Stepping Closer to SEPA

The Continent is moving closer to attaining a Single European Payments Area (SEPA) with the announcement by EBA Clearing—a private, Paris-based provider of euro clearing services, including the pan-European ACH service—that it is spearheading a project to develop a pan-European direct debit system. According to the firm, 59 major payments banks with operations in Europe already have signed on to the project and agreed to help develop the new infrastructure (see list below).

The service, which is slated to go live in mid-2007, will enable banks to offer customers direct debit services ahead of the creation of SEPA in January 2008. According to EBA Clearing, the service will allow 500 million European Union citizens to purchase goods and services using the same direct debit product in any EU country.

Despite a common currency, Europe still is fragmented in its use of payments instruments, relates Daniel Szmukler, head of communications for EBA Clearing. With regard to direct debit, each country can have a different definition of the procedure, he explains. The European Payments Council, a group comprised of bankers and banking associations, tackled this problem at the cross-border level and created a more comprehensive definition of what constitutes a direct debit. Initially, the scheme created by the organization—dubbed the Multi-purpose Pan-European Direct Debit service, or M-PEDD—will support domestic debit and then extend to more-advanced features, such as electronic bill presentment and payment (EBPP).

According to Szmukler, M-PEDD will operate using EBA's existing infrastructure for pan-European ACH. "Doing cross-border direct debit complements [this system] and is a natural fit," he says.

The original 59 banks will help fund the project. Szmukler relates that working groups will be developed to make sure systems are able to support and process direct debits as well. "The banks on board are major payments banks and want to put a strategic stake in this area to remain competitive and reach across Europe," he says.

A European Instrument

Although M-PEDD will operate on essentially the same rails as EBA Clearing's credit transfer business, the payment instrument is being built almost entirely from scratch in accordance with SEPA requirements. "It is being developed based on the needs of the European market," notes Szmukler. "The banks have made it clear [that M-PEDD] is a European instrument."

Still, at least two U.S. banks with major international operations—Citibank and JPMorgan Chase—are funding the project. "Multinational U.S. banks ... will benefit operationally" from a unified direct debit scheme, Szmukler asserts. "Each of the subscribing banks sees a chance for cost reduction. Today, cross-border direct debit is done by correspondent bank relationships—the costs are quite expensive." With M-PEDD, banks will have a legal framework for initiating direct debit payments, Szmukler points out.