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What is Single Euro Payments Area - Case Study Example

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The researcher of the following paper highlights that SEPA stands for “single Euro payments area”. This is the policy particularly for all the citizens residing in Europe to make and receive all payments in Euro only. SEPA covers a wide geographical area…
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What is Single Euro Payments Area
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What is SEPA? Defining SEPA SEPA stands for “single Euro payments area”. This is the policy particularly for all the citizens residing in Europe to make and receive all payments in Euro only. SEPA covers a wide geographical area, as it is applicable in Switzerland, Iceland, Norway and Liechtenstein along with 27 member states of European Union. The basic conditions, rights and obligations of exchanging payments within Europe, between two countries or within a country, will remain the same, irrespective of the location of such transactions taking place. This has a definite impact on all the payment transaction chain within the EU states, towards making and receiving Euro payments under the SEPA payment schemes and standards. All citizens, corporate, banking institutions, public administrators will be effected by this scheme......(1) Several financial services challenges came to the forefront during last one decade in all the European countries and SEPA came into existence during the period, 2002-2005 to solve some of the outstanding payment problems. Background of events that lead to SEPA formation During the year 1999, Euro was introduced along with the Economic and Monetary Union, for all EU member countries. The introduction of Euro was aimed to achieve the political and economic goals of European commission, for having a single European market, where Euro could move freely between the member countries. However, the introduction of Euro was not sufficient to create a single financial services market. Hence, EU commission launched a financial strategy named as “financial Services Action Plan” (FSAP) in the year 2000. This step was taken in the direction of creating a single payment area where all transactions by all the citizens of the EU member states can freely and safely make all cross border payments, in a way similar to making transactions in their own country. While FASP formulated 42 rules for this purpose, the new International Accounting System (IAS), the Markets in Financial Instruments Directive (MIFID) and Basel II are some of the important measures taken under FASP. Various important European financial players held a meeting in March, 2002 to discus the progress of FASP and take it forward for making a single Euro-zone payments infrastructure. While representatives attended this meeting from 42 European banks, European Banking Association, Others concerned with payments issue also attended The plan to introduce SEPA was launched in this meeting, where the European Payments Council (EPC) was also created for proper guidance and implementation of SEPA. This council has members mainly from banks, credit institutions and banking associations.....(2) Benefits and achievements of SEPA The aim of SEPA is to make payment transactions all over the Europe as easy and safe as making the same within the national boundaries. This will mean improved cash flow, common payment standards, simplified processing of payments and quick settlements with reduced costs across all markets. However, as the integration is under progress currently, once these achievements are realized, SEPA will benefit enormously all the living people throughout EU countries. SEPA Data Format based on international ISO standards has laid the guidelines for credit transfers and direct debits under SEPA schemes formulated by European Banking Industry. In this direction the SEPA credit transfer scheme was successfully launched in Jan 2008. Eu member states have set a timeframe deadline of Nov. 2009 to adopt common legal payments framework. It is also the time frame for launching SEPA direct debit schemes, decided in principal by EPC. Also a new SEPA Cards Framework has been principally agreed and same is being implemented by banks for their various card schemes............................(3) While dealing with the guidelines for transforming multiple national payment systems and cross border payment system into a single payment structure similar to what exists in a single country, EPC face certain tough challenges to achieve this reality.Mr. Gerard Hartsink, the EPC chairman has mentioned the greatest challenges of 2005 as getting commitments to SEPA cards and cash frameworks..............