SEPA Whitepaper

8/2/2019 SEPA Whitepaper

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White Paper

SEPA - Single Euro Payment Area


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Table of Contents

INTRODUCTION .........................................................................................................................................................3

Single Euro Payment Area - A Brief Background ..............................................................................................3

BUSINESS IMPLICATIONS.........................................................................................................................................4

SEPA - Key Components ...................................................................................................................................4

Key Directives ...................................................................................................................................................5

Impact on Key Stakeholders .............................................................................................................................7

Challenges for Stakeholders .............................................................................................................................8

FUNCTIONAL VIEW .................................................................................................................................................10

Credit Transfer Systems ..................................................................................................................................10

Direct Debit Systems ......................................................................................................................................10

Card Transfer ..................................................................................................................................................13

IT IMPLICATIONS.....................................................................................................................................................15

Credit Transfer ................................................................................................................................................15

Direct Debit ....................................................................................................................................................15

Card Transfer Systems ....................................................................................................................................15

PE-ACH concept..............................................................................................................................................16

ADDED VALUE FROM COGNIZANT .......................................................................................................................17

Cognizant & SEPA...........................................................................................................................................17

Cognizant Methodology.................................................................................................................................17

CASE STUDIES .........................................................................................................................................................18

CASE STUDY 1: Incorporating Visa & MasterCard Regulatory Changes

in Card Processing (USA Market)....................................................................................................................18

CASE STUDY 2: Incorporating Industry Changes in Card Processing

(European Market) .........................................................................................................................................19

COGNIZANT EXPERIENCE AND BENEFITS ............................................................................................................20

ABOUT COGNIZANT ................................................................................................................................................21


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Introduction

Regulatory compliance issues are putting payment service

providers under increasing pressure. Over the past few

years there has been a tremendous increase in

regulations; for example Basel II, Sarbanes-Oxley, Anti-

money laundering and the FATF (Financial Action Task

Force) Special Recommendation VII, to name but a few.

One of the latest to appear is the Single Euro Payment

Area (SEPA).

All these regulations have a major impact on automation

developments. The costs for implementing these

requirements can be very high, because of the negative

cash flows associated with tying up key resources that

cannot be used on other strategic developments.

At the same time, market pressure is immense. Shorter

time-to-market cycles, greater transparency, online real-

time product behaviour and lower consumer prices are allincreasingly important aspects of staying in business.

Objective

The objective of SEPA is to establish a pan-European

market for the safe, efficient processing and settlement

of all euro payments, irrespective of whether the

originator and beneficiary are from the same EU country.

The SEPA area also includes some non-EU countries i.e.

Iceland, Liechtenstein, Norway and Switzerland.

Throughout this paper, where the EU is referred to, it

will include these other four countries.

The timescale is very aggressive, given the enormous

challenges of executing SEPA across Europe. Some of the

key dates are as follows:

Cross border and national availability of the so-called

Pan-European Credit Transfer in the EU by January 1

2008. Plans also exist to have a priority payment

scheme in place which can process urgent payments. PEDD (Pan-European Direct Debit) availability from

January 1 2008.

Pan-European Cards usage, in the form of general

purpose cards, by 2008.

PE-ACH (Pan-European Automated Clearing House)

framework in place by 2010. From 2008 onwards

PE-ACH mechanisms must be implemented to ensure

the objective is met.

Throughout this paper the directives and guidelines laid

down by the European Payment Council (EPC) will be

used. Because the requirements of SEPA are still under

development, this paper can only be seen as a particular

snapshot in time.

SINGLE EURO PAYMENT AREA A BRIEF

BACKGROUND

The development of SEPA is being driven by various key

stakeholders. The European Commission (EC) is pushing

developments forward to enable the establishment of a

truly internal European market by 2010. SEPA is the

vehicle for implementing this vision within the payments

business. The development of the New Legal Framework

(NLF), which is to be finalised in the coming months, will

build the legal foundation for a single payments market.

The NLF is to be implemented in the local laws of the

different EU countries.

The introduction of the euro was just the first step

towards creating the SEPA. The EC initiated further

efforts to allow cross-border euro payments to be made

under the same conditions as within national borders. A

second step was the introduction of the 2560/2001 EU

regulations. In advance of the law being enforced, the

financial industry has taken its own, self-regulatory

approach. To fully achieve SEPA a joint initiative of the

European banks was established, recognising that a

common strategy and an efficient organisational

structure was essential. The strategy was developed

within the so-called SEPA Workshop, organised by the

European Credit Sector Associations (ECSA) and some 42

European banks, together with the Euro BankingAssociation (EBA) in Brussels. These groups formed the

European Payments Council (EPC) in this Workshop.

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The EPC has put pressure on its members by drawing up

key timelines for commencement by 2008, and definitive

migration by 2010. At the same time they have

developed rulebooks that describe guidelines and

directions. The EPC is the decision-making body for the

European Payment Industry. More information will be

found later in this white paper.

The EBA will develop and co-ordinate the implementation

of the various SEPA schemes and, as the operator of

STEP2, it is also the party with the clearing systems.

Additionally, corporations are also demanding a SEPA

market to be able to consolidate their own treasury

departments.

