SEPA-BdB-en

www.germanbanks.org

1

Figures | Facts | Arguments

Berlin, October 20093rd, revised edition

SEPA: unifOrm PAymEnt inStrumEntS fOr EurOPE

Summary

The integration of the euro payments market

is crucial to the completion of the European

internal market. The banking industry has

supported this target from the start and laid

the required foundations through self

regulation.

The Single Euro Payments Area (SEPA)

gives all stakeholders the chance to make

both domestic and crossborder payments in

euros in the same way. This particularly bene

fits customers and banks conducting a large

number of crossborder transactions.

Following the successful launch of euro

notes and coins on 1 January 2002, the start

of SEPA last year took Europe another big

step closer towards the completion of the in

ternal market. SEPA will create further

conditions so that the expectations in the

treaty establishing the European Community

about the settingup of an area without in

ternal frontiers in which the free movement

of goods, persons, services and capital is en

sured can also be fulfilled in the payments

market.

By employing the required resources,

harnessing expertise and agreeing consen

susbased solutions that can be implemented

across Europe, the banking industry has,

within a very short space of time, laid the

foundations for turning the political vision of

SEPA into reality, and thus made a major

contribution towards European financial

market integration.

Since January 2008, bank customers

have been able to use SEPA credit transfer

and card payment products in addition to the

familiar domestic ones. From November

2009, once the EU Directive on payment ser

vices in the internal market has been trans

posed into national law throughout Europe,

they will also be able to use the new European

direct debit. A key prerequisite for the

widespread use of the SEPA direct debit is

the ability to convert existing German direct

debit mandates. German lawmakers are

therefore called on to establish correspond

ing arrangements.

The success of SEPA will primarily

depend on the extent to which customers

take up the new European payment instru

ments. So it is vital to have the support of the

biggest users of payment services, such as

public authorities. And policymakers, as the

driving force behind the SEPA process, should

commit to supporting the integration of the

euro payments market more strongly than

hitherto, especially at national level.

SEPA schemes will initially be offered in

parallel with existing payment instruments.

In the long term, however, it will be essential

to replace the national payment systems with

the new European schemes if the political

objective of creating the Single Euro Pay

ments Area is to become a reality.

Contents

1 Introduction 7 1.1 The changing face of European payments 7 1.2 European legislators: financial market integration 9 1.3 European Central Bank: completion of monetary union 10 1.4 European banking industry: creation of SEPA 11

2 SEPA 12 2.1 Scope of SEPA 12 2.2 Potential of SEPA 12 2.3 The public sector as an early user of SEPA instruments 14 2.4 Legal prerequisites for SEPA 14 2.5 Timeframe for realising SEPA 15

3 Implementation of SEPA in the conventional payments market 18 3.1 SEPA instruments: credit transfer 19 3.2 SEPA instruments: direct debit 21 3.3 Future development and expansion of the SEPA schemes (ESEPA) 24 3.4 SEPA standards 24 3.5 SEPA infrastructure for clearing and settlement 27 3.6 Implementation and migration 27

4 Card payments 28 4.1 The situation prior to the introduction of SEPA 28 4.2 SEPA for card payments 31 4.3 The SEPA Cards Framework 32 4.4 The German banking industrys options for girocard 34

Glossary 38

List of sources 42

Charts and diagrams

Figure 1 Ranking of member states by percentage use of payment instruments 7Figure 2 The differing use of payment instruments in the European Union 8Figure 3 32 countries are members of SEPA 13Figure 4 There is little use at present of the SEPA credit transfer 16Figure 5 Credit transfers, direct debits and cheques make up

twothirds of the 78 billion transactions in Europe 18Figure 6 Germany, France and the UK account for the largest share of

cashless payment transactions in the EU 19Figure 7 Credit transfers are used to a varying extent in Europe 20Figure 8 Credit transfer is initiated by the payer 21Figure 9 Europeans do not all use direct debits to the same extent 22Figure 10 Direct debit is initiated by the payee 23Figure 11 SEPA mandates for core and BusinesstoBusiness direct debits contain

different refund provisions 24Figure 12 Details of an account in an ISO 20022 message 26Figure 13 Five categories of clearing and settlement systems 27Figure 14 Payments at POS terminals represent around

12% of EU27 gross domestic product 29Figure 15 Transactions at ATMs represent around 10% of EU27 gross domestic product 30Figure 16 Debit cards are more popular than credit cards in Germany 30Figure 17 Debit card schemes of domestic origin currently used in Europe 31Figure 18 SCF compliance options 33Figure 19 Six European schemes are members of EAPS 36

7

1 Introduction

1.1 The changing face

of European payments

A feature of the payment markets in Europe

today is a large number of highly different

schemes, agreements and legal provisions.

Every country has its own technical stand

ards, e.g. for account numbering or its data

exchange format. The different payment cul

tures are also reflected in the differing use

of the available payment instruments such

as credit transfers, direct debits, cheques

and cards. In the ranking of most used pay

ment instruments in each EU member state,

the eastern European countries come first

with credit transfers, for example, while

electronic money is used most frequently in

the Netherlands and Belgium (see figure 1).

The detailed breakdown also shows

how different usage across Europe is (see

figure 2). A look at the three biggest payment

markets Germany, France and the UK

makes this clear: the French, for example, use

cheques more often than the European

average, while Germans use them less. At

the same time, direct debits are used twice as

much in Germany as in the whole of the Euro

pean Union. In the UK, on the other hand,

cards are the most popular means of pay

ment, followed by cheques, credit transfers

and direct debits, which are all used to a

more or less equal extent.

In the euro area (Euro15), instruments

are used more or less as they are in the Euro

pean Union as a whole (EU27). There is

merely a four percentage point discrepancy

between the figures for direct debits and card

SEPA: uniform payment instruments for Europe

figures for 2008. Source: European Central Bank, Blue Book, table 7.1.(figures for Cyprus, Czech republic and malta not available.)

Figure 1

Ranking of member states by percentage

use of payment instruments

Rank

1

2

3

Credit transfers

Bulgaria

Hungary

Romania

Direct debits

Germany

Spain

Austria

Card payments

Denmark

Portugal

Sweden

Emoney

The Netherlands

Belgium

Italy

Cheques

France

Greece

Ireland

ASSOCIATION OF GERMAN BAN KS

8

figures for 2008. Source: European Central Bank, Blue Book, table 7.2. (figures for Cyprus, Czech republic and malta not available.)

Figure 2

The differing use of payment instruments

in the European Union

Belgium

Bulgaria

Denmark

Germany

Estonia

Finland

France

Greece

UK

Ireland

Italy

Latvia

Lithuania

Luxembourg

The Netherlands

Austria

Poland

Portugal

Romania

Sweden

Slovakia

Slovenia

Spain

Hungary

Euro15

EU27

0% 20 40 60 80 100

Credit transfers Direct debits Card payments Emoney Cheques Other

SEPA: UN I FORM PAyMENT I NSTRUMENTS FOR EUROPE

9

payments because direct debits are used

more frequently in euro countries.

Such differences are due partly to

divergent user requirements with regard to

the individual payment instruments. These

in turn have led to many different types of

payment schemes in domestic markets.

Under the German direct debit scheme, for

instance, the creditor, e.g. a landlord or elec

tricity supplier, is given a onceonly but

revocable authorisation (mandate) by the

customer to debit him. In Italy, on the other

hand, every single direct debit has to be

authorised individually by the customer. In

the same way, traditional user requirements

have created specific payment instrument

functions in all European markets over the

years.

Domestic schemes ensure a high level of

efficiency and security when processing

domestic payments. Crossborder interoper

ability of existing schemes has, however,

been confined to date to the required mini

mum. Domestic mass payment schemes are

therefore isolated applications which end at

borders. To allow customers to reap the bene

fits of the internal market, borders have to

become more porous in the payments sector

as well.

