SEPA: How Come and What’s Up?



The Single Euro Payments Area (SEPA) is gradually coming into force.  The aim of SEPA is to harmonize the Euro payment market; citizens and corporations in Europe already are able to make Euro payments anywhere within Europe as easily as they make their national payments.  With the first banks launching their SEPA Direct Debit in November 2009, the foundations of SEPA are laid.  It is expected that SEPA will foster greater transparency and competition, resulting in a cheaper and more efficient payments system in Europe. 

To put the development of SEPA opportunities for European firms in a broader context, we discuss the roots of liberalization and deregulation within the Euro Zone, which finally led to the idea of SEPA.  This understanding is essential.  Only in a historical context is it clear that SEPA is not an isolated event, but a small part of a much larger path leading towards the harmonization of the European payment market.  Therefore, firms cannot just seize opportunities overnight in a one-size-fits-all way, but should assess the opportunities as they arise. 

We will show the events leading to the launch of the Euro first, followed by a discussion of the European banking landscape at the turn of the century.  We follow with the Euro payments infrastructure development at the time.  After this, we describe the European Union regulation towards an integrated European payment area.  Finally, we take a closer look at the potential for firms to benefit from competition between European payment service providers.

Towards the Introduction of the Euro


In the history of the development of an integrated European market for goods and services, the introduction of Economic and Monetary Union (EMU) and the Euro as a single currency in 1999-2002 has been thought of as a key factor and a precondition for a European payment market.  (See Figure 1.) Yet, the harmonization of the European money market started earlier.  In 1861, the Portuguese Carlos Morato Roma was the first man known to propose a reform of the European monetary system through the adoption of a common European currency.[iii]

Figure 1: Main Movers European Payment Market  


Nevertheless, it took until 1970, when the Werner Report was published, for the wheels to be set in motion.  This document on monetary integration recommended the development of the European Currency Unit (ECU), a centralized European credit policy, a unified capital market policy, and the gradual narrowing of exchange-rate fluctuations.  In 1977, the European Commission (EC) reactivated it’s efforts at establishing a European Monetary Union (EMU).  These efforts led to the birth of the EMU in 1979.  At that time, few economists gave it much chance of survival.[iv]  It not only survived, however, it grew and prospered.

At the Hannover Summit of 1988, the European  Council agreed to adopt the Single European Act, with the implicit objective of monetary integration.  Mr.  Delors, then President of the European commission, recommended a three-stage plan to coordinate more economic and monetary policies with the intention of creating a European single currency under the stewardship of a European Central Bank.  The three stages in de Delors plan incorporate the coordinating economic policy, achieving economic convergence and finaly the adoption of the euro, the EU’s single currency. This report was known as the Delors Plan.

The first stage of the Delors Plan began in 1990, and the European Council convened in Maastricht in 1991. There the Heads of State signed the Maastricht Treaty, which set out the tough economic convergence criteria that had to be met to qualify for the single currency.  Next, the currencies of the non-participating countries (pound sterling, the drachma, and the escudo) were brought into the exchange-rate mechanism (notably, the pound sterling left the mechanism not much later).  The second phase of the Delors plan was fuelled in 1994, with the creation of the so-called European Monetary Institute (EMI). 

It was decided in May 1998 that 11 EU countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) satisfied the convergence criteria.  Greece met these criteria very soon afterwards, so that it was ready to introduce the Euro on January 1, 2002 as the twelfth country.  Also in 1998, the European Central Bank (ECB), the successor of the EMI, was erected.  It became operational in 1999.

The final stage of the Delors Plan, the adoption of the Euro, started on January 1, 1999.  The parity rates were fixed irreversibly.  As a consequence, national currencies were simply denominations of the Euro, but continued to be used as a matter of convenience.  Full monetary union came into existence on January 1, 2002 when the Euro was introduced in its physical form and when the national currencies were taken out of circulation.  At this time, Slovenia (2007), Cyprus (2008), Malta (2008), and Slovakia (2009) have joined the Euro Zone, with EU members Denmark and the Baltic countries legally pegging their currencies to the Euro. 

