When 12 European countries adopted the euro as their common currency on Jan. 1, 2002, transaction costs for citizens travelling from one "euro zone" country to another fell to zero, as long as they paid cash.

But transaction charges for electronic payments remained, and those for cross-border payments were much higher than for domestic payments. Sending €100 from one European country to another cost an average of €23.60 in 2001.

In January 2002, the European Commission ordered banks to charge the same fees for cross-border payments as for national ones. By 2005, that had brought the cost to the customer of transferring €100 down to just €2.46, but with no corresponding changes in the procedures or technology for handling those transactions, the cost to banks remained high.

The Single Euro Payments Area (SEPA), a grand project to harmonise bank payment systems for three kinds of transactions, is intended to remove cost disparities and speed the flow of money across the euro zone. Transaction fees could come down, payment delays could be reduced, and new services could make it easier or cheaper for small businesses to take payments from prospective customers in neighbouring countries. SEPA will begin to take effect in January, continuing through 2010, and has the backing of the European Commission, the European Central Bank and the European Payments Council (EPC), a banking industry group.

There's potentially a lot at stake: making SEPA the IT platform for automating business payment processes could save European businesses up to €100 bn (£71 bn) a year, European Commissioner for Internal Market and Services Charlie McCreevy said in May.

It's an enormous task, though, and a number of legal, procedural and technical obstacles remain before it can be fully implemented.

With SEPA, the holder of a bank account in one euro zone country should be able to exchange payments with other euro zone countries as easily as if they had an account in the country concerned. But to allow that, banks need to rebuild or duplicate many of their core systems for making national payments, businesses need to update their databases and financial systems to incorporate new payment details for customers and suppliers, and countries across the European Union need to introduce a common legal framework for international payments, the Payment Services Directive.

The three transaction types covered by SEPA are credit transfers used to make a one-off payment to another account; direct debits initiated by the account holder receiving the payment, and card payments. The first two will replace national payment systems, while the third will run alongside them.

Banks in some countries are using the move to the fully automated "straight-through processing" systems used for the first transaction type to go live, SEPA Credit Transfer (SCT), as an opportunity to reduce or eliminate costly paper-based manual payment systems such as cheques. The Eurocheque cheque clearing system used in Germany is already gone, and Belgian banks are expected to gradually stop offering cheques as a means of payment.

To make a SEPA Credit Transfer the debtor needs, at the very least, to know the creditor's IBAN, or International Bank Account Number, or else SEPA-compliant systems will reject the payment order. All banks adhering to the SEPA agreement now print account numbers in IBAN format on statements, and businesses hoping to receive payment via SEPA transfers should print them on their invoices, and make sure they have the IBAN for any companies they exchange payments with.

Software vendors are offering automated tools to convert national bank account details into IBANs, although some authorities warn that the numbers of exceptions possible make automated translations risky: better, they say, to obtain the correct IBAN direct from the party concerned. Swift, the payment processing cooperative, is also compiling a directory of IBAN data to simplify the processing of such exceptions.

Beyond IBANs, businesses exchanging bulk payment data with their banks need to adopt a new XML format for the data, based on the ISO 2022/UNIFI standard, or make sure the bank can convert their existing formats.

One feature of the SEPA payment message format is that the field for describing the nature of the payment is limited to 140 characters: Accounts payable clerks should start practicing their SMS skills now.

Payment orders not in compliance with the SEPA specifications will be rejected, with exceptions either returned to the sender for reformulation, or hand-processed. The handling costs likely to result from that will be an incentive for all concerned to get their systems in order.

Although EPC says everything is on schedule for the introduction in January of SCT, it has had to move the start date somewhat.

EPC had previously set a target of 1 January for the launch, but in June announced it would move the date back to Jan. 28 so as to give banks more time for their end-of-year routines and, in Malta and Cyprus, the introduction of the euro as the new national currency. Then in September EPC announced a further relaxation of targets: banks operating in more than one SEPA country can now adhere to the SCT agreement if they are ready to accept SCT payments at a majority of their branches, rather than send and receive SCT payments at all of them, as previously required.

The Netherlands, for one, is emphasising its readiness to receive payments: Banks there say they will be able to receive incoming SEPA credit transfers from Jan. 28, and will gradually offer outgoing payments to the point where, in early 2008, around 90 percent of Dutch bank customers can use them, according to the Netherlands Bankers Association.

Officials put the number of European banks affected by SEPA at more than 7,000, but by 31 October only 1,471 had signed an adherence agreement saying they are ready to accept SCT payments. Signatures continue to trickle in, though, and banks have until Dec. 14 to sign the agreement if they want to be part of the Jan. 28 launch.

The launch of the SEPA Direct Debit (SDD) system is somewhat further off, as some of its features depend on legal changes included in the European Union Payment Services Directive, which E.U. member states have until Nov. 1, 2009 to transpose into national law.

Direct debit systems allow vendors to debit their customers' accounts either once or periodically, under the terms of a mandate signed by the debtor. With SDD, the creditor's bank will store the mandate, rather than the debtor's bank, as with existing U.K. and Belgian systems. Legislation will also be needed to harmonise the time allowed for appeals: SDD will allow debtors eight weeks to contest a payment made in error.

For some countries the introduction of the third type of SEPA transaction, card payments, is hitching a ride on another big change in payment card systems: the roll-out of EMV (Europay-Mastercard-Visa) cards. That's the case in the Netherlands, which is migrating its national card payment system to an EMV-compliant one and issuing payment cards that comply with both EMV and SEPA Card Framework specifications. In any case, the SEPA Card Framework allows that countries can run national and SEPA payment systems in parallel for years to come, making this switch less time critical for businesses.

Jan. 28 will be far from a "big bang" in payment processing, but the cost savings that banks expect to make from its operation should push those not yet in compliance to join the club soon.

Where in the world is SEPA?

The Single Euro Payments Area (SEPA) will have most effect in the so-called euro zone, the countries that have adopted the euro as their national currency since its introduction on 1 January 2002. The original 12 members of the euro zone, Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, were joined by a more recent member of the European Union, Slovenia, on Jan. 1, 2007, making the euro the national currency for over 320 million people. Malta and Cyprus will adopt the euro on Jan. 1, 2008, bringing the number of euro zone members to 15.

SEPA also affects the E.U. members that have not adopted the euro: nine that plan to, Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia, and three that so far do not: Denmark, Sweden and the UK. Their transactions in Euros with euro zone countries will have to follow SEPA rules.

Four other countries are similarly affected: Switzerland, and the three members of the European Economic Area, Iceland, Liechtenstein and Norway.