Following EU enlargement in 2004 and

2007, the vision for the payments market is a

Europe that will gradually become a truly

homogeneous market with over 500 million

customers. The introduction of SEPA

enables citizens, enterprises and public

administrations to make cashless payments

from any account within this area using a

single set of payment instruments, just as

easily, efficiently and safely as has been

possible to date at domestic level.

The aim is an integrated payment

services market in which there is effective

competition and ultimately no differentiation

between crossborder and domestic euro pay

ments.

1.2 European legislators:

financial market integration

European policymakers were quick to identify

integration of the European payments sector

as a key condition for the completion of the

internal market. The European Commission

found in 1998 for example that, compared

with the situation in other industrialised

countries, the European Union was a long

way from fully exploiting the potential

benefits of the internal market for financial

services.

To make a fully functioning internal

market for financial services in Europe a

reality, an integrated infrastructure, among

other things, was therefore necessary in the

Commissions view to allow interaction

between domestic payment schemes. In

addition, the need for a general modern

isation and integration of the electronic pay

ments market was pinpointed in 2000

in the European Councils socalled Lisbon

Strategy as one of the key measures to

ensure the global competitiveness of the

EU.


10

The Commission also hoped that legis

lative action would give impetus to the inte

gration of the euro payments market. In

December 2001, the European Parliament

and the Council adopted the EU Regulation

on crossborder payments in euros. This regu

lation stipulates that customers must be

charged the same fees for crossborder pay

ments in euros as for comparable domestic

payments. It therefore constitutes direct

market interference, ignoring the existing

general market economy conditions. The

consequence is that cross border payments in

euros can no longer be processed on a cost

covering basis within the EU. This particu

larly affects member states such as

Germany which have created a highly auto

mated, lowcost domestic payments system.

These countries are now forced to handle

highercost crossborder payments at the low

fees for domestic payments.

Ultimately, instead of harmonising the

cost of euro payments in Europe, the regu

lation has actually entrenched the different

charges applying in the member states in the

crossborder sector as well. The extension of

the enforced price parity to direct debits by

the EU Regulation on crossborder payments

in the Community will have similar adverse

effects.

In addition, this regulation will oblige

payment service providers which now accept

domestic euro direct debits to also accept

crossborder direct debits in euros from other

member states. The intention of European

lawmakers is to make participation in the

SEPA direct debit scheme compulsory. The re

quirement will apply in the euro area from

November 2010 one year after the launch

of the European direct debit.

1.3 European Central Bank:

completion of monetary union

By virtue of its statute, the EU Treaty and the

tasks defined in the statute of the European

System of Central Banks (ESCB), the European

Central Bank (ECB) is actively involved in

shaping the euro payments market. The ECB

sees the launch of the single currency, the

euro, in 1999 and of euro notes and coins at

the beginning of 2002 as merely a first step

on the road to the integration of the pay

ments sector in the internal market. It

believes that the process of creating a

common monetary area will only be

cemented once SEPA has been realised.

In this connection, the ECB calls for

convergence between crossborder and

domestic payments. The creation of a so

called miniSEPA, i.e. the use of a single set

of panEuropean instruments solely for cross

border payments, is unacceptable to the ECB,

which believes that full integration of

payment systems encompassing domestic

payments as well is needed instead. The ECB

also takes the view that the integration of

the euro payment markets will help to

stabilise the single currency. In the medium

term, the ECBs declared aim is consolidation

of existing payment schemes along with

clearing and settlement infrastructures.

The ECB has therefore actively sup

ported the development of European pay


11

ment schemes by the banking industry and

takes a positive view of the progress made so

far.

1.4 European banking industry:

creation of SEPA

The banking industry recognised the inte

gration of the euro payments market as a key

strategic objective at an early stage. In 2000

and 2001, the German private commercial

banks developed a strategy for realising the

single payments area and have since driven

forward the SEPA process at European level.

The draft document Issues to be addressed

in a blueprint for a single euro payments

area presented by the European Banking

Federation (EBF), the voice of the private

commercial banks at European level, de

scribed for the first time measures that are

specifically required.

At a workshop in March 2002, represen

tatives of the European banking industry

drew up a common crosssectoral and cross

institutional SEPA strategy.

The main condition for implementing

this monumental project is definition of uni

form payment schemes and conventions as

the basis for fully automated processing of

mass payment transactions in euros. The

banking industry therefore faced the chal

lenge of developing a completely new,

efficient and safe panEuropean payment

system within a very short space of time. To

do so, the European Payments Council (EPC)

was set up in June 2002 on the initiative of

both the European and national banking

associations as the body responsible for

defining and implementing the SEPA

instruments and standards.

Today, more than 250 payment experts

from 32 European countries work together

in the EPC.

In 2004, the EPC approved and circu

lated its Roadmap 20042010. This document

defines the key deliverables to be met by the

banking industry to make SEPA a reality.

SEPA focuses on mass payments, i.e.

standard transactions in euros. Individual

payments such as urgent credit transfers are

not covered by the project.

In line with the agreed roadmap, the

EPC adopted the new SEPA direct debit,

credit transfer and card payment schemes in

March 2006:

The SEPA Direct Debit Scheme creates for

the first time a payment instrument that

can be used for both domestic and cross

border direct debit collection.

The SEPA Credit Transfer Scheme merges

rules contained in already existing Euro

pean agreements on the processing of

crossborder payments into a single

framework, thus ensuring a standard

European procedure for handling mass

payments. The German EUStandard

berweisung, available in Germany since

2003, provides a basis for this.

The SEPA Cards Framework defines

general card scheme requirements de

signed to make payment throughout


12

Europe much easier. Customers will be

able to use their card throughout the EU

without noticing any difference to using it

at home.

The EPC has also defined the SEPA data

formats, which represent a subset of the

messages based on ISO standard 20022. The

use of these data formats ensures a uniform

basis for processing SEPA payments. At the

same time, the EPC has established clearing

and settlement rules.

Very rapidly and on a selfregulatory

basis, the European banking industry has

therefore managed to create the key con

ditions for creating SEPA on schedule.

2 SEPA

2.1 Scope of SEPA

SEPA covers the 27 EU member states and

thus potentially all accounts held in any of

these states. Whether or not the account

holder is an EU citizen does not matter in this

respect. The SEPA project also covers the

other countries of the European Economic

Area (EEA) Iceland, Liechtenstein, Norway

and Switzerland (see figure 3). Since 2009

Monaco, which is associated with France, has

also been part of SEPA.

2.2 Potential of SEPA

Additional offerings for customers

The main advantage of SEPA for customers

is that they can make payments quickly and

just as safely, cheaply and conveniently as

they do at national level. This particularly

supports the growing mobility of citizens in

Europe that is already being promoted by

other measures, such as action on freedom of

employment and freedom of establishment

or recognition of foreign student diplomas. It

also has a positive impact on the crossborder

demand for financial services.

Corporate customers operating Europe

wide benefit from the fact that SEPA pay

ments can be handled throughout SEPA

under the same conventions. This is a basic

condition for obtaining extensive economies

of scale. A further benefit in the form of uni

form postprocessing of all euro payments

can be achieved by establishing uniform SEPA

data quality and data format standards. At the

same time, the conditions for management


13

of a central account or improved liquidity

management have also been created. In the

presentday situation of markets separated

by domestic standards, companies operating

across borders usually keep payment

accounts in every country in which they do

business. Payments made through these

accounts are counted as domestic trans

actions, though they ought in point of fact to

be classified as crossborder. This means that

the volume of actual cross border payment

transactions in the form of credit transfers

and direct debits is much higher today than

the officially reported figure of around 12%.

Realisation of SEPA will also have an inter

national impact. Thanks to the new trans

parency and uniformity in the future, multi

national businesses will find it easier to

expand their operations to Europe without

as is currently the case having to under

stand and make allowance in their systems

for every national idiosyncrasy.


