1. Is SEPA a Boon or Bane to Banks? Page 1 of 7
Abstract............................................................................ 2
SEPA Compliance – The New Mandate for Banks............................. 2
Key Challenges.................................................................... 4
Conclusion......................................................................... 5
References ........................................................................ 6
About the Author ................................................................. 7
About L&T Infotech .............................................................. 7
contents
Is SEPA a Boon or Bane to Banks?
A U T H O R : S W A P A N P A L I T

2. Is SEPA a Boon or Bane to Banks? Page 2 of 7
Abstract
Post the global financial crisis, as banks struggle to survive and grow, SEPA presents an
impending opportunity to increase their customer footprint. SEPA compliance is becoming a
mandate, and while banks have to satisfy a number of requirements to become SEPA-
complaint, it is best for them to seek support from external entities to assess their
requirements and work out the right strategy for compliance.
Transition to SEPA remains the foremost concern today with the European Parliament and EU
Council imposing mandatory uptake deadlines for SEPA-compliant Credit Transfers (SCTs) and
SEPA-compliant Direct Debits (SDDs). As per the SEPA migration report published by ECB in
March 2013, payment service providers are lagging behind with preparations for SCTs and
SDDs.
While SEPA offers a number of benefits and opportunities, it also brings up a number of issues
that banks must deal with. To address these issues, banks will have to effectively collaborate
with their customers and accordingly develop innovative products and services that can
provide a viable source of income as well as a sustainable competitive advantage.
Specifically, banks need to engage with their corporate clients if they are to realize wider
opportunities made available by SEPA.
SEPA Compliance – The New Mandate for Banks
In the aftermath of the global financial crisis, as banks struggle to survive and grow, it has
become imperative for them to focus on their business fundamentals like profitability and
client relationship management. Hence, banks have increasingly begun looking for ways to
reduce operational costs, improve client retention and acquire new customers. In such a
scenario, SEPA compliance presents an impending opportunity to increase customer footprint
through superior value proposition, lower costs and simplified processes.
SEPA or the Single Euro Payments Area is a payment-integration initiative of the European
Union for simplification of bank transfers denominated in euros. The project deals with the
implementation of the Euro across Europe and consists of a series of initiatives that attempt
to eliminate the difference between cross-border and domestic euro payments.
In order to accomplish its goal, SEPA has introduced a set of common instruments and
infrastructure for retail payments along with a set of rulebooks and frameworks that govern
the working of the same. These instruments, infrastructure and standards together allow
users to make both domestic and cross-border euro payments across Europe under the same
terms and conditions. Under SEPA, it will be possible for users located anywhere in Europe to
make euro payments anywhere across Europe using a single bank account and a single set of
payment instruments.
One of the key benefits that SEPA offers to banks is the ability to use the same instruments
and infrastructure to make payments across Europe irrespective of their location within the
continent. This means that a bank operating in multiple European countries can now follow a
single set of standards for euro payments across all these countries. In other words, all its
systems across different European countries can now speak the same language. This
standardization and simplification of payment processes can result in huge operational
savings. Further, a common set of payment standards also offers an opportunity for banks to
expand business and offer their euro services to customers located across Europe. Banks will
be able to offer their euro services to anyone in the SEPA region (subject to licenses and
regulatory approvals). This in turn will result in higher revenues for the banks and better
products and services for end users. Ultimately, it may lead to foreign banks entering new
countries, leading to increased competition, improved interest rates for consumers and wider
choice of access across Europe.

3. Is SEPA a Boon or Bane to Banks? Page 3 of 7
Transition to SEPA remains the foremost concern today with the latest SEPA newsletter
estimating the share of SEPA-compliant Credit Transfers (SCTs) and SEPA-compliant Direct
Debits (SDDs) as a percentage of the total volume of credit transfers and direct debits
generated by bank customers at 38.2% and 2.3% respectively. This consistently low uptake
record resulted in the European Parliament and EU Council imposing mandatory uptake
deadlines for SCTs & SDDs last year. A deadline of 1st February 2014 has been set for Euro
area countries while the deadline for member states with other currencies has been set to
31st October 2016.
SEPA compliance is a mandate for a bank that wishes to offer euro payment services to
customers in a SEPA country with all its payment products and back-office payment processes
meeting the new SEPA requirements set out by the SEPA Rulebooks. The following
requirements have been defined by the European legislation and SEPA Rulebooks:
 Become SEPA Scheme Participant by signing the respective Scheme Adherence Agreement
 Become operationally ready to process SEPA compliant payments
 Connect to a SEPA-compliant PE-ACH so that the bank is reachable to any other bank in
the SEPA region, and similarly, is able to reach out to any other bank in the SEPA region
In order to become operationally ready, a Bank needs the following solutions:
 Software for processing SEPA Credit Transfer and SEPA Direct Debit payments
 Software for converting and validating IBAN and BIC formats
 Software for connecting and integrating various stakeholders in the payments value chain
In addition to the above, in order to exploit the various benefits that SEPA offers, banks might
also opt for the implementation of a payment services hub that would enable them to process
all payments from a central location.
An AT Kearney study suggests that many banks had initially underestimated the challenge of
renewing payment applications with the necessary industrial strength to last. Further,
according to the research, most banks today are seeking to strengthen their applications by
using converters or are unveiling completely new applications. Also, some banks are taking
SEPA as an opportunity to reconsider their payment and collection strategies.
In our opinion, in order to fully explore benefits that SEPA can offer, banks should seek
external support; a partner capable of studying their requirements, determining their state of
readiness, evaluating various strategic options and identifying the right strategy for SEPA
compliance.
SEPA migration varies from country to country and as per the SEPA migration report published
by ECB in March 2013, Payment Service Providers (PSPs) are yet to complete preparations for
SCTS and SDDs. Limited progress has been noticed for both, SCTs and SDDs, in making
customer servicing channels SEPA-compliant. In fact, progress of preparation for SDDs is even
lower than that of SCTs. This is a major area of concern since all payment orders that are not
submitted to the respective PSP in the formats stipulated by the SEPA Migration End-date
Regulation will be rejected by the PSP. After the migration end date, banks will no longer
transfer non-compliant payments to clearing houses and failure to use the SEPA-compliant
format will result in unnecessary delays and costs for the bank’s customers.