There are many implications of the Euro adaptation.[v] The Euro led to reduced transaction costs (due to less need for currency conversion and hedging), simplified cash management, reduced cost of borrowing, provided greater price competition, increased standardization of products, improved ability to compete, and simplified accounting and financial reporting.  Yet, two items were not covered by the Euro.  The first was the integration of the banking sector, which could be resolved by the second, the infrastructure in the Euro arena.  To these items SEPA would contribute. 

The Drive for Competition Between Banks


The “Lisbon Agenda” of 2000 aimed to make the EU the most dynamic and competitive knowledge-based economy in the world by 2010.  One of the key goals of the Lisbon Agenda was to increase the competitiveness of both the European businesses and the financial sector.  This competitiveness is achieved through the adoption of common technical standards and of common business practices.  This effectively requires a Pan-European payment arena. 

One of the general goals of the EU was to generate competition between service providers and have a level playing field across all aspects of the financial services industry throughout the Union.  Introducing open, non-proprietary, and independent standards for an integrated payment area would generate new levels of competition.  Payments services providers would seek more cost-efficient solutions and, thanks to common standards, customers would be better able to see pricing differentials between payment services providers. 

To get a better understanding of the need for a single payment infrastructure in Europe, it is interesting to note the greatly segmented banking landscape of the Euro Zone in 2002.  As an example, Table 1 shows the market shares of foreign branches and subsidiaries in the different national markets in 2002. 

Table 1: Market Shares of Branches and Subsidiaries of Foreign Credit Institutions as a Percentage of Total Assets of Domestic Credit Institutions (as of year-end 2002)













































































































Source: European Commission (2004)

With Luxembourg as an exception, the countries all had a market share of 25% or less of foreign banks or other credit institutions.  For the Euro Zone as a whole, foreign banks on average had a market share of less than 15%.  This low average mainly reflects the very low market shares of foreign banks in the largest Euro Zone countries (Germany, France, Italy, and Spain) which were typically less than 10%.  This lack of integration of the banking sector contrasted greatly with other sectors of the economy.[vi] 

Although EU regulation has become evermore effective, the presence of foreign banks has not grown remarkably in most (old) EU countries.  Also, many EU countries already have a high concentration of banks (for example, Sweden, Belgium, and Portugal), with apparent additional growth from 2002 until recently.  Furthermore, apart from a small but growing number of notable exceptions, M&A activity largely takes place within national boundaries.  An early example to the contrary was the Swedish/Finnish Merita Nordbanken merger of 1998

Euro Payment Infrastructure Development


Another item not covered by the introduction of the Euro was the EU payment infrastructure.  Parallel to the introduction of the Euro, regulation was implemented to liberalize, deregulate, and harmonize financial markets and institutions with the aim of cutting the costs of cross-border payments.  In the past, cash flows between European countries were obstructed by high transfer payments by banks.[vii] With intra-EU cash transactions, often both the payer and the receiver were charged.  Maybe almost as bad, there were administrative burdens as well.

In a discussion paper[viii] published in 1990, the then European Commission made it clear that establishing an equitable payment infrastructure within Europe was critical to the success of its overall goal: “The prospect of economic and monetary union which will lead to a further increase in intra-community trade makes it all the more urgent to ensure that Europe is equipped with structures which provide as cheap, as rapid and as reliable a payments service between different Member States of the Community as already exists within them.”

Shaping this vision into reality, several EU directives were implemented concerning the deregulation of the financial markets and institutions.  In 1993, the second banking coordination directive[ix] came into force.  Part of this directive was the “Single Banking License” that made it possible for banks that were authorized in one European country to establish affiliates in the other member states.  This made it possible for foreign banks to become domestic and to issue financial instruments without having limitations because of their country of origin.  This led to more international competition on markets that were previously considered to be only domestic, but competition still remained low. 

Furthermore, in 1997, the EU imposed legislation to reduce the European banking tariffs,[x]  As a consequence, European banking tariffs were indeed reduced, but differences remained.  Even after the introduction of the Euro, cross-border retail payments were still more costly than national ones.[xi]  (See Table 2.)  In some countries, there were significant entry barriers to banks moving into the sector, including access to payment systems and credit databases.  Also, the cost of joining clearing systems for interbank payments in some countries was prohibitively high.  To overcome these problems and develop a new pan-European payment infrastructure, the disparity between legislation, systems, and standards across Member States and the European financial community had to be eliminated. 