Source: Association of German Banks, as at October 2009.

Figure 3

32 countries are members of SEPA

Euro16

EU27

SEPA = EU27 + Iceland, Liechtenstein, Norway + Monaco, Switzerland

Chances and challenges for the banking

industry

Banks, in particular, which will be among the

first to seize these fresh market opportun

ities, have the chance to acquire additional

customers across Europe by offering

attractive new SEPA products. SEPA also gives

banks acting as service providers for other

banks scope for expanding this line of

business. At the same time, existing

customer ties can be cemented, thus

strengthening customer loyalty.

Banks from countries with lowcost pay

ment services will have a particularly good

chance of winning new business and break

ing into other markets. Economies of scale

can be achieved in payments processing to

cushion the trend towards lower transaction

fees also under way in Europe. In addition,

the uniform SEPA data format will allow

banks operating across Europe to consoli

date their domestic processing procedures

and infrastructures.

On the other hand, any unharmonised,

unbalanced opening of the banking market

can create the risk of onesided access by

foreign competitors. For it to be a complete

success, SEPA therefore needs to be realised

on the same conditions and to provide a

level playing field with identical market

opportunities for all participants. It would be

wrong if, in some countries, barriers set up

to protect against market entry, e.g. purely

domestically based standards, were to be

removed, whilst other countries were to

continue to deny free and fair market access

by maintaining their domestic conventions.

Such conduct would also directly impair the

benefits of SEPA for customers.

2.3 The public sector as an early user

of SEPA instruments

Ultimately, the success of SEPA will depend

on the extent to which customers use the

new European payment schemes. Policy

makers, as the original driving force behind

the SEPA process, are called on to show the

way. The public sector, as one of the biggest

users of payment services, should undertake

to play a pioneering role by switching to

SEPA instruments at an early stage. After all,

the banking industry not least in response

to a political initiative is also investing

heavily up front to make the integrated euro

payments market a reality.

2.4 Legal prerequisites for SEPA

EU Directive on payment services in the

internal market

The European banking industry has laid the

foundations for making SEPA a reality. yet

the integration of the euro payments sector

cannot be accomplished by the banking

industry on its own. This process should be

helped along by legislators in particular.

What is needed first and foremost is a

uniform, EUwide legal basis for the SEPA

direct debit in order to overcome obstacles

raised by different rules under national legal

regimes. The EU Directive on payment

services in the internal market sets uniform

rules on, for example, the authorisation of

payments, the return of payments and

14


15

refund rights. These rules not only create

more legal certainty and acceptance in the

customertobank relationship but, because

they apply EUwide, also provide the

required basis for selfregulatory measures

at interbank level.

The EU payment services directive was

adopted by European lawmakers two years

later than originally planned. As a result, its

transposition by member states into national

law will be completed only in November

2009 instead of by January 2008 as first

envisaged. Only then can the SEPA direct

debit also be made available EUwide since

the common legal basis referred to above is

a precondition.

Use of existing direct debit mandates

for SEPA direct debits

Another key prerequisite for the successful

introduction of the European direct debit is

the ability to convert existing direct debit

mandates for use in the SEPA scheme. The

mandate used in the German direct debit

scheme authorises the payee to collect pay

ments by direct debit from the payers

account. A European direct debit is author

ised by means of a SEPA mandate. There is a

major difference between the mandates. The

SEPA mandate contains two elements: the

payer authorises the payee to debit his

account with the due amount and, in

addition, instructs his bank to pay the direct

debit. By contrast, the mandate normally

used in Germany includes no instruction to

the payers bank. Making the switch from the

German to the European direct debit scheme

will consequently require the involvement of

the payer to obtain this additional author

isation. Given that payees in Germany

currently hold an estimated several hundred

million direct debit mandates, a pragmatic

approach is needed in order to avoid

imposing an unnecessary burden on payers,

payees and the banks involved.

In the view of the banks, the future

providers of the SEPA direct debit, there is a

solution which is pragmatic and offers legal

certainty: German lawmakers simply need

to stipulate that an existing German direct

debit mandate will be converted into a SEPA

mandate if the payee informs the payer

about the change and the payer does not

raise any objection. This leaves it up to the

payee and the payer to decide when to make

the switch from the German to the European

scheme.

The issue of how existing mandates can

be converted to SEPA mandates has turned

out to be vital to the successful introduction

of the direct debit throughout SEPA. For

this reason, the European Central Bank and

European Commission have also called for

solutions which enable existing direct debit

mandates to be used for SEPA direct debits.

German lawmakers should assist by meeting

this prerequisite, especially since Germany is

now the only SEPA country in which this

obstacle still exists.

2.5 Timeframe for realising SEPA

A basic distinction must be made in the SEPA

project between implementation of the Euro


16

pean schemes and migration, i.e. the complete

phasingout of existing domestic schemes.

Implementation

In line with the political mandate, the Euro

pean banking industry has undertaken to

implement the SEPA instruments. January

2008 saw the SEPA credit transfer introduced

on schedule. This instrument is now

available at more than 4,000 European banks.

The foundations for a single European cards

market have also been laid. And the

European direct debit will be launched by

the end of this year. This means that euro

payments can be made between any

accounts within SEPA just as easily and

securely as has been possible up to now

within a member state. In future, trans

ferring money from Hamburg to Athens

will be as simple as it is at present from

Hamburg to Munich.

Migration

The SEPA schemes are being offered along

side todays German payment instruments.

Banks have already made the necessary in

vestment in new systems, while customers

can initially continue using the old instru

ments if they so wish. Companies and con

sumers are currently making little use of the

new schemes, however. Only just over 4% of

credit transfers are SEPAcompliant (see

figure 4). In Germany, the figure is even lower

at a mere 0.3% (according to statistics for

the second half of 2008).

The reason most commonly cited by

companies or individuals for the low level of

SEPA credit transfers as a percentage of all euro credit transfers. figures for the clearing and settlement systems CEC (located in Belgium), EmZ (Germany), Dias (Greece), iberpay (Spain); Sit/COrE (france), Bi-COmP (italy), JCCtransfer (Cyprus), Equens (Germany/the netherlands), Step.at (Austria), SiBS (Portugal), Bankart and GiroClearing (Slovenia) and EBA StEP2. Source: European Central Bank, figures as at September 2009.

Figure 4

There is little use at present of the SEPA credit transfer

feb

08

mar

08

Ap

r 08

may

08

Jun

08

Jul 0

8

Au

g 0

8

Sep

08

Oct

08

no

v 08

Dec

08

Jan

09

feb

09

mar

09

Ap

r 09

may

09

Jun

09

Jul 0

9

%

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0


17

use is the view that SEPA has few

advantages over German payment systems.

From a national perspective, this criticism

is understandable since the needs of

companies and consumers are covered

comprehensively by the German schemes.

This attitude ignores the political back

ground of internal market integration,

however. It is not the aim of SEPA to

improve German payment systems. These

have been continuously refined over recent

decades and little room for improvement

remains. A lot more is at stake: the objective

is not to make improvements within existing

national borders but to break down these

borders. The point is that SEPA lays the

foundations which will enable payments to

be more easily made across national

borders. This political idea of the internal

market should also apply to cashless euro

payments. In the Lisbon Agenda, the govern

ments of the European Union made a

commitment to furthering the integration of

Europe in the area of financial services.

Uniform euro payment systems are an

essential part of this initiative.

Users will not only benefit from quick,

simple and secure schemes, but will also

realise how inexpensive SEPA actually is.

Keen competition in the German market has

already resulted in very low charges for pay

ments compared to those in other European

countries. SEPA will increase rather than

reduce this competition.

Swift migration to the European

schemes will doubtless facilitate the process.

To avoid an unnecessary burden, the phase

in which both systems operate in parallel

should be brief. It would almost certainly be

best for all those involved if final migration

were completed by a set date throughout

Europe. The statutory introduction of the

euro and simultaneous replacement of

national currencies could serve as a model.


