The European Union in an effort to streamline the banking system within its member countries enacted the Single Euro Payment Area (SEPA) regulations. The chief currency which is used in IBAN and SEPA banking systems is the Euro. IBAN stands for International Bank Account Number and is used to uniquely identify each bank account holder within the IBAN and SEPA banking systems.
The Necessity of the IBAN and SEPA Banking Systems
In an effort to achieve the vision of the European Union of economic inclusivity within the member states, the SEPA agreement came into force. Several factors necessitated the formation of the SEPA regulations. The salient factors are as explained below.
- The Need to Achieve Borderless Transactions: Cross-border transactions which occurred before the SEPA initiative had high commission charges, took a long time, and there were associated challenges in correctly identifying each and every account holder. With the advent of the IBAN standards, interbank and cross-border transaction processes became more efficient and a common standard for the validation of each transaction increased the accuracy of the transactions.
- The Need to Harmonize Electronic Payments: Before IBAN and SEPA Banking System regulations were initiated there existed several electronic standards which were vendor-driven. The lack of common harmonizing standards meant that more time would be spent in order to complete a transaction. At the same time, not all the electronic money payment systems were interoperable. As a result, compatibility issues would be encountered in cases were two incompatible electronic payment systems needed to work out in harmony to transfer payments. Therefore, a need for a common standard arose. A new International standard (ISO 13616) was developed which specified the modalities of generating an IBAN number for individual account holders and organizations. For harmonious inter-bank and cross-border money transfers, IBAN and SEPA banking systems are required to develop systems which comply with this new ISO requirement.
- The Need to Strengthen the European Union Economy: The adoption of IBAN and SEPA banking systems standards was seen to have the potential to benefit the European Union economy in several ways. First, the transaction fees from all banks within the Eurozone countries was expected to be the same. This would encourage international trade leading to the growth of the European Union economy. These new standards would also simplify transactions making them be more efficient and convenient for all the participants in the economy. Having common standards would also strengthen the value of the Euro currency which was key in ensuring that the EU economy stayed relatively competitive compared to the rest of the world economies.
The Main Functional Elements of IBAN and SEPA Banking Systems
- Credit Transfer: This functional scheme allows the transfer of money from one bank account to a different bank account. It usually takes one working day for the transaction to reflect in the recipient’s bank account.
- Instant Credit Transfer: This SEPA scheme makes it possible to receive instant payments which usually take less than 12 seconds to reflect in the recipient's account.
- Direct Debit: Direct debit refers to a banking operation where a person is authorized by an account holder to directly withdraw money from their account. A good example is that of the supermarket where the retailers withdraw money from the customer’s bank account when the customers use their cards to make a retail payment. This scheme is optional and has two separate functionalities. The first functionality caters for the direct bank customers. For this to be successful the payer must pre-authorize such a debit from his/her account. The other functionality caters for businesses which have to sign an agreement with the card providers before starting to use the direct debit functionality.
There is notable progress in the European Union member states to adopt and meet the minimum IBAN and SEPA banking systems requirements. Businesses are taking new measures to comply with the new regulations and some have reprogrammed their Enterprise Resource Planning (ERP) Software to match with these regulations. Banks have also adjusted the existing customer bank details to align with IBAN standards. The countries within EU have also set up national coordination and oversight bodies to oversee the implementation of the SEPA requirements. The gains of the full implementation of the SEPA requirements will supersede the temporary setbacks being experienced while businesses and banks align their systems to match with these requirements.