EU Regulation on Instant Payments in Europe – the Story so Far and How Banks Should Prepare

The European Commission (EC) has adopted a legislative proposal on instant payments in euro, in the form of an amendment to the 2012 SEPA regulation. Although the draft regulation leaves some questions unanswered, the direction of travel is clear. This blog considers some of opportunities of instant payments and why banks should prepare now.

We live in impatient times. Everyone wants to be able to pay who they want, when they want, from the device of their own choosing. In theory, electronic payments are the new cash, empowering people to transfer value immediately, conveniently and irrevocably. In practice the journey toward universal instant payments has some way to go. Regulations are forcing the pace and standards are evolving, particularly in Europe. So, what’s happening?

Europe has embraced electronic payments as part of its financial integration strategy. Since 2014, all national bank transfers and direct debits have been replaced by their SEPA equivalents. This change has been accompanied by common standards and technical requirements, including the use of IBAN and the ISO 20022 XML financial services messaging standard for credit transfer and direct debit payments in euro. The SEPA regulation also contained arrangements for euro transfers in countries outside of the euro area.

Making Payments Faster

In practice, businesses and consumers within Europe can now make payments as easily, cost effectively and securely as national payments. This is good for consumers and business, but legislation also obliges EU payment service providers to