A guide to SEPA payments

The Single Euro Payments Area (SEPA) is a European Union initiative that allows businesses and customers to make and receive cross-border euro payments. Read on to learn about how SEPA works, IBAN rules, the various SEPA payment methods, and instant payments.

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Introduction to SEPA

What is the Single Euro Payments Area?

If you have a personal or business bank account in the European Union (EU) there’s a good chance you’re already familiar with the Single Euro Payments Area (SEPA). In any case, if you’re looking to do business in Europe or have customers based in the EU then it’s worth getting to know this payment network that facilitates over 46 billion transactions in 36 countries each year.

SEPA is an EU initiative to simplify and standardize cashless, euro-denominated payments within and among EU member countries. It’s regulated by the European Payment Council (EPC) which also manages the four main SEPA payment schemes. The SEPA Credit Transfer (SCT) scheme was introduced first in 2008 followed by SEPA Direct Debit (SDD) in 2009. Instant payments within the SEPA zone became possible with the launch of SEPA Instant Credit Transfer (SCT Inst) in 2017.

SEPA is credited with making bank payments in Europe simpler, faster, and cheaper. Prior to SEPA, its member countries operated separate systems which caused higher complexity and costs when moving money across borders. In 2021, SEPA payment schemes accounted for over 95% of all bank payments in the EU.

SEPA members

There are 36 countries in the SEPA zone, including all EU member states plus some non-EU member states. The SEPA zone allows customers and businesses to make cross-border credit transfers and direct debit payments in euros as easily as domestic payments.

Which countries are in the SEPA zone?

As of January 2024, 36 countries are members of SEPA: Austria, Belgium, Bulgaria, Cyprus, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Republic of Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovenia, Slovakia, Spain, and Sweden, along with non-EU members Iceland, Norway, Liechtenstein, Switzerland, Andorra, Vatican City, Monaco, San Marino, and the UK.

Note that both Switzerland and the UK are members of the SEPA zone despite not being EU member states, along with Norway and Iceland. SEPA members aren’t required to be in the EU.

Which countries are not in the SEPA zone?

While SEPA covers most of Europe, several countries are not part of it. For example, Kosovo and Montenegro use the euro as their national currency but are not SEPA members. When looking to accept payments or move money in Europe, it’s important to know which countries are not currently part of SEPA as it’s likely that different regulations will apply. 

One of SEPA’s key aspects is that it uses the International Bank Account Number (IBAN) as the standard for European bank account numbers. However, many other countries also use an IBAN but are not members of SEPA, such as Albania, Brazil, Saudi Arabia, Turkey, and Ukraine.

How SEPA works

SEPA is a single payment area that uses the euro as its currency. Only payments sent and received in euro can be made as SEPA payments. Both the sending and receiving bank accounts must be domiciled within the SEPA zone.

There are four SEPA payment schemes that can be used to send and receive euro payments between bank accounts. The speed, cost, and security of these payments is governed by technical and operational standards enforced throughout the SEPA zone. The four schemes are:

• SEPA Credit Transfer (SCT)
• SEPA Instant Credit Transfer (SCT Inst)
• SEPA Direct Debit Core (SDD Core)
• SEPA Direct Debit B2B (SDD B2B)

With a standard or instant credit transfer, the payment is sent from account A to account B. With direct debits, money is debited from an account and credited to another based on the authorization of a mandate that is signed between the debtor and the creditor.

SEPA payments involve account holders, payment service providers (PSPs), and clearing and settlement mechanisms (CSMs). PSPs are responsible for sending and receiving payments as well as holding the debtor’s and the creditor’s accounts. Traditionally, the only PSPs participating in SEPA were banks, but directives such as PSD2 (2016) have enabled different kinds of PSPs to emerge.

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SEPA statistics and trends

Eurozone payment data

In 2021, the total number of cashless euro-denominated payments rose by 12.5% to 114.2 billion, with the total value increasing by 18.6% to €197 trillion. Cards made up 49% of the total number of transactions, while credit transfers constituted 22%, and direct debits 20%. Meanwhile, credit transfers accounted for 93% of the total value of payments. Next is direct debit, accounting for 4% of total value, followed by cards with 2% of the total value.