(4) Adaptation of New Legal Framework for payment services and its guidelines for the end users, was yet another achievement of EU commission, in the year 2005, along with SEPA schemes framework as formulated by EPC. Following is the road map of EPC to implement SEPA schemes for making it a viable, easy, safe and cheap option for all types of financial transactions throughout European Union. (Source: Primary, EPC--- Secondary: gtnews.com, Special report, SEPA available at: http://www.gtnews.com/feature/112.cfm) SEPA goals Various EU members attended a meet in Lisbon to formulate an agenda which has aimed at making the EU market as the most competitive knowledge based economy, internationally. However, this will require the integration of all Euro financial and payments markets. Therefore, SEPA is seen as the most important step for realizing this goal that will make European economy strong internationally. While doing so, SEPA will direct the competition in the payments and financial service sector to the benefit of consumers. European Commission has conducted a recent study on the payment systems and according to its findings, SEPA has a potential to bring in benefits up to Euro 123 billion, spread over a period of six years, which will benefit the users and consumers of this payment system, in general................(5) Changes envisaged by SEPA Following changes in the payment systems are noticed with SEPA regulations being in place: Before SEPA, all EU countries had their own national or local solutions to payment transaction system. However, this will be replaced now with system solutions that will be common to all EU member states. Various EU countries had their own laws that were different to each other with varied payment instruments, standards and consumer laws. With SEPA in place, there will be common core payment systems that are legal in all EU member countries, thereby having single consumer law and simplified payment transaction as well as consumer protection laws. While doing business across borders, in the pre-SEPA, the consumers faced the risk of complex laws and systems, this has been reduced by introducing SEPA, resulting in almost no complexity and treating all SEPA payments as domestic.....(6) European Payment Council and SEPA EPC has been involved in formulating and launching the SEPA guidelines and regulations, as it has been the brainchild of EPC only. All payment systems are coordinated by EPC , as it is the decision making body of the European banking industry. Hence, it felt the urgent need for a unified payment system that is applicable to all EU members as one common legal entity. Therefore, THE European Payment Council was formally established to monitor the launching of SEPA, in the year 2002. AS EPC expanded its operations in this direction, it had 74 members from various European countries representing banking associations, at the end of year 2008. While acting on the roadmap guidelines prepared by EPC for 2004-2010, EPC has achieved the following: SEPA credit transfer scheme, for Euro payments, was launched in 2008, involving around 4300 banks, in 31 countries, which handled almost 95% of the European payment volume. SEPA core Direct Debit Scheme as well as SEPA Business to Business Direct Debit scheme has been approved by EPC to be launched in Nov. 2009. 31 countries have moved jointly to formulate single international standards with the launch of SEPA credit transfer, the banks of these countries are deploying for the first time in the world financial area, a new global data format named as ISO 20022 XML-message standards. Creation of single bank identification account number and international bank account identifier based on global ISO standards Have been agreed by EPC and it will be known as “BIC” and “IBAN”......(7) Treasury Management- SEPA Various business models and instruments have been created under SEPA for corporate treasury. Some of these are discussed below: SEPA instruments All SEPA instruments for credit transfers and direct debits shall be applicable to all Euro payments within EU/EEA + CH member states, without any amount limitations. A uniform Global Data Format under UNIFI ISO 20022 SWIFT XML specifications, which is mandatory for inter-bank use and suggested for using as an interface between the client and bank. The transfer of credit is cheap and economical as no deductions are done, resulting in the full amount transfer of the credit to the beneficiary. The transaction cycle is of maximum three business days, from order to receipt of payment. Codes for all types of payment system details are uniform for all countries within EU. This also means the same code for return reason. Foreign currency payments and those payments involving transaction outside EU/EEA are not covered under SEPA. While same day, urgent payments are not covered by SEPA, steps are under consideration to formulate “priority Euro Payment” scheme .......................