SEPA will be fully implemented in the 29 countries by

2010. The cost for the banking industry is expected to be

approx. $9 billion (estimated by Tower Group). However

this does not include the substantial costs that will be

incurred by the members, as a result of treasury back

office changes.

All in all, SEPA is an inevitable process that will be

irreversible and will lead to major changes in the coming

years.

This white paper focuses on SEPA for the payment service

providers (e.g. Banks), and will point out the

methodology and services Cognizant proposes to help

payment service providers implement SEPA.

Business Implications

SEPA KEY COMPONENTS

To achieve the objective of becoming one Euro-domestic

market, open standards will be a key component for

success. This is exactly what the EPC is aiming for with

its SEPA approach. The EPC has drawn up guidelines for

the key components that will make up the harmonisedpayment structure for the EU. These are explained by

Figure 1:

The schemes describe the inter-bank relations, the bank-

to-customer interactions and include the Pan European

Automated Clearing House (PE-ACH) concept.

Reachability is a prerequisite for SEPA to work, as all

accounts held within the SEPA will have to be reachable.

A number of PE-ACHs will be needed to achieve this

goal. A PE-ACH will perform the same clearing and

settlement functions as the local ACHs do currently. The

expectation is that only a few PE-ACHs will survive, as

not all local ACHs will make the transition to being a

PE-ACH.

PECT Pan-European Credit Transfer

The standard PECT scheme deals with credit transfers

from one account in the SEPA area to another. A number

of key imperatives are proposed. They will mandate the

usage of an International Bank Account Number (IBAN)

and a Bank Identifier Code (BIC), for both the originator

and beneficiary of the transfer, and that remittance

information (2x35 characters) is submitted throughout

the payment processing chain. Further, there will be

more room for descriptions and transactions will be

finalised within three banking days.

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Fig. 1: Single Europe-wide Payment StructureKey Components

Supported by the New Legal Framework for Paymentsin the Internal Market


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A special form of PECT will exist, in the form of the

priority payment. End-to-end processing within the SEPA

area will be required within 4 hours (according to the

EBA implementation). In addition it is expected that the

payment service providers will offer additional value-

added services to their customers.

PEDD Pan-European Direct Debit

The PEDD is a means to perform an authorised collection

on any account in the SEPA area. This involves a debtor,

a creditor, a creditor bank and a debtor bank. The

debtor gives permission to a creditor to debit his

account by signing a mandate. This mandate will be sent

together with the collection instruction and closes the

circle between a debtor and his bank. Again it is

expected that payment service providers will offer

additional value added services to their customers. The

process is explained in Figure 2:

Cards Transfer

The Cards Transfer will harmonise card usage

throughout the SEPA area. Currently, it only involves socalled general purpose cards - the mass market cards for

payments and cash withdrawals. The framework that is

being developed by the EPC will exclude e-purse cards

and other value-added services that can easily be

developed by the banks. Individuals should be able to

use their cards as easily, safely and efficiently within the

SEPA area as in their home country.

The framework endorses the concepts of EMV and PIN

and deals with cardholders, merchants, issuers and

acquirers.

KEY DIRECTIVES

Figure 3 overleaf describes the key directives of SEPA for

the Banking Industry, Consumers, Corporations, SMEs,

Merchants and Government Bodies

Currently a number of working and support groups,

formed by the EPC, are drafting frameworks, structures,

directives and guidelines to achieve SEPA

implementation by 2010.

The key groups are:

1. Electronic Credit Transfer Working Group

e-Payments and m-Payments

Task forces operating under ECTWG

2. Electronic Direct Debit Working Group

3. Cards Working Group

Business model

Fraud prevention

4. Cash Working Group

5. Legal Support Group

6. OITS (Operations, Infrastructure, Technology and

Standards) Support Group

7. TARGET Working Group

The output of the working and support groups will

provide further input for the SEPA implementation.

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Fig. 2: Direct Debit


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The multiple timelines proposed by the EPC are shown by

Fig. 4. Two timelines are very critical. The first is 2008, by

when customers of the payment service providers have

the right to offer their payment orders in the SEPA

format. Payment service providers should be able to

accept these orders and process them in line with the

SEPA definitions. The second is 2010, when local

(national) products should all be migrated into SEPA

products.

Consequently, this means that between 2008 and 2010,

both local (national) and SEPA products will co-exist. This

poses a number of serious challenges for payment service

providers.

Individual financial institutions will need to carefully

review the business case for their intra-EU payments

activities. Cost saving opportunities must be balanced

against the cost of changes to both the practice and

process necessary to conform with the new model.

1Source: EPC Annual Report 2004

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Fig. 3: Key Directives

Fig. 4: Timelines and Responsibility of Key Stakeholders1


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IMPACT ON KEY STAKEHOLDERS

Key Stakeholders

The following is a list of non-exclusive key stakeholders

affected by the creation of a SEPA:

Banks

End users (retail as well as wholesale customers)

National governments

European Union, including the four additional

countries + European Committee

National and European banking and paymentassociations

Clearing houses

International clearing organisations

European Central Bank

Card companies

Management consultants

Information technology vendors

For some of the stakeholders listed, a high level impact

assessment is shown in Figure 5.

