SEPA Scheme Participant Application
The Single Euro Payments Area (SEPA) is an initiative of the European Union that harmonises the way cashless euro payments are made in Europe. This harmonisation enables European consumers, businesses and public administrations to make cashless euro payments via credit transfer and direct debit to any place in the EU as well as a number of non-EU countries in an efficient and reliable way. In this manner, there is more competition in the payments industry and lower prices for consumers. This article will guide you through the scheme itself as well as the SEPA Scheme Participant Application process.
The benefits brought forward by SEPA are applicable to all payment service providers, including Electronic Money Institutions and Payment Institutions. Why these financial institutions may want to be part of SEPA? Because this system enables payments to be not only inexpensive but also easy, bringing down the cost of providing payment services. SEPA changed the game for payment service providers as prior to its introduction, transferring money or even paying for purchases in another Euro country took quite long and most importantly, bank charges would lead to the recipient receiving less than anticipated.
Due to regulatory safeguarding requirements and the way they are structured, EMIs and PIs have to segregate client funds into an account with an authorised credit institution or possess insurance or comparable guarantee (which is really rarely used). Because SEPA is a system of payment integration for payment transfers, PIs and EMIs can make use of SEPA by way of either a connection through the commercial bank where client money is held or through the central bank of a SEPA country participant. The lastly mentioned option of connecting through a central bank is quite difficult as requirements of a central bank would be much higher and onboarding process more tedious. The Central Bank of Lithuania is one of the exceptions to this rule. Authorised EMIs and PIs can connect to CENTROlink and offer their clients direct access to SEPA without the need for commercial banks as the “middlemen”.
The region of SEPA consists of 36 European Countries, which includes all EEA countries, Switzerland, San Marino, Monaco, Vatican City State/Holy See, and Andorra. SEPA’s legal framework is based on the Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro and Regulation (EC) No 924/2009 on cross-border payments in the Community. The benefits of SEPA extend from the firms to the customer. This article will guide your firm through the process of a SEPA Scheme Participant Application and how to connect to SEPA.
Types of SEPA Payment Schemes:
- SEPA Credit Transfer Scheme – a scheme for processing credit transfer transactions in Euro. In simpler terms, it is a payment in euro between bank accounts, for example, a large purchase or a prepaid booking for your next holiday.
- SEPA Instant Credit Transfer Scheme – a scheme for processing instant credit transfer transactions in Euro.
- SEPA Core Direct Debit Scheme – a scheme that sets out harmonised rules, practices and standards that allow Payment Service Providers (PSPs) in SEPA to offer direct debit products to their clients. This scheme is a type of pre-authorized, automatic payment that you can set up for your rent or your utilities.
- SEPA Business to Business Direct Debit Scheme – a scheme that sets out harmonised rules, practices, and standards to allow PSPs in SEPA to offer B2B direct debit products to their business clients.
Each of these Schemes has a specific Rulebook and implementation guidelines that offer insight into the SEPA Participant Application process, as well as information on the adherence requirements.
Who can become a SEPA Scheme Participant?
The eligibility of participants and the process of becoming a participant is explained in Section 5.4 of each of the Schemes’ Rulebooks. In order to be eligible as a Participant in any of these schemes, the Participant must continuously, i.e. at all times:
- Be active in the banking services or payment services business;
- It is important to note that this does not necessarily mean that payment services constitute the core of your business but rather, that you are actively engaging in such business activities.
- Be active in the business of providing payment accounts and that of holding the funds necessary for transaction execution;
- Be incorporated and licensed in a SEPA country or be licensed by an EEA regulatory authority;
- Pay debts as they come;
- Be solvent, liquid, and in compliance with capital requirements;
- Be able to meet rating or other ad hoc criteria set by the terms of the scheme;
- Comply with applicable Money Laundering/Terrorist Financing (ML/TF) regulations.
- Be able to participate in one or more clearing and settlement mechanisms (CSMs) so as to provide access to the Scheme throughout the SEPA (A list of compliant CSMs has been provided by the European Payments Council).
- Develop and effect operational and risk control measures adequate to the business undertaken.