(8) Payment directives and SEPA schemes The European Union payments directive is a legalized simple and harmonious text that identifies the basic rules and responsibilities within the payment systems. While the directive was initially made for the consumer within EU, its scope has been widened to include corporate clients in its fold. Later on it was felt that the payment directive should be an important fpart of SEPA guidelines as without it the cross border direct debit cannot be legally authenticated. While SEPA schemes and this directive have a lot in common, there may be some conflict between the coverage of schme rules and the EU payment directive. However, SEPA and banks are working to make it a smooth operation, for including the directive within the scope of the SEPA schemes. Processing flow time cycle –steps involved in transactions for the time cycle of 3 business days. (Source: European Payment Council, Doc EPC 222-07, 24th June, 2008 SEPA BUSINESS TO BUSINESS DIRECT DEBIT SCHEME RULEBOOK, available at: http://www.europeanpaymentscouncil.eu/documents/EPC222_07%20SDD%20B2B%20RB%20v1%201%20Approved.pdf page 29) SEPA—direct debit transfers Transfer from creditor to debtor bank to be done electronically, together with first direct debit. In addition, creditor dematerialization is essential. Signed direct debit mandates form the basis of collection mechanism. Value added services on debit authorization can be offered by the debtor bank, while not being obliged to check the mandate. Data elements like unique identification numbers or creditor identifier, mandate number or IBAN and BIC. A draft proposal was introduced in Sept. 2006, to facilitate transmission of electronic signature data of the relevant mandates...............(9) These characteristics associated with the SEPA cards schemes and other payment systems, will further simplify the direct debit and credit transfer operations. This will make such operations simpler, easier and harmonized,, within a legal framework. As SEPA is covering almost all EU countries, the transaction and payment system will be international, but just like a domestic deal, across these European borders. Schematic diagram showing collection of direct debits (source: European Payment Council, Doc EPC 222-07, 24th June, 2008 SEPA BUSINESS TO BUSINESS DIRECT DEBIT SCHEME RULEBOOK, available at: http://www.europeanpaymentscouncil.eu/documents/EPC222_07%20SDD%20B2B%20RB%20v1%201%20Approved.pdf page 39) SEPA and the corporate world As corporate world starts realizing the benefits of the SEPA regulations, they will opt for those banking systems that offer them payment services and other facilities as per SEPA guidelines. This will be or the benefit of the corporate business itself as commercial guidelines of SEPA will include faster payments, simplified treasury management, improved and efficient cash flow. However, corporate world is slow in picking the benefits of SEPA as EPC and banks did not involve the business representatives while formulating SEPA regulations. Hence, there may be a genuine lack of awareness in the corporate world on the developments within SEPA. However, an initiative from the corporate world to understand the SEPA regulations and start working under this umbrella, sooner than later, will be most beneficial to the business houses themselves.....(10) SEPA opportunities for corporate world Corporate houses have started realizing the benefits and opportunities thrown open by SEPA, towards better payment realizations on reduces costs. Some of these opportunities are: Easier to follow, accounts and liquidity structures. Centralized AP/AR structures on fast route. Collection via PEDD, centralized Shared services centers and fast payment centers. The following are some of the benefits for the corporate world while dealing within SEPA. All domestic payment environments can be transferred into a single standardized regional environment. Those corporate that have huge presence and transactions in European payments or Euro, will be largely benefits while working under SEPA guidelines. Reconciliation is improved and easier within SEPA as the information about the orderer and its reference is transmitted fully. With the uniform mandate handling and legal framework, various administrative hurdles vanish. While the payment incoming dates and other time cycles are clearly defined, with proper and clear period for execution or cancellation of payments; the cash flow management improves with better liquidity planning and improved working capital management as well as efficient treasury management.........................(11) SEPA and Corporate banks As Banks are the major players within SEPA, any corporate customer would like to be secure and assured that no uncertainties are involved while dealing through SEPA instruments. In this direction, the following facilities are highlighted. There is no force and time frame to change from the national instruments to SEPA instruments as these can be phased out in a smooth manner by the client. Both the national as well as SEPA schemes shall be covered during the transition phase. Banks will deploy single window payment solutions for collection of Euro and non-Euro payments, as all processing will be done through this window only. The global data format in XML will be processed by the bank and there is no need for the client to change to this “corporate to bank format”. Banks are committed to early change over to SEPA instruments, with proper development of relevant solutions, which will make it easier for corporate world to change over to SEPA..................