Observations of Some of the Key Players

1. The European Payment Council points out that

demand for cross-border payments in the EU is still

very limited and that an increase in costs for banks,

caused by legislation/regulation towards SEPA, will

endanger the competitiveness of the EU banking

system. Legislation should therefore be limited to

what is strictly necessary. Priority should be given to

self-regulation and the disruption of efficient national

systems should be avoided.

2. The Commission of the European Communities has

stressed that legislation for SEPA will be limited to

that which is absolutely necessary. It encourages the

industry to take its own steps, particularly towards

the compatibility of cards and to stop fraud.

3. In the view of the European Central Bank, there is

still great fragmentation in the euro area payment

system and progress by the EPC has been slow. It

also feels that banks have been particularly slow in

developing e- and m-payments. It points out that a

major advance in preventing fraud would be the use

of the EMV standard throughout Europe, but most

countries are a long way from this.

4. The European Parliamentary Financial Services Forum

warns that the huge investment required to make

SEPA work in the banking sector will only be

forthcoming if there is a foreseeable return on that

investment. To ensure this, SEPA needs the active

support of businesses, large and small, and of

consumers throughout Europe.

5. EuroCommerce has welcomed the Commission

initiative on SEPA, but agrees with the ECB that

banks must do more and must be forced to operate

in a more competitive way. It also believes that there

is not enough transparency on the charges levied for

credit card transactions (interchange fees). It provides

a concise view of the expectations and apprehensions

of the key players in European arena.

6. European consumers organisation, BEUC, has

welcomed the aims of the single payments marketand in particular favours binding, sanction-backed

legislation to counter industry reluctance and the

imposition of extra domestic charges.

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Key Business Technical Impact on Impact on Impact on

Stakeholders Impact Impact Fees/Cost Domestic Cross Border

Services Services

Retail Low Low Lower Improve (for Major

Customers inefficient Improvement

countries)

Corporate / Medium Medium Lower Improve (for Major

SMEs inefficient Improvement

Customers countries)

Banks High High The fees will Neutral Major

get lower Improvement

but the cost

may increase

ACHs High High Not yet Neutral Will definitely

clear improve

Fig. 5: High Level Impact on some Key Stakeholders


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CHALLENGES FOR STAKEHOLDERS

Business

Research indicates that the payments industry will

become less profitable for payment service providers.

Their additional revenues will come from value-added

services offered to the market, together with improved

efficiencies in processing. Processing very high

transactional volumes will be the key to achieving these

objectives. Payment service providers will need to

achieve economies of scale and reduce transaction costs

to a minimum if they are to achieve an adequate return

on investment and make up for the high costs of set up.

The business case for SEPA will have to be focused on

minimising the costs of running the systems involved.

Of course this is in addition to the generation of

additional revenues from core SEPA products, revenues

from value added services and minimising the costs of

the business process changes.

With the introduction of SEPA payment service providers

will have to think of the right product/market mix for

payments & cash management products.

Technology

Technology changes are expected in all parts of the

payment processing applications environment. The new

SEPA products will need to be supported, as will the

changes in the nature of payments caused by the

introduction of the SEPA.

Changes throughout the processing chain can be

expected - from receiving payments from customers,

through internal processing (including booking, billing,

etc.) to those involved with the PE-ACHs and the final

reporting of information back to the customers.

More information on these changes can be found in the

next section.

Organisational

One of the major consequences of the move towards

SEPA is the organisational shape of the payment service

provider. The domestic payments teams will become

much larger, to cope with the enhanced size of the

home market. Consequently international teams will get

smaller.

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Fig. 6: Bank Payment System


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Fig. 7: High Level Outgoing Payment Process - An Overview

Order Receipt

A1.1

CustomerOrder

OrderPreparation &Conversion

A1.2 Order Repair &Enrichment

A1.3Credit Check

A1.4

System xxx

System xxx

System xxx A

ExternalInterface


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Functional View

This section examines the functionality of the three

essential components of SEPA Credit Transfer Systems,

Direct Debit Systems and Card Payment Systems.

CREDIT TRANSFER SYSTEMS

Bank-based payments systems handle payments between

parties with accounts at the same institution, as well as

payments between parties with accounts at differentinstitutions (four-party system). Such a system requires

information to be exchanged between the two account-

maintaining banks. The data is transmitted and sorted

(clearing). Usually, the clearing of retail payments will

only ever involve calculating and settling the net

positions i.e. each banks account at the settlement

agent is debited or credited respectively. In most

European countries, the clearing and settlement of retail

payments is conducted via an automated clearing house

(ACH). The payment described above refers to thegeneric process of a credit transfer.

Figure 7 shows, at a high level, the flow of the outgoing

payment process. In this illustration, an outgoing

payment is a payment from one bank to another bank.

The information that needs to be sent to the PE-ACH is

as follows (Source: SEPA Credit Transfer Scheme

Rulebook DRAFT, version 1.0):

International Bank Account Number (European IBAN

standard) of the originator to be debited for the

credit transfer instruction.

Name of the originator (optional).

Address of the originator (optional).

Amount of the credit transfer in Euros.

Remittance information (optional).

BIC code of the originator bank.

Originator identifier code (optional) (to be assessed

in national consultation rounds).

International Bank Account Number (European IBAN

standard) of the beneficiary.

Name of the beneficiary.

Address of the beneficiary (optional).

