What it means
Before SEPA, a euro payment from one country to another could be slow and costly, with each country using its own formats and rules. SEPA created shared standards so that the same payment instruments work in all member countries.
The area includes the European Union and several other European countries that have joined the scheme. The main SEPA products are the credit transfer, where the payer pushes money, the direct debit, where the payee pulls money with the payer's authorisation, and the instant credit transfer, which settles in seconds.
Payments are identified by an IBAN (International Bank Account Number), and the bank is identified by a BIC, a bank identifier code. For a company, the benefit is simplicity.
A business can collect customer payments in several countries by direct debit using a single bank account and a single mandate system, and can pay suppliers across the area without the high charges of an international wire. Treasury teams can centralise euro payments and reduce the number of accounts they hold.
Note that SEPA covers payments in euros only. A payment in another currency, even between SEPA countries, is not a SEPA payment and may still be slow and expensive.
Local rules on documentation, such as direct debit mandates and refund periods, also need to be understood before collecting from customers. The scheme rules are managed by the European Payments Council and are enforced through regulation, so banks must meet the standards.
Businesses should check that their accounting and payment software supports the required file formats, which are based on XML (a structured data format). Finally, SEPA rules affect timing and cash planning.
Standard transfers normally settle within one business day, while instant transfers settle within seconds, so treasury teams can choose the speed they need. Knowing the cut-off times at your bank helps avoid payments missing the day's processing window.
In practice
Real-world examples.
Example
A German online retailer sells to customers in France, Spain and Italy. It collects payment by SEPA direct debit from one bank account in Germany. The finance team no longer needs local accounts in each country, which saves account fees and reduces reconciliation work.
Example
A Dutch manufacturer pays suppliers in Portugal and Austria every week. The treasurer switches from international wires to SEPA credit transfers. The payments arrive within a business day and cost a fraction of the previous fee.
Example
A subscription software firm based outside Europe opens a euro account to receive SEPA payments from European clients. Customers can pay as they would a local supplier. The firm sees a rise in successful renewals because customers no longer face unexpected bank charges.
Formula
Calculation
Monthly saving = number of payments x (old cost per payment - SEPA cost per payment)
Suppose a company makes 1,500 supplier payments a month. Under its old setup each cross-border wire cost an assumed EUR 12, giving 1,500 x 12 = EUR 18,000 a month. A SEPA credit transfer costs an assumed EUR 0.50, giving 1,500 x 0.50 = EUR 750. The monthly saving is 18,000 - 750 = EUR 17,250, or EUR 207,000 over a year. These fees are illustrative assumptions, since actual bank charges vary.Case study
Seen in the real world.
Linden Craft Supplies is an illustrative, fictional wholesaler of art materials that sells to shops in eleven European countries. Before adopting SEPA, it kept seven euro accounts to receive local payments and paid for each one in fees and staff time.
The finance manager consolidated the receipts into one account and moved customers to SEPA direct debit. Monthly account fees fell by about EUR 1,400, and the weekly cash reconciliation, which used to take two days, took half a day.
The change also improved cash forecasting because direct debits settled on known dates. The illustrative lesson is that standardised payment rails can bring savings in people's time as well as in bank fees.
Watch out
Common mistakes.
- Assuming a payment in any currency between European countries is a SEPA payment, when SEPA applies only to euro payments.
- Forgetting that SEPA direct debits need a valid signed mandate from the customer, which can lead to refunds and disputes.
- Using the wrong format in accounting software, so payment files are rejected by the bank.
Questions
People also ask.
What is the difference between an IBAN and a BIC?
The IBAN identifies the individual account, while the BIC identifies the bank, though the BIC is often no longer needed for payments inside the area.
Is a SEPA instant payment the same as a normal SEPA transfer?
No, an instant transfer is a separate scheme that settles within seconds at any time of day, whereas a standard transfer usually settles by the next business day.
Does SEPA apply to businesses outside Europe?
A foreign company can use SEPA if it holds a euro account with a participating bank, which lets it receive and send payments under the same rules.
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