SEPA Indirect participants

Reachability in SEPA - Indirect participation

Introduction

Payments are at the heart of the services provided by every fintech company. In Europe, this means accessing the SEPA (Single European Payments Area).

One option is to use the payments services provided by your bank. Another option is to become a SEPA participant.

While becoming a SEPA participant unlocks many benefits it does represent a significant investment that can be clearly reduced by becoming an Indirect Participant.

What is SEPA

SEPA stands for Single Euro Payments Area. It’s a payment integration initiative of the European Union that allows to send and receive euro payments across Europe under the same conditions and rights regardless of the country.

SEPA includes 40 countries such as:

All 27 EU countries

Plus, Iceland, Liechtenstein, Norway, Switzerland, Monaco, San Marino, Andorra, Vatican City and United Kingdom, Albania, Montenegro, North Macedonia and Moldova.

The inclusion of North Macedonia and Moldova was approved by the European Payments Council (EPC) in march 2025, with financial institutions from theses countries expected to be operationally ready by October 5, 2025.

How SEPA Works

SEPA Payments are based on the four-corner model. There are four actors that form the blocks of the scheme

Originators and Beneficiaries are account holders that have an account with a PSP.

PSP (Payments Service Providers) can be credit institutions (normally called banks) or non-banking financial institutions such as payment institutions, or electronic money institutions.

A key role and responsibility of PSPs is to send and receive payments on behalf of their customers by holding customer accounts and connecting to the CSMs.

The PSPs are connected via a CSM (Clearing and Settlement Mechanism). Each country tends to have its own CSM, for example Iberpay in Spain or SIBS in Portugal and they all tend to be interconnected to a pan-European CSM such as STEP2 by the EBA Clearing.

Direct Participation vs Indirect Access

A PSP (Payment Service Provider) is connected if it:

• Participates directly in a CSM (Clearing and Settlement Mechanism) or

• It is served by a direct participant as an Indirect Participant.

Why Choose Indirect Over Direct Participation?

Becoming indirect participant instead of a direct participant in a CSM is a strategic choice for many financial institutions, particularly smaller banks and fintechs. Here’s why:

Lower Cost and Operational Overhead

• Direct participation requires:

  • A technical gateway to the CSM platform (e.g., SWIFT network access)

  • High-availability infrastructure (redundancy, security, 24/7 support)

  • Real-time monitoring and reconciliation systems

  • Compliance with the CSM’s operational rules and connectivity tests

• Being reachable through a direct participant avoids these requirements:

  • No need to build direct connectivity

  • Outsourced back-end infrastructure

  • Pay a service fee to the direct participant

🔹 Result: Lower total cost of ownership and faster go-to-market for SEPA services.

In summary, being reachable offers a cost-effective, low-barrier way to participate in SEPA payments.

Indirect Participation Types

There are two forms of having a Direct Participant represent a reachable PSP:

• Indirect Clearing and Indirect Settlement: The Direct Participant handles Clearing and Settlement for the Indirect Participant.

• Direct Clearing and Indirect Settlement: The Direct Participant only represents the Indirect Participant in Settlement.

Indirect Clearing and Indirect Settlement

To be used with SCT (SEPA Credit Transfer)

Direct Clearing and Indirect Settlement

To be used with Instant SCT

Use Case

The fintech that wants more control

Consider being a mid-sized European fintech that has a successful and proven business case where moving funds its core to your business. You launched your operations using a Banking-as-a-Service provider which allowed you to access the SEPA network. As you have scaled and acquired more customers, you have encountered limitations that slowed your operations and affected your customer experience. For example, not having your own BIC/IBANs meant that your name never appeared in a transfer or you have recently discovered that your BaaS provider does not have instant payments. Not to mention those frustrating periods of unavailability.

So you have come to the conclusion that you need to be closer to the SEPA network and stop depending on your BaaS provider. You need to be a SEPA participant.

To be a SEPA participant you could become a bank (a daunting task) or you could become a non banking financial institution such as an EMI (Electronic Money Institution) or PI (Payment Initiator).

Once you are an EMI/PI you could then access SEPA by becoming an Indirect Participant.

SEPA indirect participants are one level closer to the CSM than a bank corporate.

PagoNxt Payment Hub offers a proven end-to-end processing solution implemented across FIs in UK, Europe and the Americas addressing all clearing requirements. Our solution is a cloud-native service platform featuring end-to-end payment orchestration, universal multi-rail support, native ISO20022 compliant, and uses an open, API-driven philosophy..

Our payments SMEs have decades of industry experience and frequently contribute to European-wide papers shaping current regulations.