BIC code of the beneficiary bank.

Beneficiary identifier code (optional) (to be assessed

in national consultation rounds).

Identification code of the SEPA electronic credit

transfer scheme.

Originators credit transfer transaction reference.

Settlement date of the credit transfer.

Originator bank's reference number of the credit

transfer message.

The table opposite shows a high level assessment of the

processing areas that are expected to undergo changes

with the introduction of SEPA. All areas that require

changes have IT implications and are examined further in

the IT section.

DIRECT DEBIT SYSTEMS

The creditor initiates the payment by instructing his bank

(the creditor bank) to collect the amount owed by the

debtor at the debtors bank. Typically, recurring bills will

be paid by direct debit, e.g.utility bills.

The utility company will instruct its bank to collect the

specified amount owed by the consumer. The information

contained in the mandate is sent together with the

collection instruction. The utility companys bank (creditor

bank) will then send information to the consumers bank

(debtor bank) to collect the funds. The debtor bank will

then debit the consumers account, and the creditor bank

will credit the beneficiarys account.

Clearing and settlement between the banks will take place

in the same way as credit transfers. The direct debit

transactions will be reported to the consumer and the

utility via an account statement.

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Process step Impacted by SEPA?

Order Receipt YESCustomer channels that are provided by payment service providersneed to be able to handle SEPA style orders.

Order Preparation + Conversion NOVery little changes are expected. SEPA orders will mainly bedelivered electronically and therefore require very little preparationand conversion, which is normally the case with paper basedtransactions.

Order Repair + Enrichment YESThe value-added services that are expected to be offered by thepayment service providers will require changes in this area.Examples may include automatic repair functionalities to increasethe STP rate and enrichment of non-SEPA domestic accountnumbers to IBAN numbers.

Credit Check NOThe credit check is needed for every payment order, no sweepingchanges are expected with the introduction of SEPA.

Validation + Authorisation NOThe payment validation and authorisation process step has to dowith the agreements between a customer and its payment service

provider. SEPA will have no direct impact on the way thisagreement check is handled.

Currency Conversion YESThe EPC rulebooks mandate that the scheme operates in Euros.However, the accounts held by the customer do not necessarilyhave to be in Euros, currency conversion is therefore needed forall non-euro accounts. This conversion needs to be extremelyefficient for high volume processing.

Routing + Transmission YESThe PE-ACH's will evolve within the SEPA area. The exact targetnumber is not yet clear, but it is expected that multiple PE-ACH'swill co-exist, each handling one or more SEPA 'products'. The

routing process that determines which PE-ACH to use (and theway to get there) plus actual transmission of the message isbound to become a very important function.

Settlement YESDepending on the outcome of the routing and transmissionprocess step, the settlement process step will be determined. Thiswill have an impact on the way the general ledger is maintained.

Billing YESIt is expected that the NLF will present guidelines on the standardtariffs of SEPA products and special tariffs will exist for valueadded services (especially for corporate clients). The billing processstep should be able to cope with this.

Reporting YESThe reporting process step may apply to either customer reporting(e.g. balance statements) or to central bank reporting. Customerreporting is certainly impacted by the existence of SEPA; centralbank reporting may be impacted.

Table 1: High Level Outgoing Payment Process Overview Impact Assessment


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The mandatory elements for SEPA Direct Debit messages are

as follows (Source: SEPA Direct Debit Scheme Rulebook

DRAFT, version 1.0):

For the de-materialised mandate:

Unique mandate reference.

Name and address of the debtor.

Name of the account holder, if different from the debtor.

The account number (only the ECBS IBAN standard) of

the debtor to be debited, or the account number (only

the ECBS IBAN standard) of the third person who has

accepted to be debited in the mandate.

BIC code of the debtor bank.

Identifier of the creditor.

Name and address of the creditor.

Signing date of the mandate.

Placeholder for future electronic signature data.

Reason code for the amendment of the mandate

(mandatory for amendments).

Signing date of the cancellation of the mandate.

For the Direct Debit collection:

Identification code of the SEPA Direct Debit Scheme.

Transaction type (recurrent, one-off, first, or reversal).

Creditors reference of the direct debit transaction.

Name and address of the creditor to be send to the

debtor.

Identifier of the creditor.

Account number (only the ECBS IBAN standard) of the

creditor to be credited for the collection.

BIC code of the creditor bank.

Name and address of the debtor.

Name of the holder of the account to be debited.

Account number (only the ECBS IBAN standard) of the

debtor to be debited, or the account number (only the

ECBS IBAN standard) of the third person, who has

accepted to be debited in the mandate.

BIC code of the debtor bank.

Unique mandate reference.

Amount of the collection in euro.

Due date of the collection.

Identifier of the underlying contract.

Reason code for the amendment of the mandate.

Identifier of the original creditor who issued the mandate.

Remittance information from the creditor to the debtor,

like the identification number of the underlying contract,

the reference number of the pre-notification, etc.

(optional).

The national direct debit schemes that are currently

operating in the European member states differ considerably

in terms of the documentation that is needed, the process

steps and their timing, as well as the liability between the

parties involved. A generic Direct Debit System for recurring

bill payments by a customer to a service company (for

example a utility company) is shown in figure 8 below.