(12) The European Central Bank has an important role within EPC to engage various European banks in the transition process for realizing the EPC roadmap. With the active participation of clients and corporates, SEPA will be having full-fledged operations towards efficient treasury management. (Source Convergence of new business model , SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, Available at http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf) SEPA compliance Banks need to be SEPA complaint in order to receive and make payments and offer other services within this payment system to all countries that adhere to SEPA guidelines. Therefore, the banks have to meet the new requirements of EPC, by adopting SEPA rules and procedures. This will include the front office jobs of the banks towards the offer of various payment products and the back office work of payment processing and clearing as well as settlement mechanism. This will also involve the active participation of other banks. Hence, the communication guidelines in this direction should be followed by the banks while adopting SEPA schemes. The EPC rule book as well as SEPA guidelines define clearly various standards set for different legal areas like message standards, execution time, payment cycles, collection of information about payment as well as its transmission. EPC has formulated an adherence agreement, which should be signed by each bank to become SEPA compliant. In simpler terms it means that every bank should be reachable by any other bank, within SEPA, by 1st. Jan 2008. Every banking community and association in a particular EU country should get this agreement signed by its banks/members in order to make reach-ability faster and easier.......(13) In this direction, time deadlines have been setup to implement various SEPA schemes. This includes compliance of SEPA guidelines for card schemes by 23rd. March 2008 and compliance with SEPA rules for self-assessments of infrastructures etc. by 25th. April 2008......(14) _________________________________________________________ BIBLIOGRAPHY In-text citation references: (1)Making SEPA reality http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf page1 (accessed on 17th April 2009) (2)Summary and background SEPA, Everything You Need to Know , 17th Jan 2006, available at:http://www.gtnews.com (accessed on 15th April 2009) (3)Take payments to the next level, available at : http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf ( accessed on 15 April 2009) (4)Progress in 2005: SEPA Scheme Rules and EU Payments Directive, available at http://www.gtnews.com/feature/112.cfm (accessed on 16th. April 2009) (6) SEPA vision, http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf ( accessed on 15 April 2009) (5) SEPA, Vision and Goals, available at: http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf page 10( accessed on 15 April 2009) (7) European Payment Council—towards our single payment area http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf page 13( accessed on 17th April 2009) (8)Convergence of new business model , SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, Available at http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf) pages 5-6 (accessed on 17th April 2009) (9)Convergence of new business model , SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, Available at http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf) pages 6-7 (accessed on 17th April 2009) (10) corporate involvement in SEPA http://www.gtnews.com/feature/112.cfm (accessed on 16th. April 2009) (11) Cash management –benefits for corporate SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf pages 8-9, ( accessed on 18th April 2009) (12)Cash management –benefits for corporate SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf pages 12, ( accessed on 18th April 2009) (13)Banks preparing for SEPA available at; http://www.ebaportal.info/_Download/EBA Insight/EBA061001_Banks_Preparing_for_SEPA.pdf page 5 ( accessed on 19th April 2009) (14)Use of and compliance with SEPA available at http://www.ecb.int/paym/sepa/html/index.en.html (accessed on 19th April 2009) Sources used http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf page1 Summary and background SEPA, Everything You Need to Know , 17th Jan 2006, available at:http://www.gtnews.com Take payments to the next level, available at : http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf Progress in 2005: SEPA Scheme Rules and EU Payments Directive, available at http://www.gtnews.com/feature/112.cfm SEPA vision, http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf European Payment Council—towards our single payment area http://www.sepa.si/slo/Publikacije/2.0_Making_Sepa_a_Reality.pdf Convergence of new business model , SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, Available at http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf corporate involvement in SEPA http://www.gtnews.com/feature/112.cfm Cash management –benefits for corporate SEPA and implications on corporate treasury, ATEL conference, 7th June, 2006, http://www.atel.lu/atel/fr/conferences/reunions/20060607/ATEL%2007%2006%202006.pdf Banks preparing for SEPA available at; http://www.ebaportal.info/_Download/EBA Insight/EBA061001_Banks_Preparing_for_SEPA.pdf Use of and compliance with SEPA available at http://www.ecb.int/paym/sepa/html/index.en.html Read More
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