Get a better insight into the SEPA terminology.
ACH – Automated Clearing House. See ‘CSM’.
Nice to know. In September 2006, representatives from 20 Automated Clearing Houses and retail payment processors from 17 countries formed themselves into the European Automated Clearing House Association (EACHA) under Belgian law.
EACHA aims to be a forum for the sharing of information, to advance its views on issues related to the payment industry and to work on common standards for SEPA inter-bank clearing and settlement. The founding members are: STET, France; Equens (Interpay Nederland B.V. & Transaktionsinstitut für Zahlungsverkehrsdienstleistungen AG), Netherlands/Germany; Iberpay, Spain; SIBS, Portugal; Voca Ltd, UK; BGC, Sweden; Deutsche Bundesbank, Germany; CEC/UCV, Belgium; DIAS, Greece; PBS, Denmark; BBS, Norway; SSB, Italy; SIA; Italy; SECETI, Italy; Banca d'Italia; Italy; SIC AG, Switzerland; KIR s.a., Poland; GIRO, Hungary; FINA, Croatia.
Additional Optional Services. The value-added services which banks are free to develop for their customers in order to ensure that SEPA payment service levels are at least equivalent to existing levels.
AOS – Additional Optional Services.
Automated clearing house. See ‘ACH’
BBAN – Abbreviation of Basic Bank Account Number. The BBAN is the unique identifier of a bank account within a given country. It is an element used to make up the IBAN. The BBAN consists of up to thirty alphanumeric characters.
BIC – Acronym for Bank Identifier Code, also known as ‘SWIFT code’. The BIC must be transmitted in addition to the IBAN because it is essential for routing payments. In SEPA, the BIC replaces the national clearing codes.
CSM – Clearing and Settlement Mechanism. A mechanism (channel and infrastructure) which allows SEPA scheme participants to clear and settle payments between them. There are five categories of CSMs :
- PE-ACH compliant ACH
- SEPA scheme compliant ACH
- SEPA scheme compliant decentralised clearing system
- Intra-group or intra-bank clearing and settlement
- Bilateral clearing and settlement.
SEPA-compliant clearing and settlement through ACH infrastructures will be limited to the following options:
- PE-ACH : a CSM which has full reachability by all banks in SEPA and a country-neutral governance structure, and which can perform clearing and/or settlement functions for SEPA direct debits and/or SEPA credit transfers.
- SEPA Scheme-Compliant ACH: a CSM which is able to process SEPA Direct Debits and/or SEPA Credit Transfers in a defined market. SEPA Scheme-Compliant ACHs may or may not choose to develop into a PE-ACH or co-operate with other ACHs of their kind to form a PE-ACH.
EBA – European Banking Association. See also ‘STEP2’
ECB – European Central Bank.
EEA – European Economic Area. The agreement creating the EEA entered into force on 1 January 2004. The EEA was maintained because of the wish of the three remaining (non-EU) countries to participate in the Internal Market, while not assuming the full responsibilities of EU membership. See also ‘SEPA – Geographical scope’.
EMV – Europay MasterCard Visa programme to implement international chip and pin security standards for card transactions.
EPC – European Payments Council. The EPC is the self-regulatory, decision-making and co-ordinating body of the European banking industry for the payments market.
Today, its main assignment is to develop and implement SEPA. Its decisions are binding for all banks operating in the SEPA environment. While the EPC is currently fine-tuning the Framework and Rulebook documents for the SEPA payment instruments and infrastructure, the regulators are putting in place the necessary legislation in support of SEPA.
Eurosystem – The European Central Bank and the National Central Banks of those countries which have adopted the euro.
European Payments Council.
FAFT – Financial Action Task Force. An inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.
Nice to know. In September 2006 the FAFT published a new payment methods report in which it examined the way in which money can be laundered through new payment technologies (prepaid cards, internet payment systems, mobile payments and digital precious metals). The FAFT found that, specifically, cross-border providers of new payment methods may pose more risk than providers operating within a particular country and recommends therefore continued vigilance to further assess the impact of evolving technologies on cross-border and domestic regulatory frameworks.