18

3 Implementation of SEPA in the conventional payments market

In 2008, a total of 78.4 billion cashless pay

ment transactions were made within the EU.

Conventional payments, i.e. credit transfers,

direct debits and cheques, make up 60% of

this volume (see figure 5). In the euro area,

the proportion is around two thirds because

direct debits play a greater role.

The EU member states differ sharply as

regards the absolute number of cashless

transactions. Germany, France and the UK

have the highest proportion, together hold

ing 60% (see figure 6). In contrast, the 20

countries with the lowest volume do not,

with a total of 18.7%, even account for as

many transactions as any of these three

countries on its own.

The further development of conven

tional payments is an important part of the

SEPA project. As the cheque has no future,

since it is a paperbased instrument, it will

continue to be processed in the traditional

way in each domestic payments system. SEPA

schemes have only been established for

credit transfers and direct debits.

The challenge has been to achieve a

common European understanding of these

two instruments so that attractive services

can be offered to all customers. The different

European payment cultures that are revealed

by, among other things, the divergent use of

the various instruments available (see figure

2) give an idea of the magnitude of this

challenge. For example, credit transfers and

direct debits make up over 80% of all pay

ments in Bulgaria, Germany and Austria,

but only just over 20% in Portugal.


Cashless payments in 2008 in billions of transactions.Source: European Central Bank, Blue Book, table 7.1.

Figure 5

Credit transfers, direct debits and cheques make up

two-thirds of the 78 billion transactions in Europe

Credit transfers Direct debits Card payments Emoney Cheques Other

EU27

21.7 20.3 29.5 5.8

0.5 0.54.417.916.614.9

0.4 0.5

78.4

54.8of which: Euro15

0 10 20 30 40 50 60 70 80Bn

19

Another important aspect in the design

of the SEPA payments instruments is auto

matability. Only industrial processing of pay

ments without any manual intervention

keeps costs low. This is in the interest of both

banks and customers. The benchmark in this

respect is particularly Germanys present

domestic payments market, which boasts a

high level of automation and thus high

costefficiency.

Credit transfers and direct debits differ

in the way they are processed. The main

difference between these two instruments is

in who triggers the transaction. While it is

the originator (payer) who initiates a credit

transfer (the take my money and credit it to

the other side principle), it is the payee who

starts off a direct debit (the I request money

from the other side and credit it to myself

principle). To ensure that only legitimate

claims are settled by direct debit, how

ever, additional requirements have to be

complied with compared to the credit

transfer. These requirements include civil

law rules. As a uniform European civillaw

regime for payments will be introduced only

at the end of 2009, no uniform European

direct debit scheme exists as things stand.

SEPA will be breaking new ground in this

respect. Credit transfers and direct debits are

described in more detail below.

3.1 SEPA instruments: credit transfer

Credit transfers are used to a varying extent

in the EU member states (see figure 7). For

example, Finns and Austrians each make well

over 100 credit transfers every year, whilst

Greeks hardly use credit transfers at all.

Overall, every citizen in the European Union

makes an average of 44 credit transfers

annually. The figure in the euro area is much

the same.

figures for 2008.Source: European Central Bank, Blue Book, table 7.1.

Figure 6

Germany, France and the UK account for the largest

share of cashless payment transactions in the EU

20.4 %

20.3 %

19.5 %

Germany

France

UK

Rest of EU27

Sweden

Italy

The Netherlands

Spain

18.7 %

3.5 %

4.9 %

5.8%

6.9 %


20


Figure 7

Credit transfers are used to a varying extent in Europe

Average number of credit transfers per citizen in 2008 in selected countries. Source: European Central Bank, Blue Book, table 7.4 a.

Greece

Spain

Italy

Poland

France

EU27

Euro15

UK

Hungary

Germany

Belgium

The Netherlands

Austria

Finland

0 20 40 60 80 100 120 140

Basic principle of credit transfer

The credit transfer process starts with the

payer also known as the originator who

settles a claim to payment resulting from an

underlying transaction (see figure 8 for a

simplified diagram). An underlying trans

action may, for example, be the purchase of a

book or the provision of a service.

In the first step of the process, the

originator initiates the payment at his/her

bank. In the second step, the credit transfer is

exchanged between the originators bank

and the beneficiarys bank. The payment

message contains at least the following:

details of the originator and his bank

details of the beneficiary and his bank

the amount of the credit transfer

remittance information

This allows the beneficiary to reconcile

the payment with the underlying transaction

(e.g. on the basis of an invoice number).

Parallel to the payment message, credit

transfer funds flow in the same direction in

favour of the beneficiarys bank. In the third

step, the amount of the credit transfer is

credited to the beneficiary, who is informed

thereof, e.g. via a statement of account.

This highly simplified diagram omits

numerous steps in the process, e.g. when

the originator is notified that his account

has been debited. The bank checks on

whether the beneficiarys account exists and

the interbank systems used to clear and

settle the payment have likewise been left

out.

Special features of the SEPA credit transfer

The European banking industry set a number

of requirements for the SEPA credit transfer

to allow uniform, automated processing.

These requirements are based on those for

the German EUStandardberweisung, which

was launched successfully in 2003:

The transfer is denominated in euros and

executed within SEPA. It may also be used

for domestic payments.

The amount is credited to the payees

account within three banking business

days.

The accounts of the payer and payee are

identified by the International Bank

Account Number (IBAN).

The Bank Identifier Code (BIC) identifies

the payers bank and the payees bank.

Use of the SEPA data formats is recom

mended in electronic banking (see also

section 3.4). Use of the SEPA data formats

is mandatory in interbank clearing and

settlement of payments.

These requirements are designed to

allow fully automated processing of the SEPA

credit transfer like in the German domestic

payments sector today.

3.2 SEPA instruments: direct debit

Like credit transfers, direct debits are used to

a varying extent across Europe (see figure 9).

Poles and Greeks, for example, hardly use

direct debits at all. By contrast, the average

German and Austrian pays by direct debit

almost 100 times a year. This is more than

twice as much as the average per capita use

in the European Union.

21

Underlyingtransaction

Flow of funds

Credit transfer

InformationInitiation

Figure 8

Credit transfer is initiated by the payer

Source: Association of German Banks.

1

2

2

3

Beneficiarys bank (payees bank)

Originators bank (payers bank)

Beneficiary(payee)

Originator(payer)


22


Figure 9

Europeans do not all use direct debits to the same extent

Average number of direct debits per citizen in 2008 in selected countries. Source: European Central Bank, Blue Book, table 7.4 a.

Poland

Greece

Hungary

Italy

Finland

Belgium

EU27

France

UK

Spain

Euro15

The Netherlands

Austria

Germany

0 20 40 60 80 100

Direct debits are used less than credit

transfers in Europe. Nevertheless, the direct

debit is an important payment instrument

for Europe as it accounts for a quarter of all

transactions. At 30%, the figure in the euro

area is even higher.

Basic principle of direct debit

The processing of a direct debit starts with

the payee, who wishes to have a claim to pay

ment resulting from an underlying trans

action settled in his favour (see figure 10 for

a simplified diagram). The underlying trans

action may be a newspaper subscription, for

example. In this case the payee is the news

paper publisher and the payer is the sub

scriber.

In the first step of the process, the cred

itor initiates the payment by presenting the

direct debit to his bank. In the second step,

the direct debit is exchanged between the

creditors bank and the debtors bank. The

payment message contains the same infor

mation as that required for a credit transfer.

With direct debits, the funds flow from

the payers bank to the payees bank and thus

in the same way as with credit transfers. In

the third step, the payer is informed that his

account has been debited, e.g. via an account

statement. For simplicitys sake, the diagram

omits numerous parts of the process such as

the banks internal systems which are used to

clear and settle payments.

