Fintech has become an indispensable part of almost any customer-related process in the financial industry. The process of transformation spurred by fintech shows no signs of stopping.
As a Ruby on Rails developer at Netguru, I’ve had an opportunity to get hands-on experience in the fintech world. Recently, I’ve worked on integrating the SEPA payments scheme for an online lender, which allowed them to automate their core business processes. Let me introduce you to the world of SEPA payments, which paved the way for the growth of likes of Revolut or Transferwise.
In this post, you will get to know what the SEPA scheme is and how SEPA payments work, why SEPA is so important for fintech, and how you can implement SEPA payments in your app.
SEPA schemes paved the way for Revolut and many other fintech companies to disrupt digital banking.
What is SEPA and what are SEPA payments?
What is SEPA?
SEPA stands for Single Euro Payments Area. SEPA harmonised and simplified transnational euro payments and made them equivalent to domestic payments.
What did the introduction of SEPA mean for fintech companies?
SEPA enabled fintech companies such as Revolut and Transferwise to transfer money in euro to bank accounts in the SEPA zone within one working day and generally cost-free for the parties involved. It thus saved those companies time and money that they would otherwise spend on trying to come up with a unified simple payment solution for the rigid European financial market. The instruments offered by SEPA can, however, be used successfully in different areas of the fintech industry too.
What countries are included in SEPA zone?
SEPA consists of the 28 member states of the European Union plus a few other countries that support this scheme.
What kind of payments can be made through SEPA?
The two main instruments used in SEPA:
What about other currencies?
SEPA is only for euro-denominated payments. It is still possible to make a euro payment even if both accounts are not euro-denominated. This, however, involves additional costs because the currencies need to be converted to euro.
As of today, SEPA is only for euro-denominated payments.
Why would fintech companies like to use SEPA payments?
What to use SEPA payments for?
The supplied payment instruments allow for sending and collecting euro-denominated payments. This is quite an important feature to have as a peer-to-peer money transfer provider, but it is also an attractive option for other types of apps.
For example, when offering online lending, SEPA credit transfers allow you to make payouts to your customers. Direct Debit allows you to collect payments, and the customer does not even have to be present online.
Direct Debit is also an excellent tool for companies offering subscription plans that require recurring payments, companies that collect payments for services after a specific time or companies that are in long-term trade agreements with trusted partners – Direct Debit can be used to automate the payment process in each of these situations.
You can calculate the amount needed for payout or repayment dynamically and trigger the payment exactly when you need to. The SEPA scheme is quite flexible in this respect. The amount collected through SEPA Direct Debit does not need to be a static amount. The mandate authorisation allows you to claim a different amount if the circumstances change.
Triggering payments automatically, monitoring payment statuses, and notifying users about missed payments means reduced amount of work for underwriting and collection teams.
Pulling payments on time instead of depending on the customer to make the payment allows for better control over collections. Better collections translate to better cash flow.
Widening the customer base
SEPA payments are widely accepted. It is enough to have a bank account in one of the SEPA member countries. SEPA payments allow you to target even those customers who do not have a credit card.
Using SEPA payments means that you have access to a single automated payment scheme that allows you to do business in many countries according to the same set of principles.
Flexibility and scalability - two major benefits of SEPA schemes
How do SEPA payments benefit your customers?
One less thing that customers need to remember
In the Direct Debit scheme, the customer does not need to be present during payment collection. This is one less step in the customer journey, which improves the overall user experience.
SEPA provides customers with a refund mechanism – they can ask for their money back within eight weeks from executing a Direct Debit. This protects the customers from having their accounts wrongly debited.
Customers can receive funds easily to their current account from any place within the Single Euro Payment Area.
It might be much easier to single out companies that are not SEPA-ready yet. All industry leaders have already implemented the scheme: Revolut, Transferwise, WorldRemit, N26, Finiata, Starling Bank, solarisBank, and Currency Cloud.
Currency Cloud is one of the leading fintech companies.
How to implement SEPA payments in your app?
What are the options?
The two main options to consider when deciding on implementing SEPA Payments are:
Building a custom implementation and integrating through your bank
If you build the whole infrastructure yourself, it means that you will communicate with your bank directly to process payments. You will need to implement a communication layer based on the technology used by your bank, and these technologies may differ between banks.