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Source: European Central Bank Statistical Warehouse, 2021

SEPA payment data

SEPA is by far the largest scheme of its kind in the eurozone. In 2021, SEPA Credit Transfer (SCT) and SEPA Direct Debit Core (SDD Core) accounted for 96% and 99% of all credit transfers and direct debits respectively within the eurozone in terms of volume. Almost all SEPA payments are initiated electronically – only 6% of credit transfers were made through paper or in person.

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Source: European Central Bank Statistical Warehouse, 2021

Both credit transfers and direct debits have grown in the SEPA zone in recent years. SCT saw volume grow by 5.8% and total value by 8% between 2017 and 2021. SDD Core saw a slower growth of 3.8% and a 3% increase in the total value of transactions.

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Source: European Central Bank Statistical Warehouse, 2021

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How IBANs and BICs work

What is an IBAN?

An important feature of SEPA is that it uses the International Bank Account Number (IBAN) standard to normalize account numbers across the 36 countries that form the SEPA zone. This is not unique to SEPA – over 80 countries in total have adopted the IBAN format – but several major countries do not use IBANs yet including China, Japan, Canada, and the US.

The IBAN is the primary account identifier within SEPA and consists of up to 34 alphanumeric characters. The IBAN format is defined by the ISO 13616 standard. IBANs always start with a two-letter country code, followed by two check digits, and end with the basic bank account number (BBAN). The BBAN itself consists of the bank identifier code (BIC) followed by the account number.

The length of IBANs within the SEPA zone vary by country. For example, France uses a 27-character IBAN format while Belgium’s has 16 characters. The structure is always consistent regardless of the number of characters in the IBAN.

Below is a German IBAN as an example. The first two characters represent the country code, followed by two check digits, an eight-digit bank code (known as a BLZ code in Germany), and a ten-digit code for the bank account number. The BBAN is the bank identifier plus the account number.

An IBAN must always be specified for payments within the SEPA zone. This helps to ensure that payments are processed more efficiently and with greater security since it reduces the risk of payments being misrouted. If payment is made to an IBAN that doesn’t exist, it will fail.

What is a BIC?

Bank identifier codes (or BICs) are used to identify PSPs, including banks, across the SEPA zone. BICs are managed by the global financial messaging network SWIFT and are sometimes referred to as SWIFT codes.

The BIC format is specified by the ISO 9362 standard. It consists of either eight (‘BIC8’) or eleven (‘BIC11’) alphanumeric characters that uniquely identifies a specific financial institution involved in a payment transaction. In the SEPA zone, a BIC8 typically denotes a specific PSP in a given country while a BIC11 denotes a particular branch belonging to the PSP.

BICs are composed of four parts: the bank code, the country code, the location code, and the branch code. Below is the BIC that denotes the UK division of HSBC as an example. The first four characters represent the bank code, followed by the two-character country code, a two-character location code, and an optional three-character branch code.

IBANs already contain BIC information and it is unnecessary to provide the BIC separately to send or receive a payment in the SEPA zone. Although the usage of BICs is becoming less frequent, it may still be required by some banks, particularly for cross-border transactions.

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SEPA clearing and settlement

As with all payment systems, clearing and settlement play a fundamental role in the processing of SEPA transactions. Clearing refers to the process of transmitting, reconciling, and confirming payments between the sending and receiving banks, while settlement involves the actual transfer of funds between the banks.

Institutions referred to as Clearing and Settlement Mechanisms (CSMs) are responsible for clearing and settling the payments between PSPs, with settlement occurring through PSP’s accounts held by the ECB. There are multiple local and pan-European CSMs in the SEPA zone and all PSPs that participate in SEPA payment schemes have to be connected to a CSM.

CSMs across the SEPA zone can be broken down into two distinct types: retail systems, which process payments for individuals and businesses, and large-value payment systems (LVPS), which process payments between financial institutions (or PSPs).

Retail payment systems in SEPA

Retail systems process payments for individuals and businesses in the SEPA zone and typically deal with large volumes of low-value payments, including credit transfers and direct debit. Retail payment systems manage the clearing process while the final settlement between financial institutions takes place through LVPS.

As of 2021 there were 25 retail payment systems within the eurozone and only one pan-European system, STEP2, which is operated by EBA Clearing, itself owned by a consortium of major European banks. The two biggest local systems are the France-based CORE, owned by major French banks, and Germany’s RPS. Both systems are overseen by their respective national central banks. Together with STEP2, these three systems account for roughly 70% of all retail payment volume in the eurozone.

