SEPA vs SWIFT and TARGET2

SEPA vs SWIFT: How SEPA compares to SWIFT and TARGET2

Need to send money overseas? Unless you jump on a plane with a suitcase full of cash, you are likely to use a bank or money transfer service to send your funds to an international destination. And this means you are also likely to come across the main international payments systems used: TARGET2, SWIFT and SEPA. They all share the same goal - providing secure cross-border money transfers - but differ across parameters such as coverage and speed.

In this short explainer, we will set out the main differences between SWIFT and SEPA, and we will also cover TARGET2. For each of these payment networks we will look at how they work and which transactions they are best suited to.

What is SEPA?

The Single Euro Payments Area (SEPA) is a EU payments initiative aimed at harmonising electronic euro payments in Europe. The scheme, which is overseen by the European Central Bank, has introduced 3 core elements that enable this harmonisation of money transfers within the SEPA region:

shared financial standards,
shared financial procedures,
and shared infrastructure.

These enable consumers and businesses to make international money transfers in euro with the same convenience as domestic payments.

The main goal of SEPA is to turn national markets in the Eurozone into a single, Europe-wide market by improving the efficiency of cross-border money transfers.

Banks that support SEPA payments either have direct relationships with other banks, set intermediaries, or use a ‘settlement account’ at one of the national central banks within the SEPA region. This set up enables seamless SEPA payments across international borders.

The geographical scope of SEPA currently covers 36 countries and territories: the 27 EU member states plus the UK, Iceland, Norway, Liechtenstein, Switzerland, Monaco, San Marino, Andorra and the Vatican City State. 146 billion electronic SEPA payments are made every year between participating banks and payment services providers.

What is SWIFT?

SWIFT is an acronym for the Society for Worldwide Interbank Financial Telecommunications, one of the largest financial messaging systems in the world. At present, SWIFT connects 11,000 institutions across more than 200 countries and territories.

SWIFT is used by banks worldwide to communicate information on financial transactions in a secure and standardized way. The SWIFT network does not actually transfer funds, but instead it sends payment orders between institutions’ accounts. Unless banks have a direct commercial relationship with each other, a SWIFT payment will need to go through an intermediary bank.

Key differences between SEPA and SWIFT?

Although SEPA and SWIFT are used for the same purpose - transferring funds across borders - there are numerous differences between the two schemes. The key differences are in costs, delivery time and coverage.

SWIFT and SEPA: costs

The fees can differ for both, but in general the cost is lower for a SEPA transfer than a SWIFT transfer.

The cost of an international transfer conducted according to SEPA standards should never exceed that of a local transfer. This means that in most cases, SEPA transfers are free of charge.

By contrast, a SWIFT payment is typically more expensive. That is because SWIFT payments are usually passed through multiple intermediary banks, where additional costs are added.

SWIFT and SEPA: delivery time

In terms of time, SEPA credit transfers - the standard form of SEPA payments - are completed in one business day. There are also SEPA Instant credit transfers, which are processed in seconds, although not all banks signed up to the SEPA scheme offer this type of transfer (take a look at this detailed SEPA Instant explainer to find out more).

By contrast, a SWIFT payment can take several days to be processed. Again, this is due to the fact that in most cases multiple intermediaries are involved.

SWIFT and SEPA: coverage

The SEPA system, created by EU lawmakers, exists only within Europe. The SWIFT system, however, works worldwide. Moreover, SWIFT supports all currencies whereas SEPA only facilitates transfers in euro.

This means that a payment in euro to a bank located in Europe will most likely be a SEPA transfer. But if funds are sent to a bank in Singapore, for instance, the transfer will be made through the SWIFT system since SEPA is not supported there.

What is TARGET2?

Another cross-border payment scheme financial institutions use is TARGET2. TARGET2 is the leading European settlement and clearing platform for processing large-value payments. More than 1,700 banks use TARGET2 to initiate transactions in euro. Taking into account branches and subsidiaries, more than 55,000 banks worldwide can be reached via TARGET2.

With TARGET2, central banks and commercial banks can submit payment orders in euro to the platform, where they are then processed and settled in the central bank money (i.e. money held in an account with a central bank). Payment orders are settled one by one on a continuous basis with immediate finality.

TARGET2 is used by central banks and commercial banks for monetary policy transactions, interbank payments and commercial payments. Every five days, TARGET2 processes a value close to the entire GDP of the Eurozone, which makes it one of the largest payment systems in the world.

How does TARGET2 compare with SEPA?

With TARGET2, there is no upper or lower limit to transaction value and the transfers are made using central bank money. Therefore, TARGET2 mostly processes large-value payments and is frequently used to carry out monetary policy operations in the euro area.

Meanwhile, SEPA Credit Transfers have a maximum transfer limit of €999,999,999.99 (one cent short of one billion euros), while the SEPA Instant scheme limits transactions to €100,000.

In respect to transaction time, both TARGET2 and SEPA Instant transfers are immediate, while SEPA Credit Transfers usually take one business day. However, the SEPA Instant scheme operates 24/7 all year round while TARGET2 is available between 8 a.m. and 7 p.m. Monday to Friday, with the exception of some official holidays such as New Year's Day and Labour Day.

Choosing between SEPA and SWIFT

Ultimately, both SEPA transfers and SWIFT payments come with advantages and disadvantages for institutions and end users. SWIFT transfers can be made in every continent, while SEPA payments are limited to within the Eurozone. On the other hand, SEPA transfers are typically free of charge, and are processed much more quickly.

If you are a fintech, bank, or PSP, the key to success is to offer the widest range of payment options to your customers and their end users. For some, speed might be critical. For others, the broadest reach might be the priority. The ability to handle both SWIFT and SEPA transfers will maximise your flexibility and allow you to offer the broadest range of options. If you are interested in adding SEPA payment to your offering, the Paysolut SEPA Gateway module gives you access to SEPA via simple API calls.

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