My Greeting to Functional people! My name is Piyush Srivastava, and I’m working as in functional/Automation for more than 5 years on various projects with respect to Banking and payment domain as a Senior Consultant and SME. Now I’m working in *Luxoft * where I got great chance to upskill myself in better way. I wanted to share some Banking concepts for the Functional people.
With the help of this article, I wanted to encourage you to start using this basic concept in your daily work or at least give it a try it will increase your Banking and payment domain concepts for sure once you start using and looking deep dive with this basic as I will keep adding my knowledge with this type of post which I gathered with my experience in this domain.
SEPA payments:
What Is a Single Euro Payments Area – SEPA?
SEPA, short for Single Europe Payments Area, is similar to SWIFT, however it exists specifically for banking and transfers within Europe. It is much newer than SWIFT, having only been established in the late-2000s.
SEPA payments can only be in euro, unlike SWIFT which operates in many currencies. 28 EU countries in the Eurozone are part of the SEPA zone, along with Monaco, San Marino, four members of the European Free Trade Association – Iceland, Liechtenstein, Norway, and Switzerland, and other non-Eurozone countries including the UK.
To make a payment via SEPA, you simply need a euro account and the IBAN of the recipient - you don’t need a BIC. In terms of the transfer process itself, SEPA payments happen much quicker than SWIFT transfers. A regular SEPA payment may take up to two days to arrive, however a new scheme known as SEPA Instant Payment or SCT Inst is able to process transfers within 10 seconds.
SEPA payments are also much cheaper to make than SWIFT payments. SEPA transactions are required to be processed under the same terms as a domestic payment, so there are little-to-no fees attached to making a transfer. This is in stark contrast to SWIFT payments, which can sometimes cost upwards of £30 in processing fees.
The advantages of a single euro payments area include
● a single system for both domestic and cross-border bank transfers
● allowing cross-border transactions by direct debit, that is to charge directly an account in one country for services provided in another country
● allowing people working or studying in another SEPA country to use an existing account in their home country to receive their salary or pay bills in the new country
● ensuring cheaper, safer and faster cross-border payments and more transparent pricing thanks to the single set of payment schemes and standards SEPA Purpose
● The purpose of the single euro payments area (SEPA) initiative is to make cross-border electronic payments as inexpensive and easy as payments within one country. Also, the system brings more competition to the payments industry by creating a single market for payment services, thus bringing down prices.
● SEPA currently includes 36 members. It encompasses the 28 EU member states along with Iceland, Norway, Liechtenstein, Switzerland, Andorra, Vatican City, Monaco, and San Marino. The single euro payment area remains an ongoing, collaborative process between these parties. SEPA is in the process of harmonizing rules regarding mobile and online payments.
● SEPA is managed by the European Commission and the European Central Bank (ECB) on a collaborative basis, through the European Payments Board. The board is chaired by the European Central Bank, which together with representatives from government and consumer groups, works to govern the board and steer its agenda.
● SEPA credit transfer is a credit transfer in compliance with the European credit transfer standard. It can be used for all types of euro payments within the single euro payments area.
● SEPA credit transfers are usually credited to the recipient on the following weekday at the latest, whereas SEPA instant credit transfers are transferred in seconds within the euro payments area. Whenever possible, most SEPA credit transfers are cleared to other banks in Finland and Europe in real time as SEPA instant credit transfers.
● Real-time payments within seconds
● Payments within the entire euro payments area are becoming faster as more and more banks adopt the SEPA instant credit transfer service to replace standard SEPA credit transfers.
● Funds are transferred and available for use within 10 seconds after the payment is sent 24/7, each day of the year.
● Inter-bank transfers in Finland do not have a euro-based upper limit. Banks from other countries also belong to the Closed User Group that doesn’t apply an upper limit. In the SEPA scheme, the general upper limit is now 100,000 euros.
● The same service is used throughout the SEPA between participating banks.
● The largest banks in Finland and throughout the SEPA have adopted the service, at least so that they accept incoming instant credit transfers. Banks will adopt the service based on their own schedule and will begin to provide the service in stages.
SCT Flow-
Step 1: the Originator Bank receives an SCT Inst Instruction from the Originator. The Originator Bank Then Instantly executes all processing conditions and Funds availability checks. When these validation checks are successful, the Originator Bank Instantly makes a Reservation of the Amount on the Originator’s Payment Account with this information Instantly accessible to the Originator, instantly prepares an SCT Inst Transaction based on the SCT Inst Instruction and puts the Time Stamp in the created SCT Inst Transaction.
