Clearing and settlement systems (CSMs) are at the core of European payments. Every day, 48 trillion of payments are cleared by those systems using the standard language of ISO XML files. However, the requirements to directly participate in the clearing and settlement process is a demanding process from a financial, technical and regulatory perspective.

For example, only 300 financial institutions are direct participants in the SEPA area. All of them are credit institutions (banks), as the regulation currently doesn’t allow PI/EMIs to be direct participants. So, how can PI/EMIs also place payments to CSMs? Through more intermediated participation models, which simplify the complexity of accessing the schemes.

In the article, we will explore the four main participation models. And with the upcoming third payment service directive (PSD3) in 2025/2026, we will also explore what PSD3 might mean for financial innovators looking to build products in the SEPA area.

In the non-participant access model, companies will send and receive payments as any individual or corporate customer would, using the services of a payment services provider or a bank. In this model, companies send payment orders to their PSP or bank and receive payments on their account by exchanging customer-grade messages or information with their bank or PSP. They do not have to process payments or exchange information with third-party financial institutions.

In this model, companies become participants in payment systems. They send and receive payments as if they were a bank, exchanging bank-grade messaging with third-party financial institutions.

In this model, companies will connect to the SEPA payment systems and settle payments via a “sponsor bank”. The sponsor bank is itself a direct participant and holds settlement accounts with the European Central Bank. The sponsor bank will forward messages from and to the indirect participants to payment systems and settle payments through its own European Central Bank settlement accounts.

Directly connected non settling participation

The directly connected non-settling participant (DCNSP) is restricted in the SEPA area to banks. (while in the UK it is also open to PIs and EMIs). In this model, the company will directly connect to the payment systems for payment instructions, but settle payments via a sponsor bank. The sponsor bank is itself a direct settling participant and holds European Central Bank Settlement accounts. The sponsor bank will settle its DCNSP payments through its own European Central Bank settlement accounts.

Direct participation

In the SEPA area, the directly connected non-settling participant (DCNSP) is restrictedto banks. (while in the UK it is also open to PIs and EMIs).

In this model, the company will directly connect to the payment systems and settle payments via its own European Central Bank settlement accounts.

Participating in the schemes (indirect, DCNSP, DSP) is usually linked to the financial institution looking to issue their own accounts and associated IBANs - a must for EMIs and banks opening accounts for their clients. Other reasons to participate can be additional control on payment operations and lower cost per payment.

Between the different participation models, the consideration is mostly linked to the annual volume of payments and how the complexity of build/maintenance offsets the higher marginal cost per payment of more indirect models. A direct participation model can also enable the financial institution to onboard other institutions as indirect participants.

The table below summarises a way to think about the different participation models.

The third payment services directive (PSD3) aims to modernise the European retail payment systems, increase consumer controls over their data and reduce fraud. The proposal - to be clarified over the coming years - encompasses six main areas of action, one of which aims at democratising the access to retail payment systems for financial innovators.

The previous payment service directives already built towards a more open and participative financial system. PSD1 (2009) created the electronic money institution license that financial innovators like Stripe leverage in Europe. PSD2 (2017) introduced open banking and the payment institution license, further increasing the regulatory options for financial innovators.

PSD3 aims to further level the playing field between banks and non-banks by allowing non-bank payment service providers (PIs or EMIs) access to all EU retail payment systems, with appropriate safeguards, and securing those providers’ rights to a bank account. Few details have, however been shared so far on how this direct participation model will work

Looking at the UK payment systems offering DCNSP and DSP models, elite PI/EMIs have adopted the opportunity of direct participation with 43 participants as of 2023 (around 6% of all PIs/EMIs in the UK) in comparison to 1513 indirect participants. At Mambu Payments, we are looking forward to our PI/EMI partners being able to see the opportunities that this change will bring about.