Financial Action Task Force. See ‘FAFT’
IBAN – International Bank Account Number. In order to ensure that a domestic bank account number (Basic Bank Account Number or BBAN) becomes a unique identifier internationally, the European Payments Council devised the IBAN (International Bank Account Number). The IBAN consists of the BBAN and additional fields (primarily the bank identifier, or BIC) in a standard format. It is a prerequisite for a euro payment to be regarded as SEPA compliant.
IBANs may only be formed, checked and corrected by the originating bank, that is, the bank which initiates the payment. An incorrect IBAN will prevent straight-through processing and the processing bank or the clearing house may charge the ordering bank for the extra costs incurred.
When issuing payment instructions, account holders should always quote a valid BIC and IBAN of their beneficiaries. Since 1 January 2006, based on an EPC decision, all European banks are required to process all cross-border (non-domestic) euro payments, received within the EU and EEA with mandatory BIC and IBAN information.
Even more significantly, from 1 January 2007, euro cross-border payments which do not contain a valid IBAN and BIC may be returned or rejected and banks may then charge a fee.
Fortis has continued to process payments without both BIC and IBAN information after 1 January 2006 without charging additional fees.
Nice to know. As the format of domestic account numbers varies from country to country, IBAN formats also widely differ, all the more because each country was authorised to implement IBAN conversion rules of its own. The total length of an IBAN can be 34 positions but in practice IBANS vary from 15 characters (Norway) to 28 characters (Poland, Hungary). Some numbers contain alpha characters but most do not. A French IBAN is only four characters longer than a domestic account number, but a Dutch IBAN is eight characters longer than the domestic account number.
International Bank Account Number. See ‘IBAN’
International Payment Instruction. See ‘IPI’
IPI – International Payment Instruction. The IPI contains the account number of the ordering customer, the account number of the beneficiary and the amount to be paid. At present, the IPI requires the beneficiary’s bank to be identified using a standard Bank Identifier Code (BIC).
NCB – National central bank. The European national central banks make up the Eurosystem.
NLF – New Legal Framework for Payments, the initial name of the EU’s (proposed) Payment Services Directive
Pan-European Automated Clearing House (PE-ACH). See ‘CSM’
PE-ACH – Acronym for Pan-European Automated Clearing House. See ‘CSM’.
PE-ACH compliance : SEPA compliance and accessibility / reachability within SEPA. See ‘CSM’.
PSD – Payment Services Directive. A European Commission’s proposal for a PSD, formerly know as ‘New Legal Framework for Payments’, was adopted on 1 December 2005. The directive is expected to be definitively adopted before the end of 2006 and consistently translated into national laws before the end of 2007. The PSD will affect all payments to, from and within the EU in any currency (i.e. not only in euro).
Reachability – The ability to get a payment from a bank in one country to any branch of a bank in another. The core idea behind SEPA is that any payment should be able to be treated throughout Europe as if it were a national payment.
SEPA – Single Euro Payments Area
SEPA compliance: transactions. A SEPA-compliant payment transaction is a non-urgent payment transaction in euro. The accounts of the payer and/or the payee do not need to be euro accounts but they must have an IBAN.
Obviously enough, euro transactions involving non-euro accounts will create additional complexity for processing banks owing to currency conversion. Subject to confirmation by the PSD, banks will be authorised to agree with their customers on a longer period for the execution of credit transfers involving a currency conversion. All other requirements for SEPA compliance must be fulfilled for such payments as well, and the charges, fees and exchange rate must be transparent to the customer.
