What Is SEPA Direct Debit? And What Does SEPA Mean for Your Business?
The Single Euro Payments Area, or SEPA, is one of the cornerstones of payment infrastructure within Europe. At its heart is SEPA Direct Debit, a financial initiative implemented by the European Union (EU) to simplify euro-denominated transactions across the SEPA zone (more on that later).
In countries where SEPA has been implemented, all euro-denominated payments must be collected via the payment scheme. It is a key component of not just Europe’s but the world’s financial systems.
In this article, we’ll cover what SEPA is, its purpose, and what the SEPA Direct Debit schemes mean for your business, not just now but in the future too. Topics we will discuss include:
- What is SEPA?
- What is the purpose of SEPA?
- How do SEPA payments work?
- Which countries are included in the SEPA zone?
- The future of SEPA: What is SPAA?
What is SEPA?
SEPA, which stands for Single Euro Payments Area, is a Europe-wide payment initiative that facilitates instant payments across the SEPA area. Introduced for credit transfers in 2008 and followed by direct debits in 2009, the SEPA initiative was fully implemented in the euro area by 2014 and in non-euro area SEPA countries by 2016.
The SEPA initiative allows businesses to collect payments directly from a customer’s bank account in the 36 SEPA countries and associated territories.
SEPA Direct Debit refers to two schemes – SEPA Core Direct Debit and SEPA B2B Direct Debit. The differences are as follows:
- The SEPA Core Direct Debit scheme is mandatory for all SEPA banks offering euro-denominated Direct Debit. Core Direct Debit allows consumers to authorise merchants to collect payments from their account, provided the consumer has given a signed mandate or approval. The Core scheme is available to all consumers holding an account at a bank in the SEPA area.
- The SEPA B2B Direct Debit scheme is only available for businesses that collect Direct Debit payments from other businesses, thereby excluding microenterprises and private individuals. The B2B scheme requires the business customer to give a mandate to the business creditor. Compared to the Core scheme, refund rights in the B2B Direct Debit scheme are more limited, reflecting the nature of B2B relationships. Because the B2B scheme is not mandatory, not all banks choose to offer it.
Unless explicitly stated, references to SEPA Direct Debit in this article are to both the Core and B2B schemes.
What is the purpose of SEPA?
The purpose of SEPA payments is to facilitate electronic euro-denominated payments across borders, making it easier for individuals and businesses alike to make and receive payments within the SEPA region.
Building upon the success seen in markets such as Denmark, Finland, Germany, and the UK, the goal of SEPA is to make instant payments the norm across the SEPA area.
SEPA payments aim to make it easy and convenient for citizens and businesses to make payments across Europe with one payment account as easily as they can in their home countries.
The goal is to:
- Achieve widespread availability of instant payments in a fragmented region,
- Harmonise electronic euro-denominated payments, and
- Modernise EU payment infrastructure.
Read more about the purpose of SEPA Direct Debit here: 5 Critical Ways SEPA will Unite Europe with Instant Payments in 2023 (and Beyond)
How do SEPA payments work?
SEPA makes payments within any given member country fast, easy, and inexpensive. By allowing for the direct debiting of any euro-denominated bank account within the SEPA area, SEPA enables account holders to receive direct deposit payments and to issue payments electronically from their bank account – even when paying to another country.
There are three types of SEPA transfers:
- SEPA Credit Transfer
- SEPA Instant Credit Transfer
- SEPA Direct Debit
SEPA Credit Transfer
SEPA Credit Transfers are one-time fund transfers conducted in euros between banks that both have IBAN codes. These transfers are commonly used for consumer purchases within SEPA countries.
Credit Transfers typically take 2-3 business days to complete. Both the issuing and receiving financial institutions must be located in SEPA countries to use SEPA Credit Transfer.
SEPA Instant Credit Transfer
SEPA Instant Credit Transfers facilitate real-time transfers of amounts up to €100,000. This method enables euro-denominated transactions to be completed by any two account holders in the SEPA area with immediate processing at any time, on any day. Instant Credit Transfers are typically completed within five seconds.