23

Direct debits differ fundamentally from

credit transfers in one respect: an author

isation (mandate) to debit the debtors

account must be given. Where a subscription

is involved, the subscriber gives the news

paper publisher this mandate. A mandate

may be issued either individually for each

direct debit or once only before the first

direct debit. It can be issued directly between

the payer and the payee or between the

banks involved. These differences in

mandating practice are the result of diverging

civil law regimes in the EU member states,

which define when a mandate actually exists.

This question is in turn closely linked to the

payers refund right. In most direct debit

schemes, the payer can contest collection of

a direct debit within a certain defined period

and reclaim the amount debited without

giving any reasons. If no mandate has been

issued at all, the amount will also be

refunded after expiry of this period.

Special features of the SEPA direct debit

The nature of the direct debit and the above

mentioned dependency on civil law make

common European direct debit rules a pre

requisite for the use of the SEPA direct debit.

The EU member states must introduce such

rules by November 2009 (see section 2.1).

There are two types of SEPA mandate.

The payer of a core direct debit can claim a

refund up to eight weeks after the amount

has been debited. Businesstobusiness direct

debits, which may only be agreed between

companies, cannot, by contrast, be contested

in this way. The wording of the correspond

ing mandates reflects this difference (see

figure 11).

The SEPA direct debit is subject to

certain requirements to allow uniform,

highly automated processing along the lines

of that for the SEPA credit transfer:

underlyingtransaction

Mandate

Flow of funds

Direct debit

Initiation

Information

Figure 10

Direct debit is initiated by the payee


32

0

2

1

Creditors bank (payees bank)

Debtors bank (payers bank)

Creditor(payee)

Debtor(payer)


24

The direct debit is denominated in euros

and executed within SEPA.

The payer authorises SEPA direct debit

by means of the relevant SEPA mandate.

The customers accounts are identified by

the IBAN and the banks are identified by

the BIC.

When the direct debit is presented, the

payee specifies the due date. The payers

account is debited on this date.

Use of the SEPA data formats is recom

mended in electronic banking (see also

section 2.4). Their use is mandatory in

interbank clearing and settlement of pay

ments.

3.3 Future development and expansion

of the SEPA schemes (E-SEPA)

The SEPA credit transfer and direct debit

schemes form a basic framework which is

sufficient to cover the vast majority of euro

payments. These schemes will be con

tinuously refined to take account of changing

user requirements, for example by adding

further features to enhance automated

processing in the corporate sector.

Besides these developments, the basic

schemes will be used to offer additional ser

vices and so expand the SEPA product range.

Banks will enhance their services by enabling

payers to make guaranteed online credit

transfers with the help of electronic or mobile

devices (e and mpayments), for example. It

will also become possible to authorise SEPA

direct debit mandates electronically as well as

in paper form, as is usual at present. This will

allow the payer to send the mandate to the

payee simply when banking online.

3.4 SEPA standards

Uniform standards to identify an account,

for example that are used by all the parties

to payments without any room for interpre


Figure 11

SEPA mandates for core and Business-to-Business direct

debits contain different refund provisions

Source: European Payments Council, as at June 2009.

SEPA direct debit mandate

By signing this mandate form, you authorise [name

of creditor] to send instructions to your bank to

debit your account, and your bank to debit your

account in accordance with the instructions from

[name of creditor].

As part of your rights, you are entitled to a refund

from your bank under the terms and conditions of

your agreement with your bank. A refund must be

claimed within 8 weeks starting from the date on

which your account was debited.

SEPA business-to-business direct debit mandate

By signing this mandate form, you authorise [name

of creditor] to send instructions to your bank to

debit your account, and your bank to debit your

account in accordance with the instructions from

[name of creditor].

This mandate is only intended for businessto

business transactions. you are not entitled to a

refund from your bank after your account has been

debited, but you are entitled to request your bank

not to debit your account up until the day on which

the payment is due.

25

tation are essential. This is what experience

in the domestic payments sector has shown

over the years. Without such standards, cost

efficient handling of billions of payments is

not possible.

For this reason the International Bank

Account Number (IBAN) and the international

Bank Identifier Code (BIC), along with the

SEPA data formats, will be mandatory in

SEPA. They are described in the following.

The International Bank Account Number

(IBAN)

The IBAN is an international bank account

number based on ISO (International Organ

isation for Standardisation) standard 13616.

The IBAN comprises an international part

the country code and the check digits and a

national component. For Germany, this

national component is the bank code (Bank

leitzahl) and the German account number.

While the length of the IBAN varies from

country to country, it is the same within a

country.

The check digit can be used to deter

mine whether the IBAN is plausible. This

check can be made by the customer himself

or by his bank when the payment is initiated.

Should the IBAN not be plausible, the pay

ment will not be executed in the first place.

The correctness of the IBAN, i.e. the existence

of the account it represents, can only be

ascertained by the accountkeeping bank,

however.

The Bank Identifier Code (BIC)

The BIC is the worldwide bank identifier code

based on ISO standard 9362 and is used like

the domestic bank code. The BIC is either

eight or eleven characters long.

The SEPA data format

Different data formats are used today for do

mestic and crossborder payments. They dif

fer according to whether messages are for:

use between banks or between customers

and their banks

domestic or foreign payments

use of credit transfers, direct debits or

card transactions

transactions processed individually or in

batches.

These formats differ as regards the type

and size of the data used, since no common

set of required data, i.e. a uniform logical

data model, has been defined. For example,

in some cases domestic systems (German

account number and bank code) and in other

cases international systems (IBAN and BIC)

are used to identify accounts. No common

technical representation, i.e. a uniform

physical data model, exists either: the

German DTAUS format calls for fixed data

element lengths, so that the bank code, for

example, always begins at the same place.

The Society for Worldwide Interbank Financial

Telecommunication (SWIFT) data formats, on

the other hand, use variable lengths.

The International Organisation for

Standardisation has now started work on


26

modelling financial industry messages uni

formly. This is set out in ISO standard 20022,

which is an attempt to replace the many

different formats existing today with a single,

uniformly modelled message family (conver

gence). An account can, for example, contain

the same details in all messages based on ISO

20022 (see figure 12), no matter whether these

formats are used in payments, securities

clearing and settlement, or foreign trade.

The Extensible Markup Language (XML)

syntax was recommended as the physical

data model. XML separates the contents of a

message from the representation of the con

tents. XML messages are thus platform and

programming languageindependent. The

accompanying XML schemas allow a check

on the technical validity of messages, e.g.

on whether the account identification is no

longer than 34 characters. This means that

such checks do not have to be programmed

in the application whether on the bank

customers side in the online banking

program or at the bank. Not only does this

remove the onceonly programming

workload, but every change to a message

can be supported by simply exchanging the

XML scheme. A check on whether, for

example, an IBAN is plausible cannot be

carried out at the same time, however.

It was agreed that messages based on

ISO 20022 would be used for the SEPA

schemes. However, these messages contain

a number of data elements that are not

necessary for SEPA but satisfy additional

requirements set by nonEuropean

countries, e.g. the US social insurance

number to identify retail customers. Subsets

of ISO messages have therefore been

defined for SEPA. This means that, while all

SEPA messages are valid messages based on

ISO 20022, they have been adjusted in size

to meet SEPA requirements and thus support

the fully automated processing of SEPA pay

ments much better.

If all involved parties use the SEPA data

formats, it will be possible to avoid data loss.

Today, various formats are in use because

different systems are involved. Each time

there is a change from one system to an

other, the data has to be converted into the

respective target format. If the new format

cannot accommodate as much data, certain

information had to be omitted. This means,

for example, that the remittance infor


Figure 12

Details of an account

in an ISO 20022

message

Source: Association of German Banks on the basis of iSO 20022, CashAccount16 element.