Large-value payment systems in SEPA

After payments are cleared through retail payment systems during the day, they are then settled with accounts held at the European Central Bank (ECB) through large-value payment systems (LVPS). In the SEPA zone, the two main LVPS are EURO1, launched by EBA Clearing back in 1999, and Eurosystem’s T2, a real-time gross settlement system that replaced the earlier TARGET2 system in 2023.

LVPS are not used exclusively for retail payments but also process interbank payments. In practice these systems move money between ledgers within the European Central Bank, debiting one account and crediting the other with the netted amount.

Instant payment systems in SEPA

Instant or real-time payments have been increasing in importance for several years. Instant payments in the SEPA Zone are defined as having a guaranteed end-to-end processing time of ten seconds or less, as required by the SEPA Instant Credit Transfer scheme. Eurosystem’s upgraded T2 system processes 99.9% of transactions in less than one minute, which is still insufficient for instant payments.

Instant payments require a modern infrastructure built specifically for the purpose of settling payments in real time, around the clock, 365 days a year. This is a major shift from batch-based, once-a-day settlement on business days.

A new real-time gross settlement (RTGS) system has emerged recently to facilitate this shift. Eurosystem developed TIPS as an extension of T2 to enable instant payments for retail customers in the eurozone. The central banks of Sweden and Denmark have also begun their migration to TIPS in order to use the system to settle instant payments in their respective national currencies.

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SEPA payment methods

SEPA Credit Transfer

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SEPA Credit Transfer (SCT) was the first SEPA scheme to be introduced in 2008. SEPA Credit Transfers are funds transfers between PSPs that both have IBAN codes. These transfers are conducted in euros and are used widely for consumer purchases throughout the SEPA zone. All banks and PSPs are required to support the scheme.

SCTs are what’s called a push payment, meaning the payment is sent by the debtor (or payer) to the creditor (or payee). SCTs are mostly one-off payments, however debtors can set up recurring SCTs via standing orders configured with their bank. SCTs are commonly used for peer-to-peer payments, invoice payments, salary payments, pensions, and social benefits.

In order to initiate an SCT, the debtor must specify the recipient's IBAN, name, and the amount. BIC or SWIFT codes are not required. There’s no minimum amount for a single payment and the maximum amount is €999,999,999. SEPA rules prohibit any fees being deducted from the payment, meaning the full amount is always credited to the recipient’s account.

SCTs can be recalled for up to ten business days in the case of a duplicate payment or technical error and senders can request a refund for up to thirteen months in the case of suspected fraud. Banks and PSPs set their own fees for processing SEPA Credit Transfers but the per-transaction cost is usually around €0.20.

What is the availability of SCT?

Each PSP (or bank) participating in SCT applies its own cut-off times. If a payment is initiated prior to the cut-off time then it will be credited to the recipient’s account on the same business day, otherwise it will arrive the following business day.

These transfers are only processed on business days. If a payment is submitted on a non-business day, such as a weekend or public holiday, it will be sent on the next business day.

How does SCT remittance information work?

The debtor can append a reference to each SCT payment. Unstructured remittance information is commonly used for SCTs and up to 140 characters can be appended per transaction. The reference field should include relevant information about the payment, such as invoice numbers or other identifiers that help the recipient recognize the transaction.

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SEPA Instant Credit Transfer

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Introduced in 2017, SEPA Instant Credit Transfer (SCT Inst) is intended to make instant payments available to everyone in Europe. SCT Inst payments are a kind of push payment, meaning they’re initiated by the debtor. SCT Inst can be used for peer-to-peer payments and invoice payments as with non-instant credit transfers, but their speed and availability also makes them suitable for ecommerce purchases, QR code payments, and request-to-pay.

Usage of SCT Inst is increasing faster than that of any other SEPA scheme, but coverage has been far from complete since its launch because banks and PSPs have not been required to support it until now. As of January 2023, 2323 institutions across 29 countries have joined the SCT Inst scheme, which amounts to 61% of financial institutions within the SEPA zone.