4. Is SEPA a Boon or Bane to Banks? Page 4 of 7
Key Challenges
Banks implementing SEPA are being confronted with a number of issues today. Major concerns
include:
 The need to replace revenue lost from lower cross-border transaction charges
 Meeting the cost of compliance
 Dealing with new competitors
In order to address these challenges, banks will have to collaboratively work with their
customers and develop innovative products and services that cater to all customer
requirements. While banks reconnect with their customers, understand their requirements
and address them, they will also have to ensure the new products and services create
sustainable competitive advantage and a viable source of income for themselves. Learning the
art of effectively cross-selling products to different customer groups will also be very
essential. In other words, SEPA is forcing banks to become more innovative and efficient in
managing their payments businesses.
SEPA offers a plethora of opportunities that enable banks to grab significant corporate market
share. Banks can take maximum advantage of the situation to expand their business and cater
to customers across Europe while simultaneously reducing costs by using a single set of SEPA
instruments and simplified payment processes. Additionally, by offering various value-added
services like e-invoicing and e-reconciliation, in conjunction with the SEPA instruments, banks
can significantly improve the value proposition of their offerings.

5. Is SEPA a Boon or Bane to Banks? Page 5 of 7
paymentnotification
Debtor Bank
CustomerCustomer
Creditor Bank
paym
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ABC Company
Country A
ABC Comapny
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Collections
management
Mandate
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One or more
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e-invoice
Creditor mandate flow
Fund
management
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Service
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ERP System
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standingorder
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mandate
Consider a scenario where a bank offers a number of value-added services like mandate
management, invoice processing, payments reconciliation and fund management in addition
to basic payments and collections processing in an outsourced payment factory-style setup.
In the SEPA world, such an arrangement would not only decrease the corporate burden but
would also provide a viable source of income to the bank. Once migration to the new SEPA
payment instruments is complete, banks will be able to increasingly shift their focus towards
offering such additional optional services that can be built on the foundation of these SEPA
instruments.
Conclusion
SEPA is by no means the end of payment regulation in Europe. Authorities are already
planning additional regulations. For example, the Payment Services Directive (PSD) is
currently being reviewed by the Commission. SEPA also needs to be leveraged and introduced
to new sectors of the economy such as e-commerce and m-payments. This would offer more
opportunities for banks to build and offer innovative products and services that will enable
them to grow and acquire new customers. Furthermore, such developments will also give a
new impetus to SCT and SDD as payment methods and improve their uptake. While ’change’ is
soon approaching, Building Societies need to carefully consider their payment strategies
against the backdrop of this shifting European landscape.

6. Is SEPA a Boon or Bane to Banks? Page 6 of 7
Abbreviations and Acronyms
EU European Union
ECB European Central Bank
SEPA Single Euro Payments Area
PE-ACH Pan-European Automated Clearing House
SCT SEPA-compliant Credit Transfer
SDD SEPA-compliant Direct Debit
IBAN International Bank Account Number
BIC Bank Identifier Code
PSP Payment Service Provider
PSD Payment Services Directive
GUI Graphical User Interface
References
SEPA Migration Report, ECB, March 2013
Banks Preparing for SEPA, Issues to Be Addressed to Achieve SEPA Compliance, Updated
Version, EBA
SEPA – Information for IT providers, Version 1.0, September 2009, EPC
Are Europe’s Banks ready for SEPA and Beyond, AT Kearney
SEPA Newsletter, April 13, EPC
SEPA: Reaping the benefits of strategic payments management, CSC

7. Is SEPA a Boon or Bane to Banks? Page 7 of 7
About the Author
Swapan Palit is a Senior Consultant in the payments space with L&T Infotech.
He has been with L&T Infotech since 2006 and brings along an overall
experience of over 10 years in IT and financial services. He has extensive
experience in requirements management and has successfully executed various
payment-related assignments. Swapan has an MBA from San Diego State
University, USA. He is also an AIPMM Certified Product Manager.
About L&T Infotech
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