What are the different types of SEPA payment?

We break down the differences and advantages of SEPA Credit Transfer, SEPA Instant Credit Transfer and SEPA Direct Debit Transfer. Which one do you need to offer?

SEPA payment types for banks and fintechs: a short introduction

Scaling financial services in Europe is much smoother than in other regions. Why? Well, there's the regulatory alignment which makes cross border growth within the European Union simple.

But another huge factor is the Single Euro Payments Area, also known as SEPA. This scheme, which is overseen by the European Central Bank, enables cross border payments within the European Union and beyond. These payments operate just like domestic payments. In this way, SEPA provides a level playing field for cashless euro payments across the 36 participating countries, making life easier for participating financial institutions, and for merchants and consumers.

SEPA scheme countries and territories

The SEPA scheme covers 36 participating countries within and beyond the European Union.

There are 3 main types of SEPA payment (also known as SEPA bank transfers). However, not all SEPA payments are created equal. There are differences in the way they are handled, the speed of transactions, who can process these payments and more. In this short article, we'll look at how each payment type works, and what the main advantages and disadvantages are. We'll cover the 3 main types of payments:

  • SEPA Credit Transfer,
  • SEPA Instant Credit Transfer (also known as SEPA Instant),
  • and SEPA Direct Debit Transfer (also known as SEPA DD).

How does the SEPA Credit Transfer work?

The SEPA Credit Transfer (or SCT) is the most basic of the three payment types. Simply put, SCTs are electronic payments in euro from one payment service provider (PSP) to another.
Most commonly used for one-off payments, this type of payment can also be used for setting up recurring payments (standing orders).

What are the advantages of SEPA Credit Transfers?

This biggest advantage is that the SEPA Credit Transfer is the most widespread of the 3 types of SEPA payment. This is an option that's available to all PSPs connected to the SEPA network (If you are not sure whether your partners are part of the SEPA scheme, check the Register of Participants.)

Executing an SCT usually requires the bare minimum of information - you just need the name and IBAN of both the sender and the recipient.

An additional advantage lies in the usage of the ISO20022 XML format, which allows for more information to be sent alongside the payment. This additional data can be used to provide your clients with expansive analytics and reporting. It's worth noting that all forms of SEPA payment use this format.

What are the disadvantages of SEPA Credit Transfers?

Overall, SEPA payments are relatively quick for cross border payments. For example, SEPA transfers take less time than SWIFT. While a SWIFT transfer can take as many as 5 days, SEPA Credit Transfer typically takes 1-2 business days.

Nevertheless, one of the downsides of using SEPA Credit Transfers is that they are still a slower form of SEPA payment. Transfers are usually completed within 1-2 business days. And note that this is business days - SCTs aren't processed on weekends or evenings.

How does SEPA Instant Credit Transfer work?

The SEPA Instant Credit Transfer scheme (also known as SEPA Instant or SCT Inst) has been available since 2017. As the name suggests, this is a version of the SEPA Credit Transfer that prioritises speed.

What are the advantages of SEPA Instant Credit Transfers?

Clearly, the big advantage of SEPA Instant is the speed.
According to the European Central Bank, these transfers are available 24/7, including on weekends and holidays.
The funds should be cleared by the recipient’s bank or payment service provider (PSP) in 10 seconds or less. This speed is achieved by directly linking the PSPs of the payee and the recipient, with no additional parties in the middle.
And because the transaction is finalised moments after it is processed, these payments carry no settlement risk.
Naturally, SEPA Instant is very popular with merchants and end users. As a fintech, giving your customers access to this rapid service can improve your value proposition.

Take the case of My EU Pay. They're a fintech that provides multi-currency virtual IBANs and European virtual accounts. My EU Pay noticed that their marketing campaigns had better engagement once they included SEPA Instant in their offering.

What are the disadvantages of SEPA Instant Credit Transfers?

One thing to have in mind is that both payment providers involved in the transaction (the sender's and the recipient’s) need to be signed up to SEPA Instant Credit Transfers. The confusing part is that not every institution that is a member of the overall SEPA scheme offers SEPA Instant Credit Transfers.