In 2023 it was announced that by October 2024 all eurozone PSPs must be able to support outgoing instant payments and that, by April 2026, PSPs outside the eurozone must be able to receive euro-denominated instant payments. All PSPs will need to comply with uniform pricing requirements by that time too. As of May 2023, 14% of all credit transfers in the SEPA zone were sent as instant transfers using SCT Inst. This can be expected to increase as instant payments become more widely available.

In order to make a SCT Inst payment, the debtor must specify the recipient's IBAN, name, and the amount. The maximum transaction amount was raised to €100,000 in 2020, increasing the system's utility for both businesses and individuals. As with standard credit transfers, SCT Inst payments can be recalled for up to ten business days in the case of errors and senders can request a refund for up to 13 months in the event of suspected fraud.

Banks and PSPs currently set their own fees for processing SEPA Instant Credit Transfers. The per-transaction cost is supposed to be similar to that of standard transfers, around €0.20, but there are examples of several PSPs setting higher fees.

What is the availability of SCT Inst?

SCT Inst targets a maximum execution time of 10 seconds to complete a transaction with the funds arriving immediately in the recipient’s account. This applies 24/7, 365 days a year. According to data from the European Payments Council, over 99% of SCT Inst transactions are completed within less than five seconds.

How does SCT Inst remittance information work?

Debtors can append a reference to individual SCT Inst payments. As with SCT payments, SCT Inst allows for up to 140 characters of unstructured remittance information per transaction. The reference field should include relevant information about the transaction that helps the recipient recognize the transaction, such as invoice numbers and other identifiers.

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SEPA Direct Debit Core

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There are two types of SEPA Direct Debit payments: SEPA Direct Debit Core (SDD Core) is aimed at consumers while SEPA Direct Debit B2B (SDD B2B) is intended for businesses. However, SDD Core is used widely for consumer and business-to-business transactions. Both schemes enable pull payments, meaning that the creditor is given authorization to collect funds from the debtor’s account. This authorization takes the form of a mandate that outlines certain pre-agreed conditions.

SDD Core is mostly used by businesses to collect recurring payments from customers such as subscriptions, rent, bills, loan repayments, and insurance premiums. The scheme can also be used to collect one-off payments. 

To use the SDD Core scheme, businesses must establish a contractual relationship with a bank or PSP in the SEPA zone. This enables the bank or PSP to initiate direct debit transactions on their behalf. Businesses also require a unique reference number called a Creditor Identifier (CID) which can be obtained from the relevant national authority or central bank, such as Deutsche Bundesbank in Germany.

It’s not mandatory for banks or PSPs to participate in the SDD Core scheme but it’s widely adopted throughout the SEPA zone. Each bank sets its own fees for using SEPA Direct Debit Core. Typically each transaction costs €0.20.

How do SDD Core returns work?

It’s important to note that with SDD Core customers are entitled to a refund up to eight weeks after their account has been debited. When a refund is requested, the funds are returned to the debtor’s account automatically without an option to appeal. 

As for unauthorized transactions, such as when an incorrect amount is collected or there’s no active mandate in place, the debtor can dispute the collection for up to thirteen months.

The debtor’s bank can return the collection up to five business days after the collection due date in the event of an error, such as the debtor’s account having closed or lacking sufficient funds. Banks and PSPs charge fees for returned transactions that are passed onto to the creditor, typically ranging from €2 to €5.

How do SDD Core mandates work?

A mandate must be signed by the debtor prior to the first SDD Core transaction. It can be embedded in the payment or onboarding flow itself and signed by the user digitally. As specified by the SDD Core rulebook, the following information is mandatory to include:

• Scheme type (SEPA Direct Debit Core)
• Unique mandate reference
• Name of the debtor
• IBAN of the debtor
• BIC of the debtor’s bank
• Creditor’s company name
• Creditor Identifier (CID)
• Creditor's full address
• Signatures and time of signing

What is the SDD Core processing cycle?

Debtors must be notified at least fourteen calendar days before a collection, unless a shorter notice period is mutually agreed upon. In the case of an initial or one-off collection, the SDD Core instruction must be sent to the bank one business day prior to the collection date. For subsequent recurring collections, the instruction must be sent to the bank at least one business day before the payment due date.

