From Format to Content: Taking standardisation to the next level?
by Bart Van Buggenhout, Senior Product Manager e-channels, International Cash Management Division, KBC Global Services
The implementation of both the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD) has supplied the technical and regulatory foundations to level the European playing field for payments. We at KBC’s International Cash Management Division detect through our customer contacts that this outlook towards standardisation in payments is welcomed by international corporate customers, public administrations and financial institutions alike. Europe’s current payments landscape – a complex patchwork of local standards to be adhered to – limits re-use of cash management and payments infrastructure, necessitating costly investments and maintenance for all parties involved.
First step: format standardisation
One of the major potential benefits of the introduction of SEPA for corporate customers lies in a side-effect at the technical level: the European Payments Council (EPC) has decided to deploy the ISO 20022 (UNIFI) message standards for the exchange of information between parties in a SEPA transaction. (See Figure 1.)
The ISO 20022 message standards define how to structure eXtensible Mark-up Language (XML) files to exchange payment-related messages between customers and their banks. The EPC defined the SEPA Data Formats as a valid subset of the ISO 20022 message standards and highly recommends that corporate customers use these SEPA Data Formats to initiate SEPA payments at their banks. And all corporate customers using SEPA are doing this, or are they? This subject is often touched upon by KBC’s consultants in international cash management during customer visits.
Format versus content?
To answer that question it is important to realise that today’s SEPA transactions are not ‘new’. As they aim to replace existing country-specific payment types, we can distinguish two SEPA subtypes:
- Cross-border SEPA transactions: replacing cross-border payments in EUR between participating SEPA countries
- Domestic SEPA transactions: replacing domestic payments in EUR (~95% of payments volumes within the SEPA zone)
Both SEPA subtypes can be described using the EPC’s SEPA Standard Formats. The distinction between them lies deeper and is situated at the content level. The differences at that level are driven by the historical implementations of payment-related functionalities.
Cross-border transactions are – by definition – exchanged between countries. This exchange called for international agreements on format and content, resulting in a working but – compared to domestic payments – basic set of functionalities supported by all participants. The EPC’s SEPA Standard Formats in their pure form cover in full this basic set of functionalities.
It has always been the goal for SEPA, however, to replace current domestic payments as well. In order to build SEPA volumes – and ultimately replace traditional domestic payments – it had to be ensured that domestic business processes would keep functioning properly within a SEPA context. Some countries therefore decided to agree on country-specific implementations of the EPC’s SEPA Standard Formats to enable continuation of existing domestic functionalities within a SEPA context, as e.g.:
- Structured communication used for reconciliation purposes
- Company identification identifying an involved party
These agreements have been documented in country-specific ‘Implementation Guidelines’ and apply to domestic SEPA transactions. (See Figure 2.) However limited the pick-up of SEPA may currently seem, reaching this volume has partly been made possible through the existence of these Implementation Guidelines. If we look e.g., at the transaction volumes for KBC in Belgium at the start of 2010 we see that ~25% of credit transfers are SEPA payments, predominantly domestic SEPA credit transfers of course.
Everybody agrees that the support of domestic functionalities within the SEPA context is required to make the adoption of SEPA possible in the short term. It needs to be clear however that – limited in number as they are – these country-specific rules will ultimately need to disappear to achieve the ‘S’ingle in SEPA.