As of May 2020, the number of banks and PSPs offering SEPA Instant was over 2,000. That's already more than half of all SEPA members.

Up until quite recently, another drawback of SEPA Instant was the €15,000 transaction limit. However, in July 2020, this limit was increased to €100,000, providing more freedom to companies handling high-value transfers.

How does SEPA Direct
Debit Transfer work?

SEPA Direct Debit Transfer (or SDD) is a common scheme for recurring payments in Europe.

From the end users' perspective, these direct debit payments work similarly to a recurring card payment. The main difference is the way these transfers are initiated. In the case of direct debit payments it is the recipient initiates the payment, requesting the funds to be transferred from the sender.

Here's how it works:

  • The recipient organises something called a "mandate". This is basically a contract between them and the payer, and includes all the details about the direct debit.
  • The payer agrees to the mandate.
  • The recipient can now initiate payments on a regular basis, according to the terms of the direct debit.

What are the 2 types of SEPA Direct Debit Transfer?

There are 2 forms of SEPA Direct Debit Transfer: one is designed for transactions between merchants and customers, and the other is best for business to business transfers.

  • SEPA Core Direct Debit (SDD Core): this form is designed for payments between end users and merchants.
  • SEPA B2B Direct Debit (SDD Business): as the name implies, this form is designed for payments between two businesses.

What are the main differences between these 2 forms of SEPA Direct Debit?

There are 3 important areas of difference you should be aware of: recipients, refunds, and verification.

  • Recipients: Unsurprisingly, with SDD Business transfers both parties must be business entities, not individuals. There are no restrictions on who can give or receive SDD Core transfers.
  • Refunds: With SEPA Core Direct Debits, the payer can request refunds. These can be requested up to 8 weeks after the payment was made with no reason needed. After this period, refunds can still be requested for up to 13 months after the transaction if the buyer can prove the direct debit was unauthorised (for example, if the mandate is missing or invalid). With SEPA B2B Direct Debits, no refunds are available once the transaction has been authorised.
  • Verification: With SDD Business, the PSP must verify the mandate before it collects any money, while in the case of SDD Core no prior verification is needed.

What are the advantages of SEPA Direct Debit Transfers?

From the point of view of customers, anyone familiar with UK Direct Debits (or any other country-specific direct debit scheme) will find SDD simple to understand. All SDDs happen directly between PSPs, with no card networks in-between, so the transactions are smooth for customers.

This also means transaction costs remain low, a big plus for merchants. SEPA Direct Debit provides merchants with 2 other advantages:

  • It ensures a consistent cash flow, as all bills (including those with variable amounts) are paid on time.
  • It eliminates the risk of a payment failing, as there is no card involved (and cards can expire or get blocked).

Ultimately, for merchants offering subscription services (which are becoming increasingly popular) or customers making recurring payments, SEPA Direct Debit is an excellent fit.

What are the disadvantages of SEPA Direct Debit Transfers?

While customers in some European countries may be familiar with the concept of direct debits, this will be a new payment format for others. This might impact initial take up.

There are also a few technical points to be on top of. For example, once a direct debit is set up, merchants are responsible for notifying customers 14 days before a payment is due.

Plus, there's the fact that customers can ask for a refund up to 8 weeks after the transaction is made (and potentially up to 13 months if there's an issue with the direct debit mandate).

Finally, SEPA Direct Debit payments take a few days to be processed, so there is a bit of a wait for merchants before they receive the funds.

How can I offer different types of SEPA payment to my clients?

The ability to facilitate SEPA transfers and issue compliant virtual IBANs open doors to serving B2B clients across the European market.

On the other hand, not being able to do so can be a real bottleneck to scaling across the region, as you would have to develop the entire infrastructure from scratch.

Partnering with a SEPA payments provider can help you quickly ramp-up your operations, as this case study of My Eu Pay's partnership with Paysolut shows.

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