Banks could face a bill of more than £880 million for failed transactions immediately following the introduction of the Single Euro Payments Area (Sepa), research has shown.

Sepa will make payments made across national borders by credit or debit card or electronic transfer as cheap as transactions within states. It will begin to come into operation on 1 January 2008 and is set to be fully established by 2010. Last month, the European Union (EU). agreed new cross-border payment rules to provide a legal framework for Sepa.

The survey of more than 100 European banks, accounting for 70% of European payments, examined practical issues of efficiency and "straight through processing" (STP) arising from the introduction of Sepa schemes and services.

The study, carried out by Coleman Parkes for IT services firm LogicaCMG, found that 35% of retail banks anticipate problems in the correct addressing and processing of Sepa payments through banks and intermediaries.

The banks cited a range of problems that could arise from failed transactions, including the cost of handling exceptions (63%), an increase in the number of payments returned to the originator (60%) and loss of reputation (59%).

The industry average cost of dealing with a failed transaction was likely to be around £4, the study found – a figure that would translate into total costs of almost £883 million, based on the banks' estimates of the total volume of Sepa payments in 2008. Growth in Sepa volumes would drive this figure even higher.

Simon Bailey, payments director at LogicaCMG global financial services, said: "The potential cost of dealing with failed transactions, as we have discovered, could be huge as Sepa comes into force. But significantly, the survey has also found that there is a high reputation impact and a customer service issue that banks will also have to manage.

"Failed retail payments transactions will be very apparent to customers. In an industry as competitive as retail banking, such failures could have damaging consequences and it would seem evident that current plans do not appear to address this issue in a systemic manner."

Bailey added: "Between 2008 and 2010, the banks' own estimates of the number of Sepa-compliant transactions mean growth of at least 40%. The cost to the industry and risk of failures will increase dramatically if the issue is not addressed."