Credit institutions authorised in accordance with Article 8(1) of Capital Requirements Directive IV, are among the entities that are deemed to fulfil all of these eligibility criteria. On the other hand, Payment Services Providers listed in Article 1(1) of the PSD2, or EMIs and PIs, are deemed to fulfil the payment services business, authorization, liquidity, ML/TF, and risk control eligibility criteria. The reason for that is the fact that these requirements formed part of their authorisation criteria and are assessed on a continuous basis due to their categorisation as PI or EMI. In addition, State Treasuries are not required to provide evidence of being able to pay debts as they fall due, or of ratings establishing its ability to meet financial obligations.
What else you will need prior to applying to any of the SEPA Schemes?
Apart from being a regulated entity and comply with the abovementioned requirements, you will need to become a SWIFT participant and obtain a sort code issued by the national competent authority (e.g. in the UK it is issued by the Pay.uk, which is the authority responsible for the supervision of national retail payment schemes) that will form part of your IBAN. Since it is not a direct aim of this article to dive into particulars about SWIFT membership or explain how to obtain a sort code we won’t dive into more details on this topic. Although, it is a crucial point and should be borne in mind by each person intending to participate in the SEPA Schemes.
SEPA Scheme Participant Application
With the exception of institutions that automatically fulfil all the criteria under Section 5.4 of each of the Rulebook, other firms are required to address in their SEPA Scheme Participant Application each of the criteria set out in Section 5.4. In the event that an applicant deems one of the criteria as not relevant or applicable to them, they need to provide an explanation with their application. There are a number of the scheme-specific adherence criteria, agreement to which is essential for becoming a SEPA Participant. Any entity that is eligible as per the above criteria can apply to become a participant of the Scheme, even if they are not a participant of the European Payments Council. The “Adherence Pack” documents together constitute the application for adherence to SEPA. It must contain the following documents:
- The Scheme Adherence Agreement
- Schedule to the Adherence Agreement
- Legal Opinion in a Form provided by EPC
- Any additional documentation supporting the Adherence Pack which evidence that the Applicant satisfies the eligibility criteria.
The SEPA Adherence Guide recommends Applicants to submit as much information as possible with their application that demonstrates they fulfil and will continue to fulfil the adherence and eligibility criteria for SEPA. As an example, the following evidence may be submitted:
- The identification of the entity as a financial or non-financial institution (BIC8) and the identification of the institution’s branch (BIC11)
- Payments Activity: Business plans, marketing prospectuses, website details, and annual report
- Payment Accounts: Terms & Conditions for the services offered by the Applicant, evidence of contracts with infrastructure providers or any other Scheme Participants for providing payment accounts
- Regulatory details: proof of being regulated by the national authority, legal opinion from qualified counsel which specifies the laws regulating the Applicant’s activities and confirming that the Applicant is indeed regulated
- Incorporation and authorisation: Certificate of incorporation, copy of the license, legal opinion confirming the Applicant’s incorporation and licensing status
- Solvency: Annual report and accounts not older than one year old accompanied by section in the Legal opinion confirming that the Applicant is not insolvent
- Liquidity and Regulatory Capital: Specification of the liquidity and regulatory capital laws the firm is subject to, a legal opinion confirming the Applicant’s compliance with these requirements, statement of liquidity and capital policies approved by the firm’s governing body, regulatory return
- Anti ML/TF: Statement of the Applicant’s policy and procedures on compliance with ML/TF laws, reassuring that there is no evidence of a breach of such laws, certification of the Applicant’s intention to keep up with future legal developments in this area
- Clearing and Settlement Mechanisms: Evidence of a contract with a SEPA scheme compliant CSM or a Scheme Participant for clearing and settling SEPA-enabled payments, written confirmation by the CSM provider that the Applicant will be reachable by the Readiness Date that has been selected
- Operational Readiness and Risk Control: Letter from the Chief Operational Officer confirming the operational readiness of the Applicant on the selected date, written confirmation by the CSM provider that the Applicant will be operationally ready and applicant evidence of internal procedures for measuring and controlling risk pertaining to participation in the SEPA scheme.
It is also advised that firms apply in due course in order to provide the Secretariat of the EPC with an adequate timeframe to assess the application. In general, applications are assessed within a maximum of 60 days from their receipt.
How can PSP Lab help your SEPA Scheme Participant Application?
If you need help with assessing your eligibility for becoming a SEPA participant and not sure how you need to fill out the SEPA Scheme Participant Application, do not hesitate to contact us. PSP Lab’s experience in the realm of Fintech consulting will not only help you make that assessment but will also assist you in the process of meeting the eligibility and adherence criteria before and after becoming a SEPA Participant.