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Fig. 8: Direct Debit System


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The process has some specific characteristics with regard

to timing. The normal flow is as follows:

For first-time collection instructions and one-off

collection instructions, the collection instruction,

together with the mandate information, should reach

the debtor bank at least five days before the

settlement date. This is done to make sure that the

debtor bank has time to offer and execute any value

added service, for example checking the mandate

information with the debtor.

For subsequent collections the collection instruction,

together with a reference to the mandate

information, should reach the debtor bank at least

two days before the settlement date.

Settlement should take place at the settlement date.

There are exceptions when the settlement date is not

a banking business day.

For returns (initiated by the debtor bank) and refunds

(claimed by the debtor), specific timing directives exist.

Returns should be sent by the debtor bank five days

after the settlement date at the latest. Refunds can be

sent within three months after the settlement date.

CARD TRANSFER

Card payments are initiated by the payer at the point of

sale or, with distance purchasing, via the internet or

phone or at an ATM used to obtain money.

At the core of a card payment system is the card

company. It provides the technical and legal network

and is valid for all system participants regardless of their

geographical location. The participants are issuers,

serving the card holders, and acquirers, servicing the

card-accepting entities. The actual processing of the

payment is not usually done by the issuers and acquirers.

Instead, to achieve economies of scale, they outsource

operations to an issuing or acquiring processor

respectively. Clearing and settlement between the issuing

and the acquiring bank are done daily via the card

company.

The areas of the payments cycle that would be most

impacted by SEPA are:

Authorisation

Settlements & clearings

Charge backs & retrievals

Fees

Statements

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Fig. 9: Card Payment System


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Authorisations

For the UK Card industry, the Association for Payments

and Clearings (APACS) determines how authorisations

come in and how clearings are generated. The APACS

message structure, together with enabled associated

clearings, will have to be modified to include additional

reason codes for both authorisation and clearing.

SEPA will specify various message and clearing formats

as well and the following non-exclusive list of interface

areas:

APACS

SWITCH (an alternate means to debit cards and

acquired by MASTERO)

Euro pay

MasterCard International

Visa Domestic and European

FNET

BANKNET

Settlements & Clearance

At the end of the day, the settlement amount is

calculated for various groups of transactions. The net

settlements that are made between the various players

are pivotal to day-to-day processing.

The settlements involved are classified as Intra or Inter,

dependant upon whether the players involved in the

transaction are the same or not.

Clearings dictate how payments systems, which govern

financial institutions like MasterCard/Visa, handle their

settlements. Both MasterCard and Visa have their own

structured format of handling inbound and outbound

clearings. All financial institutions have to follow the

clearing rules in order to qualify for fees and outward

settlements.

For settlements to happen, the clearings have to go

through the payment system. They are then forwarded

to the relevant financial institutions and make the

settlements with the player who initiated the

transaction. This is a balanced approach. Adjustments

are made between two financial institutions and only

the net amount is calculated as the settlement amount.

Visa and MasterCard have their own in-coming and

outgoing software, which validate the records. This acts

as a pre-processor, which enables financial institutions to

correct any invalid clearings due to processing mistakes.

Charge backs & retrievals

The changes in message structure will have an impact on

the following charge back and clearing field structures,

whilst referring back to the original fees of the charge

back transaction.

Outgoing First Charge Backs.

In-Coming First Charge Backs.

Outgoing Second Presentations.

In Coming Second Presentations.

Arbitration.

Fees

Fees are an amount payable to the various players in a

financial transaction. The amount paid is considered to

be a part of the settlement function and is re-defined by

the payment schemes. The fee, which is calculated for

each transaction, may be either a percentage of the

transaction, a fixed rate per item or both.

The specific calculation used for any single transaction is

defined by the eligible fee structure. The components

that determine which fee structure a transaction

qualifies for include:

Regional Pairing.

Domestic.

Intra-Regional.

Inter-National.

Type (Transaction, Cards, Merchants, etc...).

Payment Scheme. Merchant Type.

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Statements

Statement generation and distribution is an important

part of customer communication and there are very

stringent Service Level Agreements (SLA) to ensure that

the statements are delivered on time. The data for

generating the statements is mainly taken from the

approved transactions. This would also include

calculations based on the interest for cash advances, if

any, interest for merchandise, if applicable, late charge,

collection and annual fees, promotions etc.

IT ImplicationsCognizant provides a high level service for assessing the

impact of implementing the SEPA schemes. This section

discusses the IT implications for Credit Transfer, Direct

Debit, Card transfer and the PE-ACH concept.

CREDIT TRANSFER

The IT implications of the expected changes will dependon the current state of a service providers payment

application architecture. Organisations that already have

a consolidated application architecture may be

confronted with fewer changes than those that have a

complex distributed application architecture.

Consequently it is important to assess the changes

needed to the infrastructure as well as the applications.

In some cases SEPA could be the trigger for re-assessing

how the payment application architecture, or parts of it,

are sourced.

Because of the dependency on the current state of the

systems used for credit transfers, it is not possible at this

stage to indicate the exact IT impact.

However all changes need to be completed as a matter

of priority. The first deadline of 2008 is nearing fast. Not

being ready for this deadline means not being able to

maintain an aggressive strategy of staying and growing

in the payments processing business.