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SEPA Direct Debit B2B

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SEPA Direct Debit B2B (SDD B2B) is used for transactions between businesses, including loan repayments or large purchases. SDD B2B is a pull payment method, meaning that the creditor is given approval to collect funds from the debtor’s account. This typically takes place on a recurring basis but the scheme can also be used to collect one-off payments. SDD B2B is used only for business-to-business transactions.

As with SDD Core, businesses must establish a contractual relationship with a bank or PSP in the SEPA zone that will act as a creditor on behalf of the business. Participation in the SDD B2B scheme is not mandatory for PSPs or banks and its adoption is lower than that of SDD Core. 

Transaction volumes are also lower than those of SDD Core, mainly because the mandate setup process is considered cumbersome. However, payments through SEPA Direct Debit B2B cannot be refunded by the debtor if there was a valid, authorized mandate in place – unlike an SDD Core payment. Additionally, it is not mandatory to pre-notify the debtor before a collection is made. PSPs set their own fees for using SEPA Direct Debit B2B with a typical pre-transaction cost around €0.20.

How do SDD B2B returns work?

Customers using SDD B2B are not able to request a refund after the account has been debited unless it’s deemed an unauthorized collection. This includes collections made without an active mandate in place or where an incorrect amount is called. In such cases the debtor can dispute the collection for up to thirteen months afterwards.

The debtor’s bank can return the collection for up to two business days after the collection due date in the event of technical errors, such as the account being closed or containing insufficient funds. When a collection is returned, banks and PSPs charge fees ranging from €2 to €5 that are passed onto to the creditor.

How do SDD B2B mandates work?

An SDD B2B mandate needs to be signed by the debtor prior to the first collection. Unlike SDD Core mandates that are typically signed digitally, SDD B2B mandates often have to be signed with a traditional wet ink signature, though digital signatures may be accepted in some cases. A scanned copy of the original document must be sent to the debtor’s bank for registration.

It’s mandatory to include the following information in the mandate, as specified by the SDD B2B rulebook:

• Scheme type (SEPA Direct Debit B2B)
• Unique mandate reference
• Name of the debtor
• IBAN of the debtor
• BIC of the debtor’s bank
• Creditor’s company name
• Creditor Identifier (CID)
• Creditor's full address
• Signatures and time of signing

What is the SDD B2B processing cycle?

With SDD B2B, debtors must be notified at least fourteen days before the collection date, unless otherwise agreed, and the collection instruction must be submitted to the PSP or bank at least one business day before the due date.

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Looking ahead: instant payments in the SEPA zone

The provisional decision taken by the EU in 2023 to make it mandatory for PSPs such as banks to support instant payments looks set to be a watershed moment. Particularly since it also prevents PSPs from adding extra charges for customers to use instant payments.

This should mean that instant, euro-denominated payments are about to become universally available and affordable. SEPA Instant Credit Transfer currently accounts for 14% of all credit transfers in the SEPA zone but will surely grow rapidly in usage as more and more PSPs come online.

The rules will be enforced in two stages: a shorter transition period in the eurozone and a longer one for countries in the wider European Economic Area. In any case, the rise of instant payments poses a challenge to the existing batch-based systems and any PSP (or business) that relies heavily on manual workflows to process payments. 

Historically, RTGS systems like EURO1 and T2 have closed their operations over weekends and some public holidays. Real-time, 24/7 settlement demands a continuously available service without interruption. With instant payment systems like RT1 and TIPS set to grow in usage, more and more banks are upgrading their technology in order to fully support them. 

Businesses, in turn, will need to aim for a higher level of payment automation across both initiation and reconciliation. Features like live tracking, automated retries, and faster approvals that help in processing payments continuously will also become more important.

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How Atlar can help

Atlar supports all SEPA payment schemes out-of-the-box, letting you easily automate payments and manage cash across the SEPA zone using your existing banks.

You can send, receive, and reconcile payments via API or make one-off payments from a dashboard – saving hours each week that would’ve been spent on managing payments manually. And there’s no need to devote valuable engineering resources to building and maintaining direct integrations with banks.

The widespread adoption of instant payments is around the corner and many businesses will need to adapt their internal processes and infrastructure. Atlar comes with built-in support for real-time payments, providing an end-to-end solution that simplifies money movement.

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Get in touch

If you’re looking to automate money movement across Europe or need to make SEPA payments on an ad hoc basis, we’d love to speak with you. Talk to our team by booking a demo here.