In Germany and France, for example, it could mean that you will have to obtain access to communicate with your bank’s EBICS server. EBICS stands for Electronic Banking Internet Communication Standard and is a set of rules that regulates sending payment information between banks. Based on those rules you would then need to set up an authentication system and send structured messages for the actions you execute. Depending on the bank’s existing infrastructure and processes, the development of such a solution can take some time.
The cost of implementing SEPA payments varies depending on infrastructure in place.
Using the services of an existing SEPA provider
Some companies can handle the communication with the bank for you and thus take care of the complex setup – you will use their infrastructure to handle SEPA payments. SEPA payment solution providers expose their API to perform requests (usually through HTTP and JSON), which makes the process much easier. Such providers can also offer additional services such as scoring and risk management. They can even help you alleviate some of the legal and administrative burden. This comes at a cost, as you will need to pay a fee for those services, usually on a per transaction basis.
Some of these providers might also hold a banking licence (e.g. digital banking platforms), which enables you to even open your banking account with them. GoCardless, solarisBank, and Stripe are examples of the different providers you can choose from for implementing SEPA payments through a third-party provider.
Direct Debit schemes supported by GoCardless
What is the suitable option for your business?
Choosing the right way of implementing SEPA will depend on your company’s location, the available providers, and the costs each option will incur. Setting up the whole infrastructure yourself is, of course, more expensive, because of the time needed for development and the overhead costs. Depending on the size of the business – especially the number of the payments it processes – developing the infrastructure on your own may turn out cheaper in the long run in comparison to a payment solution provider, who will always charge additional fees on top of regular payment fees.
Some legal steps are required for either of the above options. The basic requirement is that you need to have a bank account in the SEPA zone. If you want to be able to use SEPA Direct Debit you need to have a Creditor Identifier. A Creditor Identifier is your unique reference in each SEPA payment that you originated in the Direct Debit flow. How you can obtain this code depends on your company’s country of registration, but it usually boils down to contacting your bank or a government agency to apply for one. Some additional steps might be necessary in different countries.
There are a few critical parts of the SEPA payment flow, regardless of which way of implementing the scheme you decide to use. Some payment solution providers can take care of some of those steps for you, but in most cases, you will need to handle this internally.
Triggers and actions
Using a payment solution provider’s API still requires you to properly communicate with that API and trigger appropriate actions at specific points in time based on the rules you set up. For example, if you make a loan payback after the loan’s due date in the Direct Debit scheme. This, of course, requires even more work when communicating directly with your partner bank.
Direct Debit mandates
When using Direct Debit, a system for managing SEPA Mandates is required. Mandates authorise you to pull payments from your customers’ account. They must be properly stored, displayed, and they should be generated based on SEPA specifications. Mandates are also subject to cancellation and amendments, and the relevant logic needs to be implemented.
Processing payments means interacting with different states of a payment during its lifecycle. A payment order can be successful, it can be pending for some time due to a review from the bank, it can also be rejected due to insufficient funds on the customer’s account, or they can fail altogether because of a connection problem with the provider’s interface. All of those cases should be handled properly. You should also differentiate between payments that are successful but for which the money has not yet been transferred and those that have already been registered on your account.
Processing payments involves interacting with different states of a payment during its lifecycle.
Returns & Refunds
SEPA Direct Debits are subject to refunds and returns. A client can submit a refund request within eight weeks of the moment a Direct Debit is executed. The bank can, for example return a payment due to an issue with mandate authorisation. Handling such cases adds an additional layer to the normal payment status handling flow.
They might also require implementing logic for other actions such as an additional Direct Debit requests made after mandate issues are fixed.
SEPA payment flows make use of notifications in many different ways. There are mandatory notifications, such as a notification you need to send 14 days before you pull money from a customer’s account in the Direct Debit scheme.
You can also issue simple notifications such as an email to the customer after a successful payment in the SEPA Credit Transfer scheme.
This is just a brief overview of what the world of SEPA payments looks like. Let me know if you would like me to dive deeper into any of the SEPA-related topics (I’d love to!).
If you have any issues with SEPA implementations, reach out to us.