • Payment Instruction Details: Details about the payment instruction being transmitted.
  • Payment Transaction Information: Information about individual payment transactions, including amounts, dates, and parties involved.
  • Settlement Details: Information related to the settlement of the payment, such as clearing and settlement system details.
  • Remittance Information: Information about the remittance advice or additional payment details.
  • Regulatory Reporting Information: Information required for regulatory reporting purposes.
  • Additional Information: Any additional relevant information associated with the payment message.
  • Supplementary Data: Optional additional data included with the message.

What is Clearing And Settlement?

Introduction

Clearing and Settlement is the process that takes place once a commitment to make a payment is made and the activities that occur to ensure that that payment is fully completed.

The European Central Bank defines clearing as ‘the process of transmitting, reconciling and, in some cases, confirming transfer orders prior to settlement, potentially including the netting of orders and the establishment of final positions for settlement‘

It defines settlement as ‘the completion of a transaction or of processing with the aim of discharging participants’ obligations through the transfer of funds and/or securities. A settlement may be final or provisional.‘

When a payment is initiated, the sender’s bank submits payment instructions to an interbank clearing network. This clearing network aggregates all orders for transactions from that senders bank to other banks. It also aggregates all orders to and from other banks including the senders bank.

The clearing company is then able to net all of the orders; the net amount is moved to each bank. This is known as the final position. The transaction is now said to settled.

Clearing And Settlement
Settlement and Clearing of SCT Payment

What is a clearing house?

A clearing house acts as an intermediary between a buyer and seller in a financial market. It validates and finalises the transaction ensuring that the buyer and seller meet their financial obligations.

It is important to note that a clearing house will require its members provide collateral/margin deposits. This is done that in the event of a participant bank being unable to fulfil its obligations.

Examples of well-known clearing houses are EBA Clearing and The Clearing House.

Who are direct/indirect participants?

Banks can join a clearing system as either direct or indirect participants. Direct participants have a direct connection to the CSM and exchange transactions directly with it. Indirect participants exchange transactions with direct participants who will make transactions on their behalf with the CSM.

Indirect participants open a correspondent bank account with direct participants in order to make/receive payments. Direct participants are responsible for collecting / depositing funds with their indirect participants.

The CSM acts as a single counter party for each direct participants. This means that the CSM assumes the risk in the event that one direct participant cannot fulfil its obligations.

Types of CSMs

CSMs can vary in size. For example EBA Clearing Step 2 is a Pan-European Automated Clearing House and is available throughout the Eurozone. Others are smaller, equensWorldline, offers CSM services to some but not all Eurozone countries.