1. A reminder on SEPA Participation models

There are two models for accessing SEPA schemes: direct and indirect participation.

• Direct participants connect directly to a clearing and settlement mechanism (CSM) and typically hold a settlement account with a central bank.
• Indirect participants partner with a “sponsor” bank, a credit institution which is itself a direct participant and provides access to the SEPA schemes while handling settlement on their behalf.

Historically, the indirect model was the only available option for PIs and EMIs, because:

• CSMs simply did not allow non-bank payment service providers (PSPs) to connect directly
• The European Central Bank (ECB) restricted access to accounts to credit institutions

As a result, there were no avenues for PIs and EMIs to become direct SEPA participants, as this was an option reserved for credit institutions. But that has now changed.

2. A timeline of regulatory changes impacting direct SEPA access

PSD2 setting the stage for PIs and EMIs

Adopted in 2015, the second Payment Services Directive (PSD2) established the legal framework for PIs and EMIs within the EU, but kept interbank settlement access exclusive to credit institutions.

The yet-to-be-published PSD3 was expected to address this gap, but the mandate for direct access was eventually implemented through the Instant Payments Regulation (IPR), which was adopted by the European Parliament and Council in March 2024.

IPR paving the way for direct SEPA access to PIs / EMIs

The IPR came with the goal to modernise the landscape of instant payments, and ensure new operational standards and enhance end-customer experiences. The changes brought it were significant:

• An amendment to the Settlement Finality Directive (SFD) explicitly adding PIs and EMIs to the list of institutions that can get direct access to payment systems. For context, the SFD was originally introduced in 1998, with the aim of reducing systemic risk from the insolvency of participants in payment and securities settlement systems.
• Imposed obligations on all Eurozone PIs and EMIs to receive and send SEPA Instant Credit Transfers (SCT Inst) by 9 April 2027, with pricing parity to regular credit transfers required by 9 January 2025. For PIs and EMIs outside the Eurozone, the compliance deadline for receiving is also 9 April 2027, while the deadline for sending is 9 July 2027 and pricing parity must be achieved by 9 January 2027.

CSMs followed suit. Systems such as EBA CLEARING’s RT1/STEP2 and the Eurosystem’s TIPS, as well as local mechanisms, have amended their rulebooks to permit non-bank entities to connect as direct participants. Of course, this remains contingent on adherence to technical standards (e.g. ISO 20022), central bank settlement access – which is accomplished directly or indirectly via a settlement partner bank – and safeguarding requirements.

Eurosystem setting the policies for PIs and EMIs to access payment systems and central bank accounts

Following the adoption of the IPR, in July 2024 the Eurosystem published its Policy on access by non-bank payment service providers to central bank-operated payment systems and to central bank accounts. By detailing the operational framework for non-bank access, it stipulated the following:

A. Access to TARGET would be granted to authorised non-bank PSPs that meet the operational and technical requirements already applicable to credit institutions

These requirements are listed in TARGET’s official guidelines. Just like credit institutions, PIs and EMIs seeking to become direct participants must also follow the CSM’s technical and operational rules.

B. PIs and EMIs will not be able to safeguard customer funds at central banks, but only with licensed credit institutions.

The goal is to avoid blurring the lines between PIs / EMIs and banks, as well as the risk of consumers and businesses favouring PIs / EMIs for holding deposits, thereby “adversely affecting the intermediation role of banks and their lending activity to the economy”. It is also stated that existing accounts at central banks will be closed, or their usage for safeguarding purposes be ceased, by April 2025.

This change affects many national central bank-operated payment systems, like Bank of Lithuania’s CENTROlink, which have typically acted as sponsor banks for SEPA indirect participants, effectively allowing PIs and EMIs to safeguard customer funds on their settlement accounts.

C. PIs and EMIs must meet specific additional liquidity limits and risk management requirements

First, the Eurosystem expects yearly updates on their operational and risk management processes. It will also mandate immediate notification from the PI/EMI in case of status changes, such as the suspension of its license.

PIs and EMIs will also face limits on daily settlement account balances, only holding funds necessary to meet settlement obligations for the current business day and must ensure sufficient pre-funded liquidity.

The upper limits were later formalised in January 2025 with the ECB’s Decision (EU) 2025/222 – effective 26 February 2025 and nationally effective from 9 April 2025 – which also confirmed no safeguarding accounts at central banks for PIs / EMIs. The initial maximum cap was fixed at twice the provider’s peak daily outgoing transfers over the prior 12 months and recalculated quarterly in year one, then annually, based on actual historical activity. Balances that exceed this maximum at close of business may incur penalties.

To make this more tangible, let’s consider the following example. Suppose a PI recorded a peak single-day outgoing transfer volume of €18 million over the past 12 months. Based on the ECB’s requirements, the maximum settlement account balance permitted at the end of any business day would be capped at twice that figure – €36 million, in this case. If, at close of business, the PI’s account holds €38 million, the excess €2 million would be considered above the cap and potentially subject to penalties. This €36 million limit would be reviewed and recalculated quarterly during the first year, then annually, based on actual activity.