DIRECT DEBIT

Again, for direct debit systems, the state of the current

systems will determine the IT implications.

However, direct debit systems do have some specific

characteristics, mainly because of the mandate

information that is sent with the collection instruction,

and the specific timing characteristics specified in the

scheme.

In most countries, current direct debit systems will not

be able to handle the new requirements of SEPA. This

will mean core processing systems will have to be

significantly adapted.

At this stage it is not possible to determine the exact IT

impact, because it depends on the specific situation and

the functional differences between current national

direct debit schemes and the forthcoming SEPA

requirements.

CARD TRANSFER SYSTEMS

Two types of companies will be significantly impacted by

the introduction of the card transfer SEPA scheme. These

are the payment service providers and the card

issuing companies.

The card framework maintains that SEPA level

interoperability should be ensured in the following four

areas:

Cardholder to terminal interface.

Cards to terminal (EMV).

Terminal to acquirer interface.

Acquirer to issuer interface, including networking

protocols.

Technological changes are required in all of these areas to

cope with the changes introduced by SEPA.

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PE-ACH CONCEPT

PE-ACHs will be a prerequisite for reachability with

SEPA, as all accounts must be reachable for the system

to work.

It is not clear yet what current systems will evolve to

become a PE-ACH, but it is expected that three to five

PE-ACHs will exist after the 2010 deadline. Dutch

Interpay, French STETS and VOCA from the UK have all

indicated they want to evolve into a PE-ACH.

The bulk credit transfer service from EBA STEP2, which

satisfies the current SEPA requirements, is already

available. However not all SEPA countries are connected

to STEP2. The discussion about the IT implications of the

PE-ACH concept will be focused on STEP2.

Architecture and Environment

A multi-purpose debit service, built on the STEP2

platform, is a natural development for STEP2 as a

processing service. With a resilient central system and a

range of participation options, it would be able to settle

in any Settlement Engine using multiple settlement

algorithms.

At a very high level we can describe this as a central

system which exists to receive, store, validate and route

payments, perform calculations of the bilateral positions

of each direct participant, generate settlement messages,

receive settlement results, create payment instructions

and deliver them to the relevant financial institutions. It

also holds configuration data, responds to on-line

enquiry requests, and provides facilities such as archiving

and disaster recovery.

Financial institutions connect to the central system via a

secure network. Currently there is a choice between

SWIFTNet and SIANet. Files are exchanged between the

financial institution and the central system. The files can

be constructed of payments formatted using theMT103+ data set and XML syntax standards. The

business operation of the system is controlled by EBA

CLEARING. A secure business control terminal is provided

at the EBA CLEARING operational centers over a secure

connection, allowing operations staff to monitor and

control the business processing of the system.

Areas that will undergo changes are:

Payment messages file format.

Back end changes in the central system.

SoftwareDirect participant financial institutions require software

to connect to the secure networks, to format files and to

deliver and receive them. Financial institutions may

either build their own connectivity software, or use the

software supplied by participant systems. We believe the

upgrade from the financial institutions existing systems

can be performed with a minimum of change. The

choice of using the participant systems software or

building their own solution will naturally be each

participants responsibility, based upon their own

assessment of the risks.

A web browser application running over the secure

network will be required to allow visibility of payments,

files and bank configuration information within the

system at the bank site.

Financial institutions must consult with the service

provider and decide how to connect to the services

provided within the PE-ACH providers. They must then

run the necessary projects to connect to the systems,

including risk assessment, purchasing equipment and

software, configuration, and testing, before going live.

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Added Value from Cognizant

COGNIZANT AND SEPA

Cognizant provides a range of services that help

organisations implement SEPA. Cognizant's added value

lies in handling the technical challenges that SEPA poses.

As indicated before, the current state of a payment

service provider's application architecture will determine

the changes that are required. The IT strategy will alsohave a huge impact on the changes needed.

Broadly speaking, there are two alternative options open

to a payment service provider. An organisation must

decide whether the work will be carried out in house or

contracted out (outsourced) to a third party provider.

COGNIZANT METHODOLOGY

Figure 10 below displays an overview of the generic

methodology Cognizant would follow for implementingSEPA. The steps and phases that will apply to an

individual organisation will depend on how far it has

progressed with its SEPA implementation. Table 2 shows

the services that Cognizant offers at each phase.

Table 2: Cognizants Service Offerings

Phases Activities Leading Party Cognizant Service

Offerings

Assessment IT strategy Payment Ser vice Technology rationalisation

Phase development Provider

System study + Payment Service Technology rationalisation

gap analysis Provider Offshorability analysis

Implementat ion Payment Service Offshorabili ty analys is

roadmap Provider

Solution Requi rements analys is Joint Effort Standard solut ion

Design (buy + make) Offerings

Vendor Payment Service

selection (buy) Provider

Solution Package Cognizant ERP, Change Management

Implementation implementation/

upgrade (buy)

including change

delivery

Design + coding Cognizant Application Development,

(make) including Change Management

change delivery

Solution Rollout Testing (buy + make) Joint Effort e-Testing

Exploitation Maintenance Cognizant Application Value

(buy + make) Management

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Fig. 10: Cognizants Methodology


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Technology rationalisation

Some payment service providers may not have a

complete and concise overview of their application

environment, let alone a clear vision on the target

situation to be reached in 2010. Cognizant can help

structure your IT architecture by undertaking a

technology rationalisation exercise. This six to ten week

assignment delivers a plan describing how to clean up,

rationalise and streamline your IT application

environment, with a focus on SEPA.

