EU's Sepa scheme stalls without regulation

LONDON – November 2 marked the deadline for the launch of the Single Euro Payments Area (Sepa) for direct debits. But the scheme, ostensibly designed to harmonise payments throughout the European Union's single market, has been slow to take off. Evidence suggests that, while Sepa and its EU legislative vehicle the Payment Services Directive (PSD) should create a variety of benefits - everything from updating outdated legacy systems to increased industry competition and consumer choice - neither the regulators nor the industry have rushed towards its adoption.

The political and market benefits of Sepa, such as furthering EU convergence, breaking barriers to competition, and benefiting consumers through greater choice and the removal of fees, have not translated into a sufficient business case for those banks who need to replace generations-old legacy systems. One UK bank reportedly still uses a system designed to operate in pre-decimalisation pounds, shillings and pence. Operational risks probably abound in such systems, which are rich in potential for fraud, payment errors and inefficiencies, but the high cost of replacing these platforms is a significant cause of industry sluggishness - without the regulatory stick provided by migration deadlines.

"Error rates in bank account details, where validation has not taken place at the point of capture, can be as high as 8%. This can result in rejected payments and have a negative impact on administration costs and customer service," explains Jonathan Williams, director of strategic development at Experian Payments, a UK-based payments software firm. "An effective data-conversion service will validate bulk bank account details and will ensure bank account errors are minimised, reducing the cost of correcting the information and improving straight-through processing and working capital. Those planning to make use of Sepa will benefit from greater efficiency in terms of consolidating their systems and rationalising the number of bank accounts they hold, as well as having a common standard for direct debit transactions in euro countries."

The issue of migration end-dates was highlighted in June this year in a European Commission consultation paper. In September, the Commission produced a roadmap encouraging close co-ordination with the European Central Bank to define business rules and set technical standards for the industry - a welcome development, but also one that could be said has taken too long to come about. Deadlines for the full industry switchover to Sepa-compliant payment systems would apply to November's introduction of direct debits, and to credit transfers, which were rolled out amid great fanfare by the EC in Brussels on January 28, 2008 but passed barely noticed by the industry.

"These developments are a result of the Sepa project stalling," says Paul Styles, product marketing manager for ACI Worldwide, a Sepa-compliant software vendor. "Without strong customer demand, achieving Sepa through self-regulation remained problematic. Appropriate levels of regulation would help the progress of Sepa implementation and help deliver the much-needed clarification for the financial services industry and its corporate customers."