Account identification

Account name

Account currency

Account type

Account

27


mation cannot pass along the entire

processing chain and reach the payee

unchanged in its original form. But if the

SEPA data formats are used throughout,

there will be no need for conversion and the

payee will receive all the necessary infor

mation intact. Should the ISO 20022 messages

also be used in future in the crossborder,

nonEuropean payments market, only a

single format family would then be used in

the long term: this would make things much

easier for bank customers and banks.

3.5 SEPA infrastructure for clearing

and settlement

Traditional payment clearing (exchange of

messages) and settlement systems are gov

erned by the respective domestic payment

conventions, no matter whether payments

are processed singly as individual payments

or in batches as mass payments. The intro

duction of the euro as a virtual currency in

1999 saw the establishment of two new sys

tems for individual payments in euros: the

TransEuropean Automated Realtime Gross

Settlement Express Transfer (TARGET) sys

tem, linking the central banks domestic indi

vidual payment systems, and the EURO1 sys

tem operated by the European Banking

Association (EBA). The EBAs STEP2 system

was added for euro mass payments in 2003.

SEPA requires an infrastructure for mass

payments that supports both the SEPA

schemes and standards, e.g. the IBAN. The

most important criterion in this network of

systems the infrastructure is the reachabil

ity of all banks. Where a payment from Bank

A to Bank B is requested, Bank A has to be

able to reach Bank B via the infrastructure,

otherwise the payment cannot be executed.

The EPC has defined five categories of

clearing and settlement systems for SEPA

(see figure 13). Each of these categories

differs particularly as regards which and how

many banks participate and can thus reach

each other. The PEACHcompliant ACH

category is especially important as such a

system must be able to reach all SEPA banks.

At least one system belonging to this

category is needed for SEPA to work. Which

systems and thus also which of the five

system categories will actually establish

themselves is something that will be decided

by competition.

3.6 Implementation and migration

The SEPA schemes are offered alongside

existing domestic schemes (see section 2.3).

Figure 13

Five categories of

clearing and settlement systems

PEACHcompliant ACH

SEPAschemecompliant ACH

SEPAschemecompliant system

Intragroup arrangements

Bilateral system


In the conventional payments sector, the new

SEPA schemes will operate solely within the

new SEPA infrastructure, whilst the old

schemes currently available will use the

existing systems.

The use of new schemes within the old

infrastructure, e.g. exchanging a SEPA direct

debit in the DTAUS format, either does not

make sense or is not possible. Both the

logical and physical data models of the

DTAUS format developed for German

domestic payments differ fundamentally

from those of the SEPA data format. Making

the DTAUS format SEPAcompatible would

mean considerable additional investment

investment that is unnecessary, since the

original SEPA messages have to be supported

by every bank, anyway. Such an unsatisfactory

solution would only make switching

completely to the SEPA schemes unnecessarily

complicated.

4 Card payments

There are various types of payment cards in

use today debit cards and credit cards, for

example. What is more, these cards often

combine different functions: they can be used

for pointofsale payments and cash with

drawals and are accepted both at home and

abroad. Owing to this versatility, which is

being further enhanced by technical

innovations such as embedded chips, cards

are increasingly replacing cash. It is therefore

only logical to establish a single European

market for plastic payments, too.

4.1 The situation prior to the introduction

of SEPA

The first cardbased payments in Germany

date back to the end of the 1960s. Initially,

cards were used to guarantee cheques.

Then, over time, they evolved into multi

function cards, and have today established

themselves as payment instruments in their

own right. The use of cards continues to

grow at a rapid rate.

Other European countries have seen

similar developments. The intensity of card

use differs considerably across Europe. The

value of POS and ATM transactions varies

between 1 and 26% of gross domestic

product (see figures 14 and 15).

Debit cards

The most widespread type of payment card in

Germany is the girocard. Banks in Germany

have issued over 90 million bank cards to

customers. These cards can be used to make

28


cash withdrawals from ATMs or pay for goods

and services at pointofsale devices

connected to the girocard network. Since

amounts are debited directly from the

customers account, these are debit cards. By

contrast, amounts paid by credit card are

normally aggregated and debited from the

account in full or in part once a month. In

Germany, debit cards are not only far more

widespread than credit cards, they are also

used more often. Though the average amount

of a credit card transaction is higher than that

of a debit card transaction, the total annual

value of transactions using debit cards in

Germany is almost four times higher than

the value of transactions using credit cards

(see figure 16).

Thanks to its efficiency, the girocard

scheme has been able to establish itself as

the leading debit card network of the bank

ing industry in Germany. The girocard net

work is continuing to expand even in the

face of competition from other schemes,

such as the ELV electronic debit scheme, and

from credit cards.

Nevertheless, as things stand, most of

the 600,000 points of acceptance for giro

card at retail outlets, for example, are to be

found in Germany. Other European coun

tries have their own, regionally focused debit

card schemes (see figure 17). Up to now,

there have been no direct links between the

schemes.

29

Figure 14

Payments at POS terminals represent

around 12% of EU27 gross domestic product

Value of transactions with domestic cards at domestic POS terminals as % of gross domestic product in 2008. Source: European Central Bank, Blue Book, table 15.

%

UK

Fin

lan

d

Port

ug

al

Den

mar

k

Fran

ce

Esto

nia

Swed

en

Irel

and

The

Net

her

lan

ds

Bel

giu

m

EU27

Cyp

rus

Slo

ven

ia

Hu

ng

ary

Euro

15

Spai

n

Mal

ta

Latv

ia

Luxe

mb

ou

rg

Ger

man

y

Ital

y

Pola

nd

Au

stri

a

Lith

uan

ia

Cze

ch R

epu

blic

Slo

vaki

a

Bu

lgar

ia

Gre

ece

Rom

ania

25

20

15

10

5

0


This means that at present customers

can usually only use their bank cards for pay

ments or cash withdrawals abroad if debit

cards with the logos of the MasterCard or

Visa international card schemes (Maestro or

V Pay) are accepted. German bank cards

normally carry the Maestro logo for this

purpose. This only enables customers to use

their debit cards at a limited number of debit

card acceptance devices, however.

Customers cannot yet use their German bank

cards abroad to the same extent as they

can in Germany. The goal of SEPA for cards

is to reduce the existing fragmentation of

the European market.

30


Figure 15

Transactions at ATMs represent around

10% of EU27 gross domestic product

Value of transactions with domestic cards at domestic Atms as % of gross domestic product in 2008. Source: European Central Bank, Blue Book, table 13.

%

Latv

ia

Lith

uan

ia

Esto

nia

Gre

ece

Mal

ta

Pola

nd

Port

ug

al

Bu

lgar

ia

Cze

ch R

epu

blic

Rom

ania

Hu

ng

ary

Irel

and

Slo

vaki

a

UK

Slo

ven

ia

Ger

man

y

Bel

giu

m

EU27

Spai

n

Euro

15

The

Net

her

lan

ds

Fin

lan

d

Cyp

rus

Swed

en

Ital

y

Au

stri

a

Fran

ce

Luxe

mb

ou

rg

Den

mar

k

25

20

15

10

5

0

bn

Figure 16

Debit cards are more popular than

credit cards in Germany

Value of transactions in bn (debit card corresponds to the card with debit function category and credit card to the card with delayed debit function category). Data for years before 2007 are not comparable.Source: European Central Bank, Blue Book, table 9.

2007 2008

Debit cards Credit cards

120

100

80

60

40

20

0

Credit cards

Credit card payments are characterised by

the fact that the amount is not debited from

the customers account immediately, but in

full or in instalments within a period agreed

on with the cardissuing bank. The cards

show the brands of international card

schemes such as American Express, Master

Card or Visa. Credit cards are accepted all

over the world where the relevant logo is on

display.

4.2 SEPA for card payments

Not only credit transfers and direct debits but

card payments, too, are part of the single

market for payments. There will be benefits

above all for cardholders, as well as for retail

ers and service providers in their capacity as

points of acceptance.