Some examples of these include:

Identifying options for changing the interface to a

single or simplified set of payment gateways

Banks which have payment systems based on certain

payment products will be impacted due to changes in

processing standards to uniform EU standards

Analysis of the payment systems to determine whether

they need to be upgraded or rebuilt

Analysis of the messaging systems and communication

technology to identify rationalisation opportunities

Identifying options for customer account consolidation

and the data migration of account history

Determining an application strategy for streamlined

reporting

Determining a migration strategy, taking into account

the different timelines for implementing SEPA across

different countries.

Offshorability Analysis

Where an organisation is involved in a consolidation

process, and some of the applications need to be phased

out, Cognizant can perform the maintenance on these

end-of-life applications. As a result year-on-year costs are

reduced and valuable resources are freed up for more

strategic projects. Cognizant can also maintain

applications that are not being phased out.

The Offshorability Analysis uses a multi-dimensional

approach to assess which applications are candidates for

(offshore) outsourcing. It not only identifies the IT

services suitable for offshoring, but also defines an

optimal resource model to support the transition and a

cost model to calculate effective savings. Last, but not

least, the Offshorability Analysis supplies you with a

detailed implementation road map for offshoring

applications in a tiered manner, to manage and plan

effective resource utilisation and the adoption of the

new offshore processes by business users.

Buy: ERP + Change management

Your organisation may already have a payments

processing software package or is planning to buy one.

Cognizant is an implementation partner for SAP and

other major vendors. In this role Cognizant can help you

implement and/or upgrade the packages in your

organisation.

Make: Application development + Change

management

When building a new payment processing platform, or

adapting an existing one, Cognizant can take the

delivery risk, by guaranteeing on time delivery for the

new system. This option could apply to applications used

in any of the process steps which will need to change

with the introduction of SEPA.

Testing services

Whatever the options chosen, they will all require

extensive testing, which can amount to up to 50% of the

project budget. Cognizants sophisticated and

comprehensive testing services can reduce the cost

significantly.

Case Studies

CASE STUDY 1: INCORPORATING VISA &

MASTERCARD REGULATORY CHANGES IN CARD

PROCESSING (USA MARKET)

Client's background

The client is a leading third party card processor in the

United States, handling complete monetary and non-

monetary transaction processing and also providing

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other services like embossing (personalising) cards, fraud

prevention and investigation, card activation, statements

and customer service.

Business needs

Visa and MasterCard (MC) make changes to their card

industry governing rules, regulations and proprietary

systems twice a year. Therefore the client needed to

make the following changes:

Changes to proprietary systems in the processorenvironment

Changes to processor systems to support Interchange

process compliance with new rules and regulations.

Scope & Solution

Cognizant has been providing application maintenance

and support services for these interchange applications,

including the entire Master Card / VISA regulations, since

2002. Some of the engagements which Cognizant has

been involved in include:

Privacy notification letter in accordance with GLB

(Gramm-Leach-Bliley) Act on Privacy of Consumer

Financial Information.

Yearly Fleet BIN range expansion for VISA & MC

Introduction of 4000 series of ICA numbers for MC

Execute the new Edit Packages and pass files to Visa

& MC

Handle new FPI (for VISA) and IRI (for MC)

Regulatory Support for Visa Fast Track Forms forCharge backs.

Business Benefits

Cognizant has partnered in the following areas:

Incorporating new rules and regulations and passing

files to Visa & MC

- This involves incorporating the new changes in the

processor test environment, running regression tests

on production data, testing with mock-up data to

simulate the post-production scenario, passing files

to association, testing the incoming stream with files

received from association and final implementation.

CASE STUDY 2: INCORPORATING INDUSTRY

CHANGES IN CARD PROCESSING (EUROPEAN

MARKET)

Client's Background

The client is Europes leading independent third party

transaction processor, with approximately 90 clients in

27 countries. It provides a variety of card and merchant

processing services and money transfer and related

payment services.

Business needs

The clients industry team had to ensure the systems

were enhanced to adhere to industry changes, governing

rules, regulations, and the interface with the proprietary

systems. Cognizant augmented the business team with

their industry and technical skills.

Scope & Solution

Cognizant was actively involved in maintenance and

enhancements of the following application subsystems:

Authorisation

Charge backs

Tickets and Clearings

Retrievals

Settlements

Incoming and Outgoing

Fees

The solution provided involved changes to core areas in

authorisation, involving interfaces to the following:

APACS

SWITCH

Euro pay

MasterCard International

Visa Domestic and European

FNET

BANKNET

Business Benefits

Cognizant employed the right mix and pool of resources.

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They were able to handle complex, generic changes in

the clearings format, charge backs and presentment, and

also a breakdown of the requirements of the payment

systems from Visa and MasterCard.

Cognizant Experience &Benefits

Strong industry focus:

Cognizant has a strong banking focus, with teams of

industry consultants and technology specialists.

Cognizant is at the forefront of offering leading-edge

technology solutions for solving business challenges.