CENTROlink phasing out its safeguarding accounts to PIs / EMIs

In August 2024, the Bank of Lithuania’s CENTROlink – a dominant sponsor for SEPA indirect participation to all SEPA schemes, launched in 2015 and holding a substantial 58% market share of all PI / EMI indirect SEPA participants – announced it would stop offering safeguarding accounts to PIs and EMIs as of April 2025. Affected customers must migrate their safeguarding arrangements to licensed credit institutions by 31 December 2025.

That said, should these institutions complete the migration in due time, remain connected to CENTROlink, and comply with the ECB’s liquidity requirements, they will automatically be considered direct participants.

3. How do these changes affect you, what possibilities do they open?

Credit institutions

While credit institutions retain full access rights to SEPA schemes and central bank accounts, the environment is shifting around them, with regulatory updates lowering the barrier to entry for non-bank PSPs.

These changes may signal new competition from PIs / EMIs, potentially reducing the demand for indirect access services in the long run.

PIs and EMIs

With direct access to SEPA systems now within reach, the IPR in place, but systems like CENTROlink phasing out their safeguarding support, the implications here are more profound.

PIs and EMIs have a set of new opportunities unlocked, that come with great costs, responsibility and operational complexity nevertheless.

A. Strategic Control

Direct participant PIs / EMIs are no longer bound by a sponsor bank’s risk policy or onboarding restrictions, allowing them to serve customer profiles that could otherwise be excluded. They also gain independence from their sponsor's operational timelines, such as cut-off times, batching schedules, or maintenance windows, which enables tighter control over their customer experience and SLAs.

What is more, direct participants can integrate new schemes as soon as they launch on CSMs, without waiting for sponsor support.

However, this independence is not absolute, as PIs and EMIs still depend on credit institutions for safeguarding. What is more, establishing relationships with CSMs and relevant institutions, as fruitful as they may turn out to be, can prove to be more of an operational burden than a competitive advantage in terms of marginal impact. In fact, it is considered part of the complexity and load that sponsor banks relieve indirect participants from.

B. Differentiation

By becoming direct participants, financial institutions could potentially act as “sponsor banks” and offer indirect participation to other PSPs. Since they must hold a settlement account with a central bank (either the ECB or a national EU central bank), they are able to settle transactions on their own behalf and, potentially, their sponsored PSPs. That said, these accounts are strictly settlement-only, with limitations on balances and no access to intraday credit, reserve holdings, or safeguarding functionalities. Client safeguarding must be handled via third-party credit institutions. While it may be technically feasible for a direct participant to hold safeguarding accounts for others, it remains unclear whether this is permitted or supported in a regulatory context.

There is also no clear precedent or guidance yet on how a PI or EMI acting as a direct participant could offer the same level of sponsorship services as a credit institution. While it appears possible in principle, this has not been officially confirmed.

Should this opportunity be clarified or streamlined through regulation, it could unlock new avenues for growth by generating revenue from new commercial activities.

C. Increased responsibilities

Direct access introduces a new set of new operational burdens, from connectivity setup to operational obligations such as liquidity forecasting, increased compliance reporting, and additional risk governance reporting. As stated above, PIs/EMIs that want to become direct SEPA participants must also have the required level of infrastructure and financial readiness to absorb the task of establishing direct connectivity, as well as the requirements to manage and guarantee liquidity according to changing regulations.

D. Cost management at a very large scale

Though becoming an indirect participant is quicker and requires less capital than developing and validating an integration with one or several CSMs, direct SEPA access can be more cost effective.

Despite high initial setup and regulatory compliance costs, direct participants can have lower running costs on their payments because connecting directly to the CSMs requires no sponsor bank taking a fee on each payment.

That being said, the benefits are only viable at a very large scale. Institutions must be able to handle the technical and operational complexity of establishing direct connectivity, as well as the financial requirements to manage and guarantee liquidity according to regulations.

4. Summary

Over the past decade, a cascade of regulatory changes has reshaped the landscape of SEPA participation. These are:

• The PSD2 establishing the foundation for PIs and EMIs in 2015
• The IPR unlocking direct SEPA access for PIs / EMIs in March 2024, thus removing the exclusivity from credit institutions
• The Eurosystem setting the rules of direct access for PIs and EMIs in July 2024
• The ECB officially forbidding safeguarding at central banks while formalising liquidity requirements for non-bank direct participants in January 2025
• CSMs updating their rulebooks to support non-bank access, and CENTROlink ceasing safeguarding accounts for PIs and EMIs from April 2025

For fast growing PIs and EMIs, the new regulatory framework offers an opportunity to reduce costs, gain strategic control, and build competitive advantage. That is if they are willing and able to take on the financial risk and complexity of direct access.

Credit institutions, meanwhile, will need to reassess their role in this shifting ecosystem, as the lines between banks and non-bank PSPs continue to blur. Direct participation remains a complex and capital-intensive process that few institutions can tackle alone – sponsor banks should not underestimate their role. In fact, one key takeaway for them is that they should better market all the complexity they abstract for indirect participants, as they are much more than regulatory-imposed gatekeepers of the scheme.