Step 2: the Originator Bank Instantly sends the SCT Inst Transaction message to the CSM of the
Originator Bank. Via this message, the Originator Bank gives the authorization to the CSM of the Originator Bank to reserve Funds on its account as cover for the SCT Inst Transaction. This provides upfront settlement certainty.
Clearing function of CSM: out of scope of the Scheme: the CSM of the Originator Bank Instantly reserves Funds from the Originator Bank as settlement cover for the SCT Inst Transaction. The CSM of the Originator Bank Instantly sends the SCT Inst Transaction to the CSM of the Beneficiary Bank.
Step 3: the CSM of the Beneficiary Bank Instantly sends the SCT Inst Transaction message to the Beneficiary Bank. For the Beneficiary Bank, this message under step 3 implies that the Beneficiary Bank has settlement certainty for this SCT Inst Transaction in case the Beneficiary Bank accepts the transaction for further processing.
The Beneficiary Bank: Instantly verifies if it can apply the SCT Inst Transaction to the Beneficiary’s Payment Account and executes various validation checks.
Step 4: the Beneficiary Bank sends the confirmation message to the CSM of the Beneficiary Bank indicating that the Beneficiary Bank
● has received the SCT Inst Transaction and
● is able to Instantly process the SCT Inst Transaction (positive confirmation) or not (negative confirmation with an immediate Reject)
The CSM of the Beneficiary Bank gives a certainty of receipt for the confirmation message that the
Beneficiary Bank has sent.
Clearing function of CSM: out of scope of the Scheme: based on the message received in step 4:
● In case of a negative confirmation: the CSM of the Beneficiary Bank passes on this confirmation message to the CSM of the Originator Bank. The CSM of the Originator Bank releases the reservation of Funds for the cover done between steps 2 and 3.
● *in case of a positive confirmation: *
○ Step I: Out of scope of the Scheme: based on upfront technical arrangements (e.g., a technical acknowledgement, a special designed message) the CSM of the Beneficiary Bank notifies the Beneficiary Bank that the message in step 4 has been successfully received.
○ The CSM of the Beneficiary Bank initiates the final settlement processing for this specific SCT Inst Transaction with the CSM of the Originator Bank
Step 5: only when the Beneficiary Bank has sent a positive confirmation via the message in step 4 and the Beneficiary Bank has the certainty that the message under step 4 has been successfully delivered to the CSM of the Beneficiary Bank, it Instantly Makes the Funds Available to the Beneficiary. The Beneficiary Bank relies on the settlement certainty covered by the message in step 3. The information about the new available Funds is Instantly accessible to the Beneficiary. This action means that the Beneficiary has immediate use of the Funds subject to the Terms and
Conditions governing the use of the Payment Account of the Beneficiary.
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Step II:** out of scope of the Scheme: if agreed with the Beneficiary, the Beneficiary Bank may inform the Beneficiary about the Funds Made Available to the Beneficiary. The information itself and the execution time for such information are not within the scope of the Scheme.
*Step 6: * The CSM of the Originator Bank Instantly reports to the Originator Bank if the SCT Inst Transaction has been successful (or not). The basis for this report is the contents of the confirmation message in step 4 which the CSM of the Originator Bank had received via the CSM of the Beneficiary Bank.
Step 7: in case the Originator Bank receives a negative confirmation about the SCT Inst Transaction which indicates that the Funds had not been Made Available to the Beneficiary, the
Originator Bank is obliged to Immediately inform the Originator. The Originator Bank lifts the Reservation of the Amount made in step 1.
*Step III: * Out of scope of the Scheme: in case the Originator Bank receives a positive confirmation about the SCT Inst Transaction, it formally debits the Payment Account of the Originator. If agreed with the Originator, the Originator Bank informs the Originator about the Funds Made Available to the Beneficiary. The information itself and the execution time for such information are not within the scope of the Scheme.
Settlement function of a CSM: out of scope of the Scheme: when a positive confirmation is received, the amount of the SCT Inst Transaction is included in the Settlement procedure between the Originator Bank and the Beneficiary Bank, and as such credited by the CSM to the Beneficiary Bank during the settlement process.
SEPA vs. SWIFT transfers
When it comes to SWIFT vs. SEPA transfers, the best choice depends mostly on where you’ll be sending the money from, and where you’ll be sending it to. Both networks have the same ultimate goal, to make international payments easier, cheaper, quicker, and safer.
If you need to send euros to a bank account in the EU, using a SEPA transfer would be the wisest choice, as it is quicker and cheaper.
However, if you’re dealing with any currency other than euros, or you’re sending money to a bank account outside of the eurozone, then you won’t be able to use SEPA, so SWIFT would be the best option.
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