SEPA - Single Euro Payment Area

White Paper

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

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, Antimoney 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 realtime product behaviour and lower consumer prices are all increasingly 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 Banking Association (EBA) in Brussels. These groups formed the European Payments Council (EPC) in this Workshop.

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.

Fig. 1: Single Europe-wide Payment Structure Key Components

Supported by the New Legal Framework for Payments in the Internal Market The schemes describe the inter-bank relations, the bankto-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

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 harmonised payment structure for the EU. These are explained by Figure 1:

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.

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 valueadded 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:
Fig. 2: Direct Debit

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

Cards Transfer The Cards Transfer will harmonise card usage throughout the SEPA area. Currently, it only involves so called general purpose cards - the mass market cards for

provide further input for the SEPA implementation.

Fig. 3: Key Directives

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.

Fig. 4: Timelines and Responsibility of Key Stakeholders1

Source: EPC Annual Report 2004

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 payment associations 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.
Fig. 5: High Level Impact on some Key Stakeholders
Key Stakeholders Business Impact Technical Impact Impact on Fees/Cost Impact on Domestic Services Impact on Cross Border Services

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
Will definitely improve

Retail Customers

Low

Low

Lower

Improve (for Major inefficient Improvement countries) Improve (for Major inefficient Improvement countries) Major Improvement

Corporate / SMEs Customers Banks

Medium

Medium

Lower

High

High

The fees will Neutral get lower but the cost may increase Not yet clear Neutral

ACHs

High

High

credit card transactions (interchange fees). It provides a concise view of the expectations and apprehensions of the key players in European arena.

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

6. European consumers organisation, BEUC, has welcomed the aims of the single payments market and in particular favours binding, sanction-backed legislation to counter industry reluctance and the imposition of extra domestic charges.

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.

Fig. 6: Bank Payment System

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

Order Receipt A1.1 Order Preparation & Conversion A1.2 System xxx System xxx Order Repair & Enrichment A1.3 Credit Check A1.4

External Interface

System xxx

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 different institutions (four-party system). Such a system requires information to be exchanged between the two accountmaintaining 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 the generic 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.

10

Table 1: High Level Outgoing Payment Process Overview Impact Assessment

Process step Order Receipt Order Preparation + Conversion

Impacted by SEPA?
YES Customer channels that are provided by payment service providers need to be able to handle SEPA style orders. NO Very little changes are expected. SEPA orders will mainly be delivered electronically and therefore require very little preparation and conversion, which is normally the case with paper based transactions. YES The value-added services that are expected to be offered by the payment service providers will require changes in this area. Examples may include automatic repair functionalities to increase the STP rate and enrichment of non-SEPA domestic account numbers to IBAN numbers. NO The credit check is needed for every payment order, no sweeping changes are expected with the introduction of SEPA. NO The payment validation and authorisation process step has to do with the agreements between a customer and its payment service provider. SEPA will have no direct impact on the way this agreement check is handled. YES The EPC rulebooks mandate that the scheme operates in Euros. However, the accounts held by the customer do not necessarily have to be in Euros, currency conversion is therefore needed for all non-euro accounts. This conversion needs to be extremely efficient for high volume processing. YES The PE-ACH's will evolve within the SEPA area. The exact target number is not yet clear, but it is expected that multiple PE-ACH's will co-exist, each handling one or more SEPA 'products'. The routing process that determines which PE-ACH to use (and the way to get there) plus actual transmission of the message is bound to become a very important function. YES Depending on the outcome of the routing and transmission process step, the settlement process step will be determined. This will have an impact on the way the general ledger is maintained. YES It is expected that the NLF will present guidelines on the standard tariffs of SEPA products and special tariffs will exist for value added services (especially for corporate clients). The billing process step should be able to cope with this. YES The reporting process step may apply to either customer reporting (e.g. balance statements) or to central bank reporting. Customer reporting is certainly impacted by the existence of SEPA; central bank reporting may be impacted.

Order Repair + Enrichment

Credit Check Validation + Authorisation

Currency Conversion

Routing + Transmission

Settlement

Billing

Reporting

11

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.
Fig. 8: Direct Debit System

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.

12

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.

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

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.
Fig. 9: Card Payment System

Settlements & clearings Charge backs & retrievals Fees Statements

13

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.

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

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

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.

14

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.

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

IT Implications
Cognizant 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 depend on 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.

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.

15

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 the MT103+ 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. Software Direct 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.

16

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 also have 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 implementing SEPA. 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.
Design + coding (make) including change delivery Solution Rollout Testing (buy + make) Exploitation Maintenance (buy + make) Cognizant Application Development, Change Management Solution Design Implementation roadmap Payment Service Offshorability analysis Provider Standard solution Offerings Assessment Phase IT strategy development System study + gap analysis

Table 2: Cognizants Service Offerings

Phases Activities Leading Party Cognizant Service Offerings

Payment Service Technology rationalisation Provider Payment Service Technology rationalisation Provider Offshorability analysis

Requirements analysis Joint Effort (buy + make) Vendor selection (buy) Payment Service Provider Cognizant

Solution Package Implementation implementation/ upgrade (buy) including change delivery

ERP Change Management ,

Joint Effort Cognizant

e-Testing Application Value Management

Fig. 10: Cognizants Methodology

17

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 nonmonetary transaction processing and also providing

18

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 processor environment 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 for Charge 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.

19

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.

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 industryfocused solutions spanning a wide range of technology platforms and business entities.

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 and settlement, 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.

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

Cards & Payments solutions expertise: Cognizants Cards & Payments Practice leverages its indepth 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

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 resolution of issues.

20

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.

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.

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 reengineering, 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 SEICMM Level 5 assessments from an independent thirdparty 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.

21

European Offices 20 Orange Street, London - WC2H 7EF United Kingdom Phone: 44 207 321 4888 Fax: 44 207 321 4890 Email: info@uk.cognizant.com Herengracht 136 1015 BV Amsterdam The Netherlands Phone: 31 20 524 7700 Fax: 31 20 524 7799 Email: infonl@cognizant.com 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 Floor 5 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 Phone: 201 801 0233 Fax: 201 801 0243

For further information please contact sepa@cognizant.com

www.cognizant.com