With a combined strength of 6000+ associates in

banking & financial services, Cognizant has expertise and

experience in the areas of cards processing, payment

solutions, retail banking, portfolio management,

brokerage, asset management, custody, clearing andsettlement, wealth management, risk management,

stock exchanges, customer interfacing, commercial

lending and investment banking.

Technology Bandwidth:

Cognizants experience across various technologies and

platforms has helped consolidate its presence in large

financial institutions. Cognizant is involved with

application management across platforms and

technologies such as mainframe, midrange, workstation,networks and the Internet, in projects varying from

legacy systems to web-integration.

Cards & Payments solutions expertise:

Cognizants Cards & Payments Practice leverages its in-

depth understanding of the business and technology

drivers in the payment industry. The practice consists of

industry experts who constantly analyse the latest

business trends to provide state-of-the-art solutions

which have a positive impact on the key processes of

payments solution organisations. Complementing the

business knowledge is the extensive experience of over

1,200 professionals who have been involved in

developing, supporting and implementing industry-

focused solutions spanning a wide range of technology

platforms and business entities.

Over the years, Cognizant has built up extensive industry

competence and functional expertise by partnering with

various clients in the areas of Credit, Debit, Private-label,

Stored-value cards and Payment Solutions.

Cognizants payment card industry experience covers the

entire spectrum of financial services companies including

Issuers, Acquirers, Third Party Processors, Payment

Solution providers, and all process areas including:

Application Processing, Transaction Processing, Customer

Services, Collection and Recovery, Charge backs, Risk

Management, Solicitation, Settlements, Back-office,

Loyalty, and Emerging payment solutions.

In addition, Cognizant has gained experience in various

third-party products such as VisionPLUS, CACS,

Capstone, ACS, TRIAD and Knowledge Sight, widely used

in the cards industry.

Key Differentiators

1) Focus - With a 100% focus on business verticals,

Cognizant works with large clients in core areas of

systems software, engineering services, products,training and enabled services

2) Offshore Maturity - Cognizants onsite-offshore

mix percentage has been steady at a 15-30% onsite:

70-85% offshore average across all kinds of projects

3) Customer Responsiveness - Close interaction with

clients, through the deployment of local relationship

management/account management teams, who are

empowered to make decisions for speedy resolutionof issues.

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4) Onsite-Offshore Delivery Model - Cognizant has

a proven onsite/offshore project management model

with clearly defined roles, reporting structures and

escalation mechanisms and the deployment of Client

Partner and Account management teams. The unique

benefit of this model is the concurrent execution at

onsite and offshore locations, which ensures a

physical proximity to the client as well as a focused,

scalable offshore team.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of IT

services. Focused on delivering strategic information

technology solutions that address the complex business

needs of its clients, Cognizant provides applications

management, development, integration, and re-

engineering, infrastructure management, business

process outsourcing, and a number of related services

such as enterprise consulting, technology architecture,

program management, and change management

through its onsite/offshore outsourcing model.

Cognizant's more than 23,000 employees are committed

to partnerships that sustain long-term, proven value for

customers by delivering high-quality, cost-effective

solutions through its development centres in India and

onsite client teams. Cognizant maintains P-CMM and SEI-

CMM Level 5 assessments from an independent third-

party assessor and is a member of the NASDAQ-100

Index, and further information about Cognizant can be

found at www.cognizant.com.

Banking and Financial Services is Cognizants largest

vertical, contributing to over 35% of the companys

revenues. Cognizants Financial Services practice

leverages domain and technology expertise to drive

additional value for our customers.

At Cognizant the proof is in the pudding: Cognizant

currently serves over 40 clients through our Banking and

Financial Services practice. Our customers provide great

references into the onsite/offshore space.

DONT TAKE OUR WORD FOR IT

According to the 2004 annual CIO Survey by Morgan

Stanley and Goldman Sachs, they found Cognizant

gaining significant traction in the global outsourcing

space. The survey rated Cognizant to have the best

delivery capability among the offshore players.

Cognizant closely monitors industry trends and

regulations. As thought leaders, we actively collaborate

with our clients and invest significantly in solution

development. Our comprehensive and mature portfolio

of offerings enables our clients to consistently deliver

higher stakeholder value and industry-leading results.

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European Offices

20 Orange Street,

London - WC2H 7EF

United Kingdom

Phone: 44 207 321 4888

Fax: 44 207 321 4890

Email: [email protected]

Herengracht 136

1015 BV Amsterdam

The Netherlands

Phone: 31 20 524 7700

Fax: 31 20 524 7799

Email: [email protected]

Cognizant Technology Solutions AG

Seefeldstrasse 69

8008 Zurich

Switzerland

Phone: 41 43 488 35 75

Fax: 41 43 488 35 44

Cognizant Technology Solutions

Tour Ariane

33th Floor5 Place de la Pyramide

92088 Paris la Defense Cedex 5

France

Phone: 33 1 55 68 11 36

Fax: 33 1 55 68 11 37

Hahnstrasse 30-32

60528 Frankfurt

Germany

Phone: 69 66 04 450

Fax: 69 66 04 542

Global Headquarters

Cognizant Technology Solutions

500 Glenpointe Centre West

Teaneck NJ 07666

For further information

please contact

[email protected]

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