SEPA Direct Debit
SEPA Direct Debit is a payment method that allows businesses and individuals to make cross-border collections in euro currency. As mentioned above, there are two main types of SEPA Direct Debit: SEPA Core Direct Debit and SEPA B2B Direct Debit.
SEPA encompasses most European countries, including all 27 EU countries, as well as some non-EU countries. SEPA Direct Debit transfers are the most common way non-EU businesses interact with SEPA accounts.
Provided your business is authorised, SEPA Direct Debit enables you to collect payments directly from a customer’s bank account. This makes SEPA Direct Debit particularly useful for recurring payments such as digital subscriptions.
Which countries are included in the SEPA zone?
SEPA payments are used for euro-denominated transactions across the SEPA zone. The SEPA zone consists of:
- The 27 member states of the European Union (EU),
- The four members of the European Free Trade Association: Iceland, Liechtenstein, Norway, and Switzerland,
- The United Kingdom,
- And Andorra, Monaco, San Marino, as well as Vatican City.
In eurozone countries, i.e. countries using the euro, all bank accounts previously reachable through a national scheme are now reachable via the SEPA payment schemes. In non-eurozone countries, the SEPA schemes are only used for euro-denominated payments. National schemes should continue to be used for payments made in the local currency.
After Brexit: Is the UK still in SEPA?
As of 2024, the UK is still a member of SEPA. In 2019, the United Kingdom was approved to stay involved with the SEPA scheme regardless of a Brexit deal or no deal, as long as the UK continued to comply with the relevant criteria.
SEPA payments between the UK and EU should be treated the same, meaning that post-Brexit UK businesses will continue to be able to make SEPA transfers in euros.
There are, however, a few extra details which are necessary for UK businesses to make SEPA payments:
- SEPA Credit Transfers and Instant Credit Transfers must include the full address of the originator and the BIC code of the Beneficiary Bank.
- SEPA Direct Debit collections from the creditor must include the full address details of the debtor and the BIC code of the Debtor Bank.
Without these additional transcription details, transactions may be rejected.
The future of SEPA: What is SPAA?
SEPA is helping usher in the next generation of open banking payment services in the form of SPAA. SPAA, which stands for SEPA Payment Account Access, is a regulatory initiative within the EU.
SPAA enables third-party providers (TPPs) – e.g. fintech companies and other non-bank entities, such as Brite Payments – to access payment accounts held by banks on behalf of their customers.
Part of the broader framework established by the revised Payment Services Directive (PSD2), SPAA aims to drive ‘open payments’ in the EU by promoting innovation, competition, and consumer protection in the EU payment services market.
Why is SPAA important, and what happens next?
PSD2 introduced new rules and requirements that banks are expected to adhere to. However, the costs of implementing these changes have fallen on the banks, which may be hesitant to invest in consumer protection without a sustainable business model. This, in turn, may discourage them from further innovation in the payment services market. Indeed, even with the advent of PSD3 (the latest revision of the Payment Services Directive), there are still issues to address – read Brite’s recent PSD3 explainer for more information.
To address this issue, SPAA aims to create opportunities for open data access while ensuring banks have adequate incentives to invest in maintaining their application programming interfaces (APIs) and real-time payments infrastructure.
By enabling TPPs to access payment accounts, SPAA goes beyond PSD2 and PSD3, introducing new features and functionalities designed to help drive growth in account-to-account (A2A) payments. SPAA introduces a dispute resolution mechanism for any issues that may arise between consumers, banks, and TPPs. This gives consumers peace of mind knowing they have recourse if there are any problems with their transactions or data sharing.
SPAA marks the beginning of a new phase in the rollout of open banking-based services across Europe. With collaboration between banks and fintechs, as well as widespread instant credit transfers, SPAA will help set the stage for A2A payments to become the main alternative to card payments. Indeed, according to Brite’s Instant Economy Payment Insights report, Pay by Bank (the consumer-facing term for A2A payments) is already one of the top three online payment methods in Europe.
Faster, smarter, and more secure payments with Brite
Want to know more about how you can add instant A2A payments to your payment mix? Or, would like to know how you can make the most of open banking SPAA? Then get in touch with us today, and one of our payment experts will help guide you through what you need to know.
