The two companies have signed a Memorandum of Understanding (MoU) to establish a merged entity, which will manage around 6.6 billion transactions per year and hold a 10% market share in the eurozone.

The merger is expected to be completed by mid-2006.

Interpay says the combined firm will be the first full-service payment processor in the single euro payments area and will be offering Sepa products as soon as the scheme goes live on 1 January 2008.

Commenting on the merger, Ben Haasdijk, CEO of Interpay, says: "With the establishment of this new company, Transaktionsinstitut and Interpay ensure a solid market position in the consolidating European payments market.

"The combined volumes of the two processors will result in considerable increase in scale, and will enhance important synergy and scale advantages in the future."

Michael Steinbach, Transaktionsinstitut's spokesman of the board of managing directors, adds: "Joining forces with Interpay enables us to jointly gain substantial advantages and to offer highly competitive products in terms of price and quality."

He says the proposed merger will also benefit FinForce, the cross-border payments entity established by KBC and EDS and in which DZ Bank claims a ten per cent stake.

The aim of the Sepa initiative to dismantle cross-border barriers and drive down costs for non-cash euro payments to the level of domestic transfers. The initiative is expected to lead to intensified competition and consolidation so that ultimately only a very limited number of payment processors will remain.