SEPA requires the removal of legal, commercial and technical barriers across markets in the euro area, aimed at making cross-border payments cheap and easy. The legal barriers are addressed in the Payment Services Directive (PSD). In order to develop a common infrastructure and standards within the eurozone, the European Payments Council (EPC) was set up by European banks and credit associations in June 2002.
New rulebooks: The European Payments Council (EPC) has developed so-called 'Scheme Rulebooks', a set of rules and standards for the new SEPA Credit Transfer, SEPA Direct Debit and SEPA Cards Framework.
SEPA Credit Transfer (SCT): This scheme aims to allow providers to offer payment services of a core and basic credit transfer throughout the Euro Payments Area. SCT provides for a maximum execution time of three days from any point in SEPA, even though most payments are expected to arrive even more quickly than they commonly do so today.
SEPA Direct Debit (SDD): The SDD similarly allows for core and basic payment services across SEPA, whereby one-off and repetitive payments are collected on behalf of creditors from debtors.
SEPA Cards Framework (SCF): The SCF is to provide a policy framework for banks, card schemes and other actors to move towards the creation of SEPA for cards. SEPA card standards will be defined by the end of 2008 at the latest. Experts expect an overhaul of national debit card schemes using Visa or MasterCard for cross-border interoperability.
For both SCT and SDD, there is a "replacement strategy", meaning that the old schemes will eventually be phased out. However, for the card business, due to its highly complex nature there will instead be an "adaptation" programme for existing schemes and operators to adopt a new set of business and technical standards and processes.
As a result of the late transposition of the Payment Services Directive, SEPA direct debits will only be available after 1 November 2009. However, SEPA credit transfers and card framework payments will be available from January 2008.
The Commission anticipates that the establishment of the euro payments system will lead to potential savings of €50-100 billion. However, banks are faced with the need to make major investments in order to comply with the SEPA requirements. Payment processing organisations will also have to gear up their systems to meet the new cross-border payment standards.
Moreover, banks and processors will not be able to raise extra charges for cross-border transactions as prices are brought in line with national transaction costs. This means that these organisations will see a substantial drop in their revenues in addition to the new investments.
Competition and consolidation
For credit transfer, direct debits and card payments, a clear separation of the scheme (the rules agreed between providers of payment services) and the infrastructure (delivery systems and processing platforms) is foreseen in order to enable increased competition among industry processors.
With regard to competition issues in the payment network industry, the Commission has underlined its view that the industry needs to comply with common standards and make the infrastructure readily available, and that pricing needs to be transparent as well as cost-based. However, the opening up of the market to competition is expected to bring about the consolidation of infrastructures, which can profit from economies of scale.
Migration to the new system
The European banking industry intends to offer SEPA and national payment instruments alongside one another from 2008. Full migration to the new system is to be achieved by 2010. It is expected that by then, a "critical mass" of all European payments will be made using the new SEPA methods. However, the banking industry argues that the 2010 target will be difficult to meet unless the public sector, which makes up a large part of overall use of payment services, does not take on the new SEPA methods.
According to the European Central Bank's (ECB) 5th SEPA progress report, the conversion of national payment transactions into SEPA formats may be "problematical".
The new SEPA system largely leaves out the role and implications of cash use. Cash continues to play a key role. According to Professor Paul De Grauwe of Leuven University, the cost of cash is a multiple of the cost of cards. It is, however, not transparent and consumers are unaware of the high cost of cash.