The declared aim of creating a SEPA for

card payments is to make such payments sig

nificantly simpler for cardholders and mer

chants.

31


Schemes shown: LinK in the united Kingdom, Dankort in Denmark, Pin in the netherlands, girocard in Germany, Cartes Bancaires in france, multibanco in Portugal, 4B, Euro 6000 and Servired in Spain, Pagobancomat in italy.Source: Association of German Banks, October 2009.

Figure 17

Debit card schemes of domestic origin

currently used in Europe

European cardholders are to be able to

use their cards throughout SEPA in the

same way as they do at home.

European merchants are to be able to

accept cards issued anywhere in SEPA in

the same way as they accept domestic

cards.

4.3 The SEPA Cards Framework

It is against this backdrop that the European

Payments Council has established a frame

work describing the SEPA cards market. The

SEPA Cards Framework (SCF) sets out its rules

and principles. The prospects for card

schemes, cardholders, cardaccepting busi

nesses and cardissuing banks are examined.

Focus of the SEPA Cards Framework

The rules and principles contained in the

SEPA Cards Framework are commitments by

all banks which are members of the Euro

pean Payments Council. The framework covers

all the following types of card payments:

Transactions at POS terminals and ATMs

in SEPA using generally accepted cards

issued by SEPA banks.

Payments and cash withdrawals in euros.

Card payments with a payment guaran

tee, meaning that when a card is present

ed to the merchant, payment to that

merchant or his acquirer is guaranteed.

The SEPA Cards Framework does not

cover direct debitbased transactions

without a guarantee of payment (ELV).

Payments using cards containing a chip

which complies with specifications

issued by the EMVCo organisation (EMV

chip) and confirmed with a personal

identification number (PIN). Payments

using cards with a magnetic strip will

cease being SCFcompliant in 2010.

Transactions using electronic purses,

such as Germanys GeldKarte, are also not

covered. The SEPA Cards Framework does

not address product features or the business

terms and conditions governing the use of a

card.

SEPA Cards Framework specifications

for card schemes

Card schemes that wish to be SCFcompliant

must meet the following requirements:

Transparent, nondiscriminatory member

ship criteria. Membership may no longer

be restricted to domestic banks. Banks

supervised by authorities in countries

other than that in which the card scheme

is registered must also be able to become

members and must not be discriminated

against.

SEPA licensing. Instead of separate licences

for each member state, only licences for

the entire SEPA may be issued in future. It

must be possible to apply for issuing and

acquiring licences separately.

Transparent price structures applicable

throughout SEPA.

Ownership and management of the brand

must be separate from other services

(such as payments processing). Payment

system services must be offered and

priced separately (unbundling).

32


33


Figure 18

SCF compliance options

Existingcard schemes SCF compliance

Option 2

SCF complianceand extension of scheme

SEPAwide or alliances

Option 3

Cobranding with an SCFcompliant

international scheme

Option 1

Replacement with international card schemes


All cards must be equipped with EMV chip

technology by the end of 2010.

Propriety specifications are to be replaced

with open standards.

Basic SCF compliance options for existing

domestic card schemes

The need to adapt is particularly acute for

debit card schemes, which currently enable

little or no crossborder acceptance.

There are various possible ways for exist

ing card schemes and cards to satisfy the re

quirements of the SEPA Cards Framework.

For illustration purposes, the framework de

scribes three ways for domestic card schemes

to become SCFcompliant (see figure 18):

Option 1: This option involves shutting down

or selling the scheme. Debit card pay

ments are then processed by one or more

international schemes. The selected inter

national card scheme must be SCFcom

pliant.

Option 2: The existing domestic scheme

meets all the requirements of the SEPA

Cards Framework by 2008 or, if applicable,

2010. This offers domestic schemes the

opportunity to extend their activities

throughout SEPA. They can also enter into

alliances with other card schemes, be they

domestic or international, which are also

SCFcompliant. Another possibility is to

establish a new, European card payment

scheme.

Option 3: Cobranding with international

card schemes is already extremely wide

spread. It allows cards which are part of a

regional or domestic network to be used

in SEPA and internationally, too.

For a domestic debit card scheme like

girocard, all three options are conceivable.

All three options are open to individual banks

and banking groups, as well as to national

banking industries as a whole. They can also

be combined. Another possibility is to imple

ment more than one option in parallel, ap

plying different options to different products,

for example. The SEPA Cards Framework does

not exclude further routes to SCF compliance.

The only prerequisite is that all card payment

products and brands covered by the frame

work must meet its requirements by the end

of 2010.

4.4 The German banking industrys

options for girocard

The German banking industry has already

got its girocard scheme and thus over 90

million bank cards ready for SEPA. The Euro

pean Central Banks requirements for card

payment schemes have also been met.

Since all German bank cards are part of

the girocard scheme, the obvious solution is

to use this as a starting point for SEPA. The

German banking industry has designed a

threetier strategy to ensure that these cards

will be accepted throughout SEPA and, in

deed, the world. It is based on applying a

combination of options 2 and 3 from the

SEPA Cards Framework to the girocard

scheme. The scheme is being retained and

adapted to satisfy SEPA requirements.

Broader acceptance throughout Europe will

be achieved by means of cooperation agree

ments with other card payment schemes.

Continued co branding arrangements with

international card schemes will, in addition,

ensure that cards are accepted all over the

world. The three tiers are outlined below.

1. Retain girocard

The German banking industry sees its giro

card payment scheme as a key element in

the introduction of SEPA for cards. The giro

card scheme meets the requirements of the

SEPA Cards Framework. Girocard is offered

to banks and customers throughout Europe.

Neither the use nor the operation of the

scheme is confined to Germany; both are

open to parties in other European coun

tries. The same price structure applies

throughout Europe. What is more, no licence

fees are charged for participating in the

girocard scheme.

At the same time, the schemes rules

ensure maximum competition between par

ticipating issuers, operators and processors.

In principle, any company which fulfils cer

tain technical conditions is free to offer its

services through the girocard scheme. The

governance of the scheme is thus complete

ly separate from the provision of other ser

vices (unbundling). Migration of the scheme

to EMV chip technology will be completed

by the end of 2010 at the latest. The change

over process for bank cards and ATMs is

already well advanced.

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The freedom of access enshrined in the

girocard scheme and the keen competition

it fosters guarantee a high level of efficiency.

This gives the German banking industry a

crucial head start in implementing SEPA.

2. Alliances with other schemes

It is the aim of the German banking industry

to allow SEPA card payments to benefit as

much as possible from the efficiency of its

existing domestic debit card systems. In order

that this can apply to more than girocard

transactions, the girocard scheme is being

linked up with other European networks.

Bilateral agreements with domestic partner

schemes allow mutual acceptance of cards

and enable transactions to be processed di

rectly, without needing to be routed through

a central intermediary such as Visa or

MasterCard. This approach ensures that the

requirements of the SEPA Cards Framework

will be satisfied. Domestic card schemes,

each of which is SCFcompliant, are thus

entering into alliances with one another as

described in option 2 of the framework.

The creation of a network of this kind,

based initially on bilateral agreements, will

culminate in virtually universal acceptance

of cards at ATMs and POS terminals in par

ticipating countries. What is more, card

holders and merchants can continue to use

schemes with which they are already famil

iar. The advantages of these schemes, such

as their efficiency, widespread acceptance

and familiarity, can be built on further. The

investments made in recent years by

businesses and banks are the starting point.

Cardholders and merchants will not face

additional costs compared with using their

domestic schemes. Pilot trials were success

fully launched in 2006 and gradually

extended in 2007.

These bilateral agreements evolved in

November 2007 into a panEuropean

network based on a multilateral agreement

between card schemes the Euro Alliance of

Payment Schemes (EAPS, see figure 19). The

card schemes participating in EAPS have a

market potential of over 222 million debit

cards, 2.1 million POS terminals and almost

190,000 ATMs throughout Europe. This

potential now needs to be progressively

unlocked.

