What does the European Commission's proposed regulation on instant payments mean for the industry?

In October 2022 the European Commission (EC) announced a legislative proposal to make instant payments in euros available to all citizens with a bank account in the EU/EEA. In short, the EC proposal contains four major initiatives: 

1. All Payment Service Providers (PSPs) that already offer credit transfers in euros (excluding payment institutions and electronic money issuers) should also offer instant (SCT Inst) payments.
2. End user fees for instant payments should be equal to or less than those of standard credit transfers (SCTs).
3. All PSPs should provide a Confirmation-of-Payee (CoP)-like service, i.e., senders should be made aware of the recipient of a transfer. 
4. Concerning sanction screenings, all PSPs should conduct daily checks of their clients against EU sanction lists rather than prior to each payment. 

The EC has several intentions: 1) increase the supply of instant payments in euros, 2) address dissuasive fees for instant payments compared to other payment methods (i.e., avoid premium fees for instant payments), 3) simplify the sanctions screening process, and 4) increase security and confidence in instant payments.

Huge geographical deviation in the uptake of instant payments

One of the biggest reasons the EC is proposing legislative action is that four years after the SEPA-wide instant payment scheme went live, the uptake of instant payments in the eurozone lags behind its expectations. According to the EC’s impact assessment, euro instant payments made up less than 11% of all euro credit transfers by volume as of Q421. This means that only about one in nine credit transfers in euros are instant payments. 

There are major differences in uptake between EU countries. In some markets, instant payments have become the “new normal” (the Netherlands), and others are on this path (Belgium and Finland). In other countries (such as France and Germany), there is plenty of space for instant payments to grow. Uptake was only between 1% and 4% in Europe’s largest two markets (France and Germany). And in markets such as Austria and Italy, the uptake compared to SCTs has been negligible, according to the EC’s impact assessment.

Some of these differences are driven by market-specific characteristics and payment habits, the price of instant payments, lack of incentives, value-added services (VAS) facilitating a better user experience in payment initiation, competition issues, and payer concerns about the security of instant payments, to name a few. This has meant that the benefits of instant payments are largely unrealized for consumers, merchants, corporates, PSPs, and the economy as a whole. 

This is not the first time governments or payment communities have created such a mandate. In Brazil, the largest banks were required to join the new system (SPI) when it was launched in November 2020. This created an initial network effect that quickly attracted smaller banks, non-bank PSPs, and payment initiation service providers to join voluntarily. A similar example is India with its launch of UPI. In Hungary, the central bank decided to migrate the majority of transactions to their new RT payments system; all transactions below 10 million Forints (~EUR 26,000) are processed instantly. The adoption of instant payments in the Netherlands was achieved by the banking and payments community’s collective decision to migrate one-off transactions to instant payments, not by regulatory pressure.

What does this mean for the industry and Europe’s payment ecosystem?

For Clearing and Settlement Mechanisms (CSMs), this could mean changes in the use of payment services. The migration of SCTs to SCT Inst could take place for certain use cases, shifting volume, and the need for specific VAS along with them. CSMs will need to understand how potential payment migration will impact their services. The increased interest from banks to provide request-to-pay and other VAS as well as the need for fraud prevention services> are all likely to increase should the EC’s proposal go into effect. 

Payment gateway providers will benefit from increased business opportunities in the next 1-2 years, specifically in the markets where instant payments are not yet widely adopted. Payment gateway providers will need to prioritize markets to penetrate and understand local needs because payments are still very culturally bound.

Card networks will see implications too, as the widespread adoption of instant payments could open the door for the use of SCT Inst at the POS if incentives are aligned. This could mean increased competition for card transactions, which in turn could affect revenue streams. In fact, we are already seeing this in some markets outside of the EU. In Brazil, Pix transactions have already exceeded all other electronic payment methods, including debit cards. Card networks need to set a strategy based on different adoption scenarios, and understand who their new competitors are, which markets are likely to see faster RT adoption, and how they can compete with new players.

For VAS providers, the EC’s proposal could mean increased demand for request-to-pay solutions, directories, open banking-related services, CoP, and identity verification services. 

PSPs that do not yet offer instant payments will need to decide which CSM to join. This needs to incorporate concerns around cost, timelines, requirements, payment gateway vendor selection, fraud services, and other VAS. 

Banks need to understand how to leverage the revenue opportunities of real-time payments in a landscape where fees are under pressure and end-user habits are changing. Instant payments will affect revenue generation – the EC’s proposal prevents instant payments from being offered as a premium product, which could mean cross-subsidizing or developing VAS on top of RT payments that lead to a positive business case. Furthermore, banks will need to educate their business customers about how they can benefit from the opportunities presented by real-time payments.

And while many of the issues around instant payments have been solved, there are still outstanding issues when it comes to implementing CoP: does CoP require a new scheme? To what degree will CoP be standardized across the SEPA and/or the EU? What role can CSMs play in creating cross-border interoperability? 

For payments experts and enthusiasts, the EC’s proposal is certainly an exciting initiative to follow. Major changes in the payments space are likely to occur in the next one-to-two years and I expect to see movement in the payments value chain.