SEPA Payments Guide: Everything You Need To Know

The Single Euro Payments Area, known as SEPA, is a payment system developed by the European Commission, the European Central Bank, and European banks.

SEPA was created to fully harmonize electronic Euro payments across Europe.

It allows European consumers, businesses, and public administrations to make cross-border payments denominated in euros, as easily as they would do domestic payments.

The story of SEPA began in 1999 when the banking industry argued that a monetary union should also have a single payment area.

The view was that it would lead to further integration of the EU economies.

However, it was not until 2007 that the European Union passed the Payment Services Directive forming the legal basis for the establishment of the Single Euro Payments Area.

Since then, SEPA has been gradually improved to minimize the cost of SEPA payments, increase fee transparency, and speed transfer.

What is SEPA Payment?

Any SEPA payment must satisfy the following two conditions: it must be a payment denominated in Euro, and it must be a cross-border payment within the SEPA zone, i.e. within the group of countries applying the SEPA payment system.

There are two types of SEPA payments:

• Credit transfer – it is a one-time electronic payment between banks located in the SEPA zone. More than 20 billion SEPA credit transfers are executed every year.
• Direct debit – it is an automatic recurring payment set up to transfer funds to the same beneficiary according to a predefined frequency. Direct debit is subject to the payee signing and returning a mandate to the beneficiary to which the recurring payment is made. Once in place, the direct debit will ensure that you don’t miss a payment, so it is ideal for rent, electricity bills, and other regular payments.

How does a SEPA Payment work?

SEPA utilizes the International Bank Account Number (IBAN) to enable transfers between bank accounts.

If you’ve heard about SWIFT transfers, it works similarly with the only difference being that SEPA transfers are only for Euro payments within the SEPA zone.

Let’s take a look at the example below:

Your German client, banked with Deutsche Bank in Germany, gives instructions to pay EUR15,000 to your bank account with BNP Paribas in France.

Because both banks are based in the EU and the payment is in euros, the payment can be processed using SEPA.

Scenario 1 – Both banks have a direct commercial relationship

The SEPA message issued by Deutsche Bank will be directly addressed to BNP Paribas and the funds are transferred directly between the two banks as follows:

• Deutsche Bank will debit your German client’s bank account by EUR15,000.
• Deutsche Bank will credit EUR 15,000 to its Nostro account opened with BNP Paribas. The Nostro account is the marker of the direct commercial relationship between the two banks. To put it simply, a Nostro account is an account opened by one bank in the books of another bank for the sole purpose of executing international transactions.
• BNP Paribas will debit EUR 15,000 from Deutsche Bank’s Nostro Account.
• BNP Paribas will credit EUR 15,000 to your bank account, minus any fees charged for the transfer.

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