How SEPA fuels the next phase of modern payments

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When the European Union began developing the Single Euro Payments Area more than a decade ago, it didn't include a vision for real-time payments and the potential for a third European payments scheme.

The intention for SEPA was slightly less ambitious: Convert fragmented payment markets into a single domestic scheme to improve cross-border payment efficiency. What SEPA planners did not foresee was that this effort would become the largest payment-integration project of modern times.

SEPA began in 2008 and became operational in all eurozones in 2014, but it did not eliminate local payment schemes. Nevertheless, it became the method for all cross-border payments and reduced the cost of moving money around the region, to an estimated 3% of the total GDP, according to the European Union.

It didn't take much longer for SEPA to enter into, and even bypass, the faster payments initiatives unfolding across the globe.

The SEPA Instant Credit Transfer scheme came about as a real-time money transfer system. SEPA regulators quickly touted it in 2017 as the largest faster payments system in the world.

SEPA Instant Credit Transfer is built around the ISO 20022 standard, a coding message for cross-border payments that allows the movement of data that includes relevant information about the purpose of a payment for banks to share.

SEPA was breaking ground for other faster payments initiatives and planners, especially the one unfolding through the Federal Reserve in the U.S.

"The instant payment scheme is adhered to by more than half of the EU banks, and real-time payments will become the norm," said Ron van Wezel, senior analyst for retail banking and payments at Aite Group.

"Payments is considered the 'lubricating oil' for EU's single market," he said. "And regulators — the European Commission and Parliament — have strongly focused on creating a payment law that opens competition, stimulates innovation and protects consumer interests."

SEPA has plenty of moving parts, as global and European stakeholders on the payments landscape keep tabs on how all of the directives intersect and affect one another.

"SEPA isn't just one thing, but a continuing set of actions to deliver the political vision that is SEPA," said Gareth Lodge, a London-based industry analyst with Celent.

In that regard, SEPA is somewhat joined at the hip with the initial Payment Service Directive and PSD2, which opened the payments innovation landscape to more third-party providers.

"The core ACH payments, SEPA Credit Transfer and Direct Debit Core have been operational for years and are, with few exceptions, the main payment types in all eurozone countries," Lodge said. "Pricing for cross-border payments have been brought in line with their equivalent domestic transactions."

In seeing this sort of commonality in payments throughout Europe, the banks began pondering the creation of a third payment scheme.

Because past attempts to establish a third European card scheme to compete against Visa, Mastercard, PayPal and others never materialized, the new proposal called Pan European Payment System, or PEPSI, is garnering some attention. The European banks behind PEPSI announced their intentions last month.

The European Central Bank has not weighed in heavily on PEPSI, other than to state it supports the effort of the 20 French and German banks pushing the concept.

With bank support and a common eurozone, it is expected that PEPSI could more easily develop into a payment scheme than something like the ill-fated Merchant Customer Exchange, a merchant-backed effort in the U.S. that came and went over a three-year period. MCX, designed to operate through ACH payments via a mobile wallet, promised to lower costs for merchants but never made it past the pilot phase.

It won't be easy for PEPSI, especially when consumers are content with their chip-and-PIN or contactless cards and mobile payments throughout Europe.

"I think SEPA for cards has not yet been achieved," Aite's van Wezel said. "There is no SEPA cards rulebook because, from a consumer perspective, there is no issue. Cards work the same everywhere in the EU."

Still, merchant acquirers facing increasing competition are longing for ways to deal with inefficiencies and different standards, local exceptions and different card fees in each country.

"There is a growing number of merchants who are using real-time payments at the point of sale to displace cards," Celent's Lodge said. "Whether these are truly to be a third card rail is almost not the point, because the goal of the third scheme was to provide competition to the card duopoly, and these initiatives seem to be addressing that."

For the time being, an initiative like PEPSI is garnering viewpoints from bankers, merchants and consumers ranging from it having "no impact" to becoming "a major disruption" — and all points in between, Lodge added.

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Compliance Faster payments Real-time payments Cross border payments European Union