Table 2: Cross-border Payment Cost-raising Factors














1.  Anticompetitive behavior by banks


2.  Structural problems within markets


3.  Market failures


Source: De Grauwe (2005)

It was only when the introduction of the Euro was secured that the political attention turned to making improvements to a fully integrated payments market.  It was understood that greater integration in the financial markets was crucial to the success of the Euro and the European Economic and Monetary Union.  The Financial Services Action Plan (FSAP) was published by the EC in 1999 and endorsed by the Lisbon Council in 2000.  The FSAP represents the European agenda to create an integrated financial marketplace by 2010.  One of the key components of the FSAP and the Lisbon Agenda was the Single Euro Payments Area, or SEPA for short. 

In order to achieve the given goal, in June 2002 the European Payment Council (EPC) was set up.  The EPC is recognized as the decision-making and coordinating body of the European banking industry in relation to the implementation of SEPA.  Its primary purpose is to support the creation of SEPA.  The EPC is a self-regulatory body encompassing more than 65 European banks, including the three European credit sector associations (among them the European Associations of Corporate Treasurers) and the Euro Banking Association. 

The EPC’s primary deliverables are the development of SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) “Schemes.” These schemes are a set of core inter-bank rules, practices, and standards around which banks can compete to offer credit transfer and direct debit products to their customers and potential value-added services at a national community level.  Furthermore the EPC is responsible for the development of the SEPA cards framework.  This framework spells out high level principles and rules which, when implemented by banks, schemes, and other stakeholders, will enable European customers to use general purpose cards to make Euro payments and cash withdrawals throughout the SEPA area with the same ease and convenience as in their home country.

EU Regulation and ECB Pressure


As of 2001, the EU started to develop regulation to ensure that the vision of SEPA would be realized as the first regulation came into force.[xii]  At that time, the basic principle was adopted that fees applied to payments must be the same regardless of sender or recipient account location within the EU.  This regulation covers card payments, cash withdrawals, and credit transfers. 

In 2005, after extensive discussions with the various SEPA stakeholders (banks, companies, trade associations, and consumers), the European Commission issued its proposal for the Payments Services Directive (PSD), the underlying legal framework for the creation of an EU-wide single market for payments.  The PSD is the necessary legal framework in which all payment service providers will operate.  In April 2007, the European Parliament adopted the PSD proposal and it came into force on December 25, 2007.[xiii]

The first SEPA pan-European payment instruments became operational parallel to domestic instruments on January 28, 2008.  The PSD had to be transposed into the national legislation by all EU Member States by November 2009 at the latest, and only Sweden will not be able to implement the PSD in 2009.  Expectations are that SEPA could become fully operational by the end of 2010 and hopes are to attain a critical mass of SEPA payment instruments by the end of 2011.  However, this is still a major challenge.  In July 2009 – almost one and a half years after the SCT launch – only 4.4 % of credit transfers used SEPA standards.[xiv] The economic slowdown may influence the speed of parties implementing SEPA solutions.  However, it also seems that some parties recognize that the opportunities of major efficiency gains and cost savings are quite welcome in these uncertain times. 

In order to have the usage up, three types of payment have to be realized with SEPA:

(1) SEPA Credit Transfer (SCT) – already accepted by most clearinghouses, but the uptake by the market is slow.

(2) Card payments – to be effective a European card scheme is needed.  At the moment,  several card schemes have been developed, however, no initiative is underway to take one of the schemes to the market.

(3) SEPA Direct Debits (SDD) – the first banks will be ready for SDD as of November 2009 and the SDD schemes will be fully realized by November 2010.

Furthermore, the development of frameworks for SEPA E-payments, M-Payments, and E-invoicing can speed up the use of SEPA payments.  An E-payment is an internet banking payment, with payment confirmations arriving in real time.  An M-payment is initiated on a mobile phone and could be used for both proximity and remote transactions.

