The Single Euro Payments Area (SEPA)
Introduction
Since the establishment of the European Economic Community in 1958, the movement towards a more integrated European financial market was marked by several events, the most visible of which were undoubtedly the launch of the euro in 1999, and the cash changeover in the first euro area countries in 2002. Less visible, but also of great importance, was the establishment of the central banks' large-value payment system, known as TARGET, on 1 January 1999. TARGET provided the backbone of the financial system in euro and was the implementation tool for the Eurosystem's single monetary policy. Eventually, on 19 November 2007, TARGET, which was a decentralised platform, was replaced by the single shared platform called TARGET2.
The next major step towards closer European financial integration was the implementation of SEPA and was a further rung in the ladder towards realising the full potential of the single market in Europe. The objective of SEPA was to put all electronic payments (credit transfers and direct debits, credit card and debit card payments) across the euro area on the same platform of domestic payments. In practice, SEPA meant that a payer was able to make fast and secure transfers between bank accounts anywhere in the euro area, just like making domestic transfers, and at the same cost.
SEPA was strongly supported by the European Commission (EC) and the European Central Bank. The legal framework supporting SEPA is the Payment Services Directive (PSD) which was revised in 2018 under the revised Payment Services Directive (PSD2). The Central Bank of Malta has been appointed as the Competent Authority for SEPA implementation in terms of Regulation (EU) 260/2012 by the Minister for Finance.
In April 2024, the European Union (EU) enacted the Instant Payments Regulation (IPR), aiming to make instant euro payments universally accessible across EU and EEA (European Economic Area) countries. This regulation mandates that payment service providers (PSPs) offering standard credit transfers in euros must also provide instant payment services. The implementation is phased: PSPs in the Eurozone are required to receive instant payments by 9 January 2025 and to send them by 9 October 2025. For PSPs outside the Eurozone, the deadlines extend to 9 January 2027, for receiving and 9 July 2027, for sending instant payments.
The IPR introduces several key provisions to enhance the efficiency and security of instant payments. Notably, it requires PSPs to perform a verification of payee, ensuring that the beneficiary's International Bank Account Number (IBAN) matches their name, thereby reducing the risk of errors and fraud. Additionally, PSPs must conduct daily checks of their customer base against EU sanctions lists to prevent illicit activities. The regulation also stipulates that charges for instant payments should not exceed those for traditional credit transfers. These measures collectively aim to foster a more integrated and secure payments environment within the EU.
SEPA Instruments
(i) SEPA Credit Transfer (SCT)
The SCT is a payment between one party and another through an intermediary, generally a payment service provider. Under the SCT scheme, charges are shared between both parties and settlement should not take more than the following day from payment initiation. To effect payment instructions, the International Bank Account Number (IBAN) is required. Further details regarding SCT can be found on the EPC's website.
(ii) SEPA Direct Debit (SDD)
With an SDD, consumers are able to initiate regular payments by signing an agreement ('mandate') to give consent to the beneficiary so that the latter can pull funds from the payer's bank account when a particular payment is due.
Direct debits are ideal for payments which are periodic in nature, such as recurring payments, subscriptions and payments of bills. Direct debits enables the payer to avoid late payment fees as it is the responsibility of the beneficiary to initiate the process to collect the payment.
The SDD scheme requires a unique identifier to allow debtors and also debtors' banks to check collections received against mandate information. This checking requires a unique identification of creditors which cannot differ between institutions. Once obtained, the Creditor Identifier (CI) of the Creditor can be used on any SDD mandate and in any SDD collection initiated through any Creditor Bank and presented to any Debtor Bank regardless if the Debtor is registered under the same SEPA country as the Creditor or not. Details on the composition of the Maltese SDD CI can be found here.
The documentation below provides further information on the benefits of direct debits for both consumers and merchants:
(iii) SEPA Instant Credit Transfer (SCT Inst.)
The SEPA Instant Credit Transfer (SCT Inst) scheme, operational since November 2017, revolutionized euro payments by enabling instant transfers across participating pan-European countries in less than 10 seconds, 24/7. To further enhance this framework, the European Payments Council (EPC) has updated the SCT Inst rulebook. The 2023 version 1.2 rulebook, effective from 17 March 2024, aligns with the 2019 ISO 20022 standard, ensuring improved interoperability and efficiency in payment processing.
Looking ahead, the 2025 SCT Inst rulebook, scheduled to come into effect on 5 October 2025, fully complies with the legal obligations of the Instant Payments Regulation. This regulation mandates that instant payments become the standard across Europe, fostering greater financial integration and convenience for consumers and businesses.
These ongoing developments reflect the commitment to a more efficient, secure, and integrated European payments environment, ensuring that individuals and businesses across the SEPA region benefit from instant and reliable financial transactions.