SEPA compliance: banks. In order to offer payment services to its customers in a SEPA country, a bank has to become SEPA-compliant. This means that both the payment products it offers, its processes and communications with other banks and CSMs have to meet the new SEPA requirements of :
- the EPC’s self-regulatory documents (scheme rulebooks for SCTs and SDDs, cards framework, implementation guidelines)
- the European Union’s legal texts, including the Payment Services Directive, touching on multiple areas, such as message standards, execution time, payment information to be collected and transmitted and many others.
In order to become SEPA-compliant, banks will have to sign an ‘adherence agreement’, that is, a commitment to strictly adhere to the EPC Rulebooks, implying the following :
- every individual bank needs to ensure it will be reachable by any other bank in SEPA as of 1 January 2008
- every local banking community needs to ensure that full reachability will be established for a given country.
SEPA compliance : users of payment services. A corporate will be regarded as SEPA compliant if it is in a position to send credit transfer and direct debit payments in the SEPA format for processing by banks and PE-ACHes.
SEPA – Geographical scope
SEPA compliance will affect the payment business of some countries more than that of others:
- In the euro zone (1), all domestic payment products and instruments will gradually be replaced by SEPA-compliant products and instruments. New SEPA instruments and rules will be offered from the beginning of 2008. The existing non-SEPA-compliant legacy instruments and business practices will continue to exist during a transition period. Besides giving top priority to the implementation of and migration to the new SEPA Schemes developed by the EPC, banks in the euro zone will also have to adopt the Payment Services Directive both to their new SEPA payment environment (and thereby achieve full SEPA compliance) as well as to their legacy instruments and infrastructure.
- In the rest of the EU25 (2), banks will need to introduce the new SEPA Schemes for their euro payments for 2008. They will have to adopt the Payment Services Directive to their non-euro payment environment and may choose to apply SEPA standards to their domestic payments.
- Norway, Liechtenstein and Iceland, which are part of the European Economic Area, and Switzerland, have also decided to make their euro payments SEPA-compliant and will therefore also need to introduce SEPA products and instruments for 2008. They may choose to additionally align their domestic payments business with the SEPA standards.
- However, Andorra, Faroe Islands and Greenland (Denmark), the Channel Islands and the Isle of Man (UK’s Crown Dependencies) are not part of SEPA.
(1) The euro zone currently comprises the so-called EU12, i.e. Austria, Belgium, Finland, France (including French Guyana, Guadeloupe, Martinique and Réunion), Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal (including the Azores and Madeira) and Spain (including the Canary Islands, Ceuta and Melilla). Slovenia is scheduled to join the euro zone on 1 January 2007. Several European ‘city states’ – Monaco, San Marino and Vatican City are also part of SEPA.
(2) Cyprus, Denmark, Estonia, Hungary, Latvia, Lithuania, Malta, Norway, Poland, Slovak Republic, Czech Republic, the United Kingdom (including Gibraltar) and Sweden.
STEP2 – Short for ‘Straight Through Euro Processing’. STEP2 is operated by the European Banking Association (EBA) and is the first PE-ACH system for bulk payments. EBA started clearing payments of up to EUR 50,000 per transaction in January 2006.
STP – Straight-through processing, or processing without human intervention, for maximum speed and efficiency. End-to-end STP is the target model for SEPA payments. For STP to work, at least two key building blocks are required : an IPI and an IBAN.
Straight-through processing. See ‘STP’
SWIFT – The industry-owned co-operative supplying secure, standardised message services ad interface software to nearly 8,000 financial institutions in 206 countries and territories. SWIFT members include banks, broker-dealers and investment managers. The broader SWIFT community also encompasses corporates as well as market infrastructures in payments, securities, treasury and trade.
TARGET2 – The Eurosystem’s planned replacement for TARGET (Trans-European Automated Real-time Gross settlement Express Transfer System), a standardised high-value payment infrastructure. An essential building block for settlement of SEPA payments and for other euro payments (money market, forex, securities), Target2 is scheduled to be launched as the end of 2007.
UNIFI – Universal Financial Industry message scheme