In September 2009 the ECB identified six actions to be completed by all stakeholders (EU and national authorities, industry and users) over the next three years, following six priorities:[xv]

(1) Foster migration;

(2) Increase awareness and promote SEPA products;

(3) Design a sound legal environment and ensure compliance;

(4) Promote innovation;

(5) Achieve standardisation and interoperability; and

(6) Clarify and improve SEPA project governance.

SEPA Potential for Firms


Financial market integration is urgent for the EMU to function smoothly, mainly so that it can function as an insurance mechanism enabling adjustment to asymmetric shocks.  Substantial impediments that have led to a situation in which the banking sector within the Euro Zone is among the least integrated sectors of the economies continue to exist.

First of all, because of the open standards, it becomes easier for customers to switch between banks.  Indeed because of the open standards, the consumer-to-bank communication is the same throughout Europe and no changes are needed in the customer’s software.  Secondly, even more important, in principle, it is possible to reach any bank account in the Euro Zone with only one bank relation/account.  Without SEPA, in order to properly serve business partners abroad and to provide them with local and familiar payment services, a firm had to maintain at least one bank account per country where it was active.  Because of the open standards of SEPA this is not needed anymore.  Thirdly, yet not part of the basic SEPA agenda, automation of accounts payables and receivables will change the payment industry.  Standardized interfaces and payment related messages, E-invoicing, and E-reconciliation will save a lot of money.   

In short, competition will increase because payments institutions will be able to offer their propositions, products, and services throughout SEPA more easily, which will provide customers with more choice and therefore lower prices and lower internal administrative costs.  Although the implementation of and migration to SEPA has been slow, SEPA is with us and will continue towards full realization (albeit perhaps not by the end of 2010).  Firms that adapt to the new standards in time may reap strategic benefits in terms of cost and speed.  This may even enable greater revenues, if suppliers and customers also enter the payment chain.

Wim Westerman is a fellow of the University of Groningen’s Center for International Banking, Insurance and Finance. Joris Barbas is a Business Analyst at Deloitte Financial Advisory Services where he works on strategic SEPA implementations.




[i] Joris Barbas studied business administration at the University of Groningen, the Netherlands.  Currently he is employed as a Business Analyst with Deloitte Financial Advisory Services in Amsterdam where he advises firms on a strategic SEPA implementation.

[ii] Wim Westerman is a fellow of the University of Groningen’s Center for International Banking, Insurance and Finance.  Wim specializes in treasury management, capital budgeting, and management control in the Netherlands, the rest of Europe, and South Africa.

[iii] J. L. Cardoso,  “A Proposal for a European Currency in 1861: The Forgotten Contribution of Carlos Morato Roma,” History of Political Economy 36(2): 273-293 (summer 2004).

[iv] B. Eichengreen. and C. Wyplosz. “The Unstable EMS, Brookings Papers on Economic Activity 1 (1993): 51.

[v] R. Grant. and S. Goldberg, “Euro Benefits for Cash Management,” Journal of Corporate Accounting and Finance. 18(1): 29-32 (2006).

[vi] P. De Grauwe. Economics of Monetary Union. (Oxford: Oxford University Press, 2005).

[vii] H. Von Eije. and W. Westerman, “Multinational Cash Management and Conglomerate Discounts in the Euro Zone,” International Business Review. 11(4):. 453-464 (2002).

[viii] European Commission, Making Payments in the Internal Market, COM (90) 447:1, 26 September 1990. 

[ix] European Commission, The Banking Coordination (Second Council Directive) Regulations 1992.

[x] European Commission, Council Directive 97/5/EC on Cross Border Credit Transfers, OJ EC L43, 14 February 1997.

[xi] Grant. and Goldberg,. “Euro Benefits,” 29-32.

[xii] European Commission, Regulation 2560/2001 of the European Parliament and of the Council of 19 December 2001 on Cross-border Payments in Euro, OJ L 344, December 28, 2001.

[xiii] European Commission, Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on Payment Services in the Internal Market, OJ L 319, December 5, 2007.

[xiv] European Central Bank, “SEPA in Use, available at

[xv] European Commission, Completing SEPA: a roadmap for 2009-2012, COM(2009)471 Final, September 10, 2009.

[xvi] De Grauwe, Economics of Monetary Union.