The checklist to becoming a SEPA indirect participant

From owning its own BIC and IBANs to cutting its payment costs by 10, there are many advantages for a regulated fintech company to become a SEPA participant. However, it represents a significant project for a growing company and is a decision that should not be taken lightly.

In this article, we explore the steps for a regulated payment institution (PI), electronic money institution (EMI) or credit institution (CI) to become a SEPA indirect participant.

There are three main work streams to become a SEPA indirect participant, which can be run in parallel: regulatory and administrative tasks, selection of and commercial discussions with a sponsor bank, and technical integration with a sponsor bank.

Regulatory and administrative tasks

In addition to holding customer accounts and sending and receiving payments on their behalf, which are regulated activities, becoming a SEPA indirect participant means accessing interbank communication systems. Different entities manage and oversee such systems with which candidate SEPA indirect participants have to interact.

Local regulator

Even if the candidate SEPA indirect participant is already a regulated PI, EMI, or CI, they need to declare their intention to become a SEPA indirect participant to their local regulator.

Request BIC from Swift

To issue its own IBANs and to be reachable from other SEPA participants, a SEPA indirect participant needs its own BIC. The body managing BICs worldwide is Swift. Swift ensures that:

• BICs follow international standards

• BICs are unique to each entity, to prevent routing errors

• BICs country code, location code and branch node correspond to the applicant SEPA indirect participant

SEPA indirect participant candidates can order a “non-connected BIC”, i.e., a BIC not connected to the Swift network, directly from Swift’s website.

Declare BIC to the EPC

The European Payments Council (EPC) provides the technical framework for SEPA payment schemes. To access SEPA, candidate SEPA indirect participants need EPC validation. This validation is requested by declaring a BIC to the EPC.

It also implies providing the EPC with a legal opinion from a lawyer, which is required to guarantee the EPC that the SEPA indirect participant has completed all the necessary regulatory steps to become SEPA indirect participant.

Choose clearing and settlement mechanisms

A sponsor bank might work with several different clearing and settlement mechanisms (CSMs). The SEPA indirect participant can choose which CSMs the sponsor bank will exchange their SEPA messages with. Also, the SEPA indirect participant might want to work with different CSMs for different schemes.

Register BIC with CSMs

This is how a SEPA indirect participant registers on the CSM and when the CSM will add the SEPA indirect participant BIC in its systems to route SEPA messages to the SEPA indirect participant. The sponsor bank does this on behalf of the SEPA indirect participant.

Sponsor bank

The SEPA sponsor bank is the most critical partner for a SEPA indirect participant. As such, it is present at several steps of a SEPA indirect participant’s project.

Choose SEPA sponsor bank

Candidate SEPA indirect participants can evaluate potential SEPA sponsor banks through several factors.

All sponsor banks do not offer all SEPA payment methods. A bank can offer the reception of SEPA instant credit transfers, but not the emission of such payments. The same goes for SEPA direct debits.

In addition to SEPA payment-related services, candidate SEPA indirect participants should evaluate sponsor banks' offers related to bank accounts.

Indeed, a SEPA indirect participant needs a safeguarding and a settlement account to process SEPA payments. Sponsor banks can charge significant costs for the management of these accounts.

It is also critical that the sponsor bank allows intraday transfers between the settlement and safeguarding accounts, to optimise treasury management between these accounts and avoid insufficient funds on the settlement account, which can lead to high financial penalties and the impossibility of processing payments.

The ideal sponsor bank should also debit fees from a different account than the settlement or safeguarding accounts to ease the bookkeeping process by separating money movement on behalf of customers from the business' operating costs for the SEPA indirect participant.

Other considerations include the experience of the sponsor bank on this model, the support model and team, including value-added services such as fraud detection or BIC reachability, and SEPA payments pricing.

Discuss commercial terms

SEPA indirect participation is a commercial offering from sponsor banks. So commercial discussions are part of the process, including the support model, settlement and safeguarding accounts pricing model, payments pricing model and actual total pricing.

Sponsor bank onboarding

After a sponsor bank is chosen and a contract is signed, the sponsor bank will start onboarding the future SEPA indirect participant. It includes designating the project team on the bank’s side and giving access to technical integration documentation and a testing environment to ease the development of the integration.

Open settlement and safeguarding bank accounts

SEPA indirect participants process payments of their customers themselves. To do so, the regulation requires them to use a settlement and a safeguarding account.

Note that financial institutions sending and receiving payments on behalf of their customers as bank corporate customers also need a settlement and a safeguarding account. Those accounts can be opened at any bank, but most of the time are opened at the sponsor bank for simplicity reasons, and the sponsor bank will run their KYC checks on the indirect participant before opening the accounts.

Technical integration

To process SEPA payments on behalf of their customers, SEPA indirect participants need to integrate with their sponsor bank technically.

The SEPA indirect participant needs to connect with the sponsor bank’s system that will forward SEPA messages from and to the CSMs. In some cases, the SEPA indirect participant must connect to a different system, the sponsor bank’s cash management system, to manage their settlement and safeguarding accounts.

For both integrations, the SEPA indirect participant needs to:

• Obtain technical documentation from the bank

• Develop the connectivity between its systems and the bank’s systems

• Develop the logic to translate the bank’s file formats into its own systems’ managed file formats or APIs, and vice-versa

• Run SEPA certification with the bank. The bank will make sure that: 1. All files sent from the SEPA indirect participant are conforming, 2. All files sent to the SEPA indirect participant are processed adequately and on time

• Run penny tests in production

Accelerating SEPA indirect participants’ projects

As we saw, the three work streams involved in such projects are not trivial and require careful planning and execution. Most companies going through this journey are assisted by independent experts and consultants that have done it before.

On the technical side, working with technology providers that provide bank integrations, like Numeral, the technical integration tasks of the SEPA indirect participant are cut down to: Integrating the Numeral API into their systems Setting up the Numeral solution, such as defining batching rules or notification settings

Having already integrated with leading sponsor banks and supported financial institutions in their SEPA indirect participation projects, we can provide growing fintech companies with more than software on such projects.

If you’re interested in discussing your SEPA indirect participant project, contact us.