PSD2 SEPA (Single Euro Payments Area) is responsible for the opportunity for consumers to make digital payments in euro to a member country of the European Union (EU) and numerous non-EU countries. This can be done in any digital transaction by using credit transfer or direct debit. PSD2 SEPA cross-border payments are extremely safe and as efficient as national payments.
SEPA as a concept was first introduced in 2008, followed by direct debits the next year and it was finally implemented in 2014 within the euro area and by 2016 in non-euro area SEPA countries.
The purpose of PSD2 SEPA
The PSD2 SEPA was created as an innovative solution to payment infrastructure development. Its core purpose is to change the ways of currency transfer within the EU while increasing efficiency and creating a union in a federated financial network.
The European Union has created three separate regulations (PSD2, SEPA and Global Data Protection Regulation (GDPR)) that are overlapping and construct a secure and harmonised payment transaction environment. They safeguard Personally Identifiable Information (PII) helping financial institutions and Third-party Payment Providers (TPPs) to handle payment card data while eliminating opportunities for fraudulent activities.
The legal backbone of SEPA
SEPA triggered the increase in payment efficiency and competition within the European Union. It eliminated borders by introducing the euro to member countries, therefore, cross-border payments became the same as national. Even more, it standardised the payment processes and regulations which created equal rights and requirements for the involved parties.
The SEPA legal framework was developed based on Payment Service Directive (PSD/PSD2), SEPA migration end-date regulation and Interchange Fee Regulation.
PSD2 SEPA was supported by many public authorities and brought to daylight in a union. The European banking industry has sparked the need for SEPA and EU members together with the European Commission and Eurosystem supported the further implementation.
As of 30 October 2020 SEPA consisted of 36 European members together with numerous countries that are neither a member of the EU or Euro Area.
SEPA’s effect on payments
With the emergence of SEPA, the money movement has experienced an incredible shift and was suddenly put in higher gear. It affected the ways that money transfers function between businesses, the general public and the financial industry.
Two main types of instruments were implemented with SEPA – cash and derivatives. The International Accounting Standards (IAS 32 and 39) define an instrument as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.”
Cash instrument consists of payments, loans, deposits and securities that execute a previously agreed transaction between the sender and receiver. The derivative instrument consists of a value that comes from the core unit – assets, interest rates or indexes.
SEPA regulation made real-time transactions with immediate results possible. Due to this framework, all payments must be available 24/7 and transferred instantly. The transfer is irreversible and happens instantly with an abrupt message informing about the success or failure of the said transaction.
The correlation among PSD2 SEPA and GDPR
SEPA is the legislation for sensitive payment information, PSD2 is a framework that backs up the payment legislation and GDPR is a regulation that mandates businesses and financial institutions to protect consumers’ sensitive data within the EU.
However, when looking closely, PSD2 was created to open sensitive data to third parties to make money transfers and payments more efficient. The GDPR, on the other hand, was developed to safeguard that information and make it private. Thus they seem to be two conflicting regulations that businesses should implement. In reality that is not true, because they both are there to ensure that data privacy remains secure while utilising it to improve services. Hence if a business manages sensitive information inappropriately it will face serious consequences.