Overview of the bank payments infrastructure in SEPA

The Single Euro Payments Area (SEPA) standardizes electronic payments in Euro across Europe. This enables companies & consumers to transact easily, making cross-border payments as simple and as cheap as local payments.

To be able to leverage SEPA payments, both the sender and destination accounts need to be domiciled within the Single Euro Payments Area. There are four distinct payment schemes that guide how transactions are made – SEPA Credit Transfer (SCT), SEPA Direct Debit Core (SDD Core), SEPA Direct Debit B2B (SDD B2B), and SEPA Instant Credit Transfer (SCT Inst).

There are currently 36 members within SEPA, including the following:

• 27 European Union member nations
• Four countries from the European Free Trade Association – Lichtenstein, Norway, Switzerland, and Iceland.
• The United Kingdom, despite leaving the EU, UK will remain a member of SEPA
• Four microstates – Vatican City, Andorra, Monaco, and San Marino.  

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SEPA payment statistics

In the Euro area, the total number of non-cash payments, encompassing all types of payment services, rose by 12.5% to 114.2 billion in 2021 compared to the previous year, with the total value increasing by 18.6% to €197.0 trillion. Cards made up 49% of the total number of transactions, while credit transfers constituted 22%, and direct debits 20%.

In 2021, the volume of credit transfers within the euro area grew by 8.6% to 25.1 billion, and the total value increased by 19.3% to €184.2 trillion. The proportion of electronically initiated credit transfers continued to rise, with a ratio of around sixteen electronic transactions to one paper-based transaction. Direct debits experienced a 5.8% increase to 23.2 billion in 2021, with the total value increasing by 11.1% to €7.3 trillion. Card transactions increased by 17.3% to 56.3 billion, with a total value increase of 14.4% to €2.3 trillion, averaging approximately €40 per transaction.

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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 payment orders between the payer's and payee's banks, while settlement involves the actual transfer of funds between the banks.

SEPA transactions are cleared and settled through various clearing houses, called Automated Clearing Houses (ACHs) or Central Clearing Mechanisms (CCMs). These institutions manage the exchange of payment messages and facilitate the netting of payment obligations between banks. Some examples of ACHs operating within the SEPA region are EBA CLEARING's STEP2 platform and the Eurosystem's TARGET Instant Payment Settlement (TIPS).

Clearing and settlement for SEPA transactions can follow either a bilateral or multilateral model:

• Bilateral clearing: In this model, two banks directly exchange payment messages and settle their payment obligations individually at the European Central Bank. Bilateral clearing acts as the basis for real-time payment settlement where participants maintain a balance with the central bank, enabling instant execution of transactions.
• Multilateral clearing: In multilateral clearing, payment messages are exchanged through a central clearinghouse, which calculates the net payment obligations between participating banks. Given instant payments have yet to achieve full-scale adoption multilateral clearing is the predominant method used within the SEPA region

Once the clearing process is complete, banks settle their payment obligations through a settlement system. In the SEPA area, settlement typically occurs in central bank money, using systems like TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) or the Eurosystem's TIPS (TARGET Instant Payment Settlement) for instant payments. These systems ensure the secure and final transfer of funds between banks, enabling efficient transactions within the SEPA region.

Through implementing various payment schemes, SEPA enables businesses and consumers to benefit from simplified payment processes, faster transaction times, and improved cost transparency. The clearing and settlement systems underpinning SEPA ensure the secure and efficient exchange of payment messages and funds between banks, fostering an integrated payment market within the region.‍

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Account identifiers

An important feature of SEPA is the standardized account identifiers – the International Bank Account Number (IBAN) and Bank Identifier Code (BIC).
The IBAN is the primary account identifier within SEPA, which consists of up to 34 alphanumeric characters. It is a standardized format that includes the country code, check digits, bank identifier, and account number. The IBAN is designed to facilitate the accurate and efficient processing of cross-border electronic payments, as it reduces the risk of errors in money transfers. Here’s a German IBAN as an example: DE23500105177429243846. The first two characters represent the country code, followed by 2 check digits, 8 digit bank code (BLZ code), and a 10 digit code for the bank account number. The structure of the IBAN is consistent throughout SEPA countries but the length varies.

An IBAN must be specified for both credit transfers and direct debits. This standardization ensures that payment transactions are not only processed more efficiently but also completed with greater security. By using the IBAN, the risk of misrouting payments is minimized, thus enhancing the overall reliability of the payment system.

The Bank Identifier Code, or the Society for Worldwide Interbank Financial Telecommunication (SWIFT) code, is the other important identifier. The BIC is an 8 or 11-character alphanumeric code that uniquely identifies a specific financial institution involved in a payment transaction. The code is composed of four parts: the bank code, the country code, the location code, and the branch code. As an example here’s the BIC of HSBC Bank: HBUKGB4BXXX. The first 4 characters specify the bank code, followed by the 2 character country code, 2 character location code, and a 3 character branch code.

