The Single European Payments Area (SEPA): Implementation Delays and Implications for the United States

Publication Date: April 2007

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The Single European Payments Area (SEPA) is a planned electronic payments system that upon completion in 2010 would allow individuals, small- and mediumsized businesses, and corporations to make electronic payments throughout the European Union as efficiently and safely as such payments are being made on the national level today. However, the implementation process has been plagued with delays. The most recent delay occurred on December 12, 2006, when a vote on the Payment Services Directive was scheduled to be taken. But unresolved regulatory policy issues among member states prevented it from happening. One reason for the delay is pressure from European bankers who are uncertain about their ability to profitably recoup their costs once the system is constructed. The legislative status of the directive is that the President of the European Council is re-drafting it and between July 12 and September 12, 2007, a vote should be taken in the Plenary Committee of the European Parliament.

Congress is interested in SEPA because it has been monitoring the European Union's effort to unify its 27 member countries' financial markets. Congress recognizes that upon implementation of these efforts, such as the EU Financial Services Action Plan (FSAP), the Financial Conglomerate Directive (FCD), and now the Payment Services Directive (PSD), American firms doing business with the European Union could be significantly impacted.

The European payments systems are extremely fragmented. There are 27 national systems governed by national and local laws and practices. On average, the cost of making payments in the EU remains relatively expensive, even though more less-expensive electronic payments are being made, replacing the more costly cash and paper-check payments. European payment services costs include the inefficiencies caused by the use of non-standard customer interface, incompatible formats between foreign and domestic banks, and a low degree of automation in banks' internal systems. By one measure, these inefficiencies and others are estimated to cost the EU between 2% to 3% of its gross domestic product (GDP) (the EU GDP was $13.4 trillion in 2005 which would mean between $268 and $402 billion).

This report presents a brief background on the efforts to create SEPA by the European government and the banking industry. It assesses the current electronic payments systems from the wholesale (large value) level and the retail (small value) level of payments. The report then examines the attempts to develop the panEuropean automated clearinghouse system (PEACH). It summarizes the provisions of the Payment Services Directive that establishes the legal and regulatory basis for SEPA. The last two sections examine the implications of SEPA for U.S. international banks and conclude with an outline of the potential advantages and disadvantages of SEPA for European and American financial services providers.

This report will be updated as developments warrant.