The alliance is based on mutual accept

ance of payment cards and direct processing

of transactions. A set of standards for direct

processing between acquirers and issuers is

currently being drafted by a standardsetting

body known as the Berlin Group. EAPS will

thus allow European debit card payments to

be processed in a considerably more stream

lined manner. There will be benefits for

customers and merchants, too. There will be

more points of acceptance throughout

Europe available to cardholders, who will no

longer be dependent solely on international

payment schemes like Maestro or, in the

near future, V Pay. And it will be easier for

merchants to accept more cards from the

card schemes participating in EAPS because

they will not need to sign new acceptance

agreements.

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The European Payments Council is not

alone in seeing alliances of existing schemes

as a potential way of implementing SEPA for

cards. The European Central Bank is calling

for at least one European card scheme to be

established alongside international schemes

so as not to lose the expertise and efficiency

of existing domestic providers. It regards the

creation of EAPS as an important step which

should also be taken by other payment

schemes.

3. Continued cobranding

Cobranding German cards with an

international payment scheme is already the

basis for using cards worldwide. Customers

can currently use cards cobranded with

Maestro, for example, at participating ATMs

and retail locations all over the world. In

return, merchants in Germany may opt to

accept foreign Maestro cards. Such cards can

also be used to make cash withdrawals from

ATMs throughout Germany. SEPA has a

second cobranding option as well: Visas

V Pay is a debit card scheme based on EMV

chip technology and PIN which has been

especially designed for SEPA.

Cobranding with Maestro will continue

to ensure that customers can use their cards

worldwide, while a cobranding agreement

with V Pay will allow cards to be used at least

throughout SEPA. The cobranding option,

which is specifically mentioned in the SEPA

Cards Framework, will remain an essential

part of the German banking industrys SEPA

strategy, even if the other options are

becoming increasingly important.

Combination of options

The approach adopted by the German

banking industry gives cardissuing banks

36


Figure 19

Six European schemes are members of EAPS


CoGeBan Convenzione per la Gestione del marchio Bancomat Operator of the Italian Bancomat and Pagobancomat schemes

Eufiserv Operator of a panEuropean acceptance network

EURO 6000 One of the three big Spanish debit card schemes

LINK Interchange Network Operator of an ATM network in the UK

Sociedada Interbancria de Servicios Operator of the Portuguese Multibanco scheme

Zentraler Kreditausschuss Operator of the girocard scheme (formerly electronic cash)

optimal flexibility for SEPA. It will be

possible to offer cardholders and merchants

individually tailored solutions. On top of

this, the combination of the three options

will permit SEPA to be implemented swiftly

and on schedule, while preserving scope for

flexibility over the long term.

Using the girocard scheme as a starting

point for SEPA will allow investments by

merchants to be channelled into existing

acceptance systems. Furthermore, unneces

sary disruption of customer habits and

extensive technical adjustment to a new

system can be avoided. It is therefore vital to

retain the confidence of cardholders and

merchants in order to promote a shift from

cash to card payments and, at the same time,

exploit the opportunities offered by SEPA to

all concerned.

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ACH Automated Clearing House: facility for the clearing of payments.

Acquirer Company which acquires points of acceptance for various payment card

schemes. It often offers other services as well, such as settlement.

Berlin Group Initiative set up by a number of European banking industry organisations

to standardise the interface between issuers and acquirers

(www.berlingroup.org). The standards drawn up by the group are used

in the bilateral processing of transactions in the EAPS, for example.

BIC Bank Identifier Code: international bank code in accordance with

ISO 9362. Listed at www.swift.com/biconline.

Clearing Processing of incoming payments and collective transfer to relevant

banks.

Conventions Agreements relating to aspects of payments processing such as data

formats or rules for returning direct debits.

CSM Clearing and settlement mechanism.

DTAUS Data format used for domestic German payments.

EAPS Euro Alliance of Payment Schemes (www.cardalliance.eu). Company

made up of European card schemes established to draw up a common

business policy framework to link individual (often currently domestic)

schemes. The objective is mutual acceptance of the cards of participating

schemes.

EBA Euro Banking Association (www.abeeba.eu).

EBF European Banking Federation (www.ebffbe.eu).

ELV Electronic debit scheme used by German merchants and based on the

German direct debit scheme. No online authorisation or blacklist check.

38

Glossary

GLOSSARy

EMV chip Chip for payment cards complying with EMVCo standards.

EMVCo Company responsible for the chip card specifications of MasterCard,

Visa and Japan Credit Bureau (JCB), a Japanese credit card company

(www.emvco.com).

EPC European Payments Council (www.europeanpaymentscouncil.eu).

EURO1 EBA clearing system for individual payments (www.ebaclearing.eu).

Euro area Members since 2009 (Euro16): Euro15 and Slovakia

(ec.europa.eu/economy_finance/the_euro/index_de.htm?cs_mid=2946).

Members until the end of 2008 (Euro15): Euro13 and Cyprus, Malta.

Members until the end of 2007 (Euro13): Euro12 and Slovenia.

Members until the end of 2006 (Euro12): Austria, Belgium, Finland,

France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,

Portugal and Spain.

Membership date not yet fixed: Bulgaria, Czech Republic, Estonia,

Hungary, Latvia, Lithuania, Poland, Romania and Sweden.

No membership in the foreseeable future: Denmark, United Kingdom.

European Member states since January 2007 (EU27): EU25 and Bulgaria, Romania

Union (www.europa.eu).

Member states until the end of 2006 (EU25): EU15 and Cyprus, Czech

Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia,

Slovenia.

Member states until the end of 2003 (EU15): Austria, Belgium, Denmark,

Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,

the Netherlands, Portugal, Spain, Sweden, United Kingdom.

Candidate countries: Croatia, Former yugoslav Republic of Macedonia,

Turkey.

Possible future candidate countries: Albania, Bosnia and Herzegovina,

Iceland, Kosovo under UN Security Council Resolution 1244,

Montenegro, Serbia.

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EU-Standard- Crossborder credit transfer within the meaning of Article 2(a)(i) of the

berweisung EU regulation on crossborder payments in euros which does not exceed

50,000 and on which the IBAN of the payee and the BIC of the payees

bank are indicated pursuant to Article 5(2).

IBAN International Bank Account Number under ISO 13066 (www.swift.com/

solutions/messaging/information_products/directory_products/iban_

format_registry/index.page).

ISO International Organisation for Standardisation (www.iso.org).

ISO 20022 Universal Financial Industry message scheme (www.iso20022.org).

Issuer Cardissuing bank.

Maestro International debit card scheme operated by MasterCard which can be

used at ATMs and POS devices (www.maestrokarte.de).

PE-ACH PanEuropean ACH. SEPACSM reachable by all SEPA banks.

PIN Personal Identification Number: confidential number used to identify

cardholder when conducting card transactions.

POS terminal Device used for payment with a bank card at a point of sale.

Regulation on Regulation (EC) No 2560/2001 on crossborder payments in euros

cross-border (eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2001:344:0013:0016

payments in :EN:PDF).

euros

SCF SEPA Cards Framework: sets rules and principles for the SEPA cards

market (www.europeanpaymentscouncil.eu/knowledge_bank_detail.

cfm?documents_id=18).

SCF-compliant Card scheme satisfying the requirements of the SCF.

GLOSSARy

SEPA Single Euro Payments Area.

SEPA countries EWR plus Monaco and Switzerland.

SEPA CSM SEPA clearing and settlement mechanism.

STEP2 Clearing service for mass payments operated by EBA Clearing

(www.ebaclearing.eu).

SWIFT Society for Worldwide Interbank Financial Telecommunication

(www.swift.com).

TARGET/ TransEuropean Automated Realtime Gross Sett

SEPA-BdB-en

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