The BIC further ensures the correct routing of electronic payments to their intended recipients. While the IBAN identifies the specific account, the BIC is responsible for identifying the financial institution and, if applicable, the specific branch of that institution. Although the usage of BIC is becoming less frequent, it may still be required by some banks, particularly for cross-border transactions.

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SEPA payment schemes

Credit Transfers

SEPA Credit Transfer (SCT)

SEPA Credit Transfer is a push payment, meaning payments are initiated by the debtor. SCTs are mostly one-off payments; however, the debtor can set up recurring SEPA Credit Transfers via standing orders, configured with the bank. SEPA Credit Transfers are commonly used for P2P payments, B2C & B2B invoice payments, salary payments, pensions, and social benefits.

In order to send an SCT, the debtor needs to specify the recipient's International Bank Account Number (IBAN), the recipient's name, and the payment amount. The BIC is not required for SCTs. The maximum single payment amount for a SEPA Credit Transfer is €999,999,999.

Each participant bank applies its own cut-off times to payments. If an SCT is initiated prior to the cut-off, then it will be credited to the recipient account the same business day, else the following business day. SEPA Credit Transfers are processed only on business days. If a payment is submitted on a non-business day, such as a weekend or public holiday, it will be received on the next business day.

For each payment, the debtor can append a reference. Unstructured remittance is commonly used for SCTs. SCTs allow one 140-character occurrence of unstructured remittance 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.

Each bank applies its own rate for SEPA Credit Transfers. Commonly, each transaction costs €0.20.

SEPA Credit Transfers can be recalled for up to 10 business days in the case of a duplicate payment or technical error. In case of fraudulent SCTs, the sender can request a refund for up to 13 months.

All banks & PSPs are required to support the SEPA Credit Transfer scheme.

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SEPA Instant Credit Transfer (SCT Inst)

SEPA Instant Credit Transfer is a push payment, meaning payments are initiated by the debtor. SEPA Instant Credit Transfers are mostly one-off payments; however, the debtor can set up recurring SEPA Instant Credit Transfers via standing orders. Similarly to SCTs, instant credit transfers can be used for P2P payments, B2B & B2C invoice payments, salary payments, pensions, and social benefits.

In order to send a SEPA Instant Credit Transfer, the debtor needs to specify the recipient's International Bank Account Number (IBAN), the recipient's name, and the payment amount. Initially, the maximum transaction amount was set at €15,000. However, in July 2020, the EPC increased the limit to €100,000, expanding the system's utility for both businesses and individuals.

SEPA Instant Credit Transfers are processed instantly  – within 10 seconds, funds should be made available to the receiver – 24 hours a day, 7 days a week, 365 days a year.

For each payment, the debtor can append a reference, for SCT Inst, unstructured remittance is commonly used. SCT Inst allows one 140-character occurrence of unstructured remittance. The reference field should include any relevant information or reference details about the payment, such as invoice numbers or other identifiers that help the recipient recognize the transaction.

Each bank applies its own rate for SEPA Instant Credit Transfers. Commonly, each transaction costs €0.20.

Similarly, SEPA Instant Credit Transfers can be recalled for up to 10 business days in the case of a duplicate payment or technical error. In case of fraudulent SCT Inst transactions, the sender can request a refund for up to 13 months.

SEPA Instant Credit Transfer is an increasingly popular scheme but as banks and PSPs are not required to support it, the coverage is fragmented. To date, 2323 institutions from 29 countries have joined the SCT Inst scheme, which amounts to 61% of financial institutions within SEPA. However, not all banks support the SCT Inst scheme both as an initiating and receiving party, further hampering adoption.

Late last year, the European Commission set forth a proposal for the universal adoption of SEPA Instant Credit Transfers, soon requiring all banks to support the scheme.

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Direct Debits

SEPA Direct Debit Core (SDD Core)

SEPA Direct Debit Core is a pull payment, meaning that the creditor is given approval to collect funds from the debtor account. Direct debits are mostly used by companies to collect recurring payments, such as subscriptions, loan repayments, and insurance premiums from customers. The scheme can also be used to collect one-off payments. SEPA Direct Debit Core scheme is used for both consumer and business-to-business transactions.

To access the SDD Core scheme, businesses must establish a contractual relationship with a bank or Payment Service Provider (PSP) participating in the SEPA region. This relationship enables the bank or PSP to act as a creditor on behalf of the business to initiate direct debit transactions. Businesses must also obtain a Creditor Identifier (CID), a unique reference number that identifies them in all SEPA Direct Debit transactions. The CID is issued by the relevant national authority or central bank, such as Deutsche Bundesbank in Germany.

Prior to initiating the first collection, a mandate needs to be signed by the debtor to authorize direct debit pulls from their bank account. For SDD Core, the mandate can be embedded into the onboarding flow, where users can sign the mandate digitally. The SDD Core mandates must include a mandatory mandate text, specified by the SDD Core rulebook, and the following information:

• Scheme type – SEPA Direct Debit Core
• Unique mandate reference
• Name of the debtor
• IBAN of the debtor
• BIC of the debtor’s bank (can vary by bank)
• The creditor’s company name
• The Creditor Identifier
• Creditor's full address
• Signatures & time of signing

According to the scheme rulebook, the debtor must be notified at least 14 calendar days before a collection unless a shorter notice period is mutually agreed upon. In case of a one-off or first collection, the instruction must be sent to the bank 1 business day prior to the collection date. For subsequent recurring collections, the instruction must be sent to the bank at least 1 business day before the payment due date. The debtor bank can return the collection for up to 5 business days after the collection due date in case of technical errors, such as the debtor account being closed or insufficient funds. In case of returns, the banks apply fees ranging from €2 to €5 per returned transaction that will be passed through to the creditor.

Each bank applies its own rate for SEPA Direct Debit Core. Commonly, each transaction costs €0.20.

The customer is entitled to a refund up to 8 weeks after the account has been debited, in which case the funds will be returned to the debtor automatically without an option to appeal. As for unauthorized transactions, such as collections made without an active mandate in place or collecting an incorrect amount, the debtor can dispute the collection for up to 13 months.

The SEPA Direct Debit Core scheme is not mandatory but is widely adopted by banks across the area.

SEPA Direct Debit B2B (SDD B2B)

SEPA Direct Debit B2B is a pull payment, meaning that the creditor is given approval to collect funds from the debtor account. Direct Debits are mostly used by companies to collect recurring payments, such as subscriptions, loan repayments, and insurance premiums from customers. The scheme can also be used to collect one-off payments. SEPA Direct Debit B2B scheme is used only for business-to-business transactions.

Like with SDD Core, to gain access to the B2B scheme, businesses must establish a contractual relationship with a bank or Payment Service Provider (PSP) participating in the SEPA region. This relationship enables the bank or PSP to act as a creditor on behalf of the business to initiate direct debit transactions. Businesses must also obtain a Creditor Identifier (CID), a unique reference number that identifies them in all SEPA Direct Debit transactions.

Prior to initiating the first collection, a mandate needs to be signed by the debtor to authorize direct debit pulls from their bank account. For SDD B2B, in most cases, the mandate has to be signed in wet ink and a scanned copy of the original physical copy must be sent to the debtor bank for registration. The SDD B2B mandates must include a mandatory mandate text, specified by the SDD B2B rulebook, and the following information:

• Scheme type – SEPA Direct Debit B2B
• Unique mandate reference
• Name of the debtor
• IBAN of the debtor
• BIC of the debtor’s bank (can vary by bank)
• The creditor’s company name
• The Creditor Identifier
• Creditor's full address
• Signatures & time of signing

The customer should be notified at least 14 days before the collection date unless otherwise agreed. A collection must be submitted to the bank at least 1 business day before the due date. The originating bank can return the collection for up to 2 business days after the collection due date in case of technical errors, such as the debtor account being closed or insufficient funds. In case of returns, the banks apply fees ranging from €2 to €5 per returned transaction that will be passed through to the creditor.

Each bank applies its own rate for SEPA Direct Debit B2B. Commonly, each transaction costs €0.20.

In the case of SEPA Direct Debit B2B, the customer is not entitled to a refund after the account has been debited, unless it’s an unauthorized collection. For unauthorized transactions, such as collections made without an active mandate in place or collecting an incorrect amount, the debtor can dispute the collection for up to 13 months.

The SEPA Direct Debit B2B scheme is not mandatory nor supported by as many banks as SDD Core. Similarly, it’s used less as the mandate setup process is cumbersome.

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How Atlar can help

With Atlar, you can access local SEPA payment rails through an API and dashboard via your existing banks.

To save companies from manually managing payments and wasting engineering resources on building direct integrations with banks, we have built the Treasury Operating System that allows you to support SEPA payment schemes – both for credit transfers and direct debits – out of the box.

Given European Commission’s proposal, fuelling widespread adoption of real-time payments, companies must adapt their internal processes and infrastructure. Atlar was built with real-time payment needs in mind. Our Treasury Operating System offers an end-to-end solution for managing payment flows, enabling businesses to initiate credit transfers and direct debits programmatically, automate reconciliation, monitor transactions and balances in real-time, and track the status of payments via webhooks to combat returns and refunds.

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Get in touch

If you’re a company looking to automate payments over SEPA payment rails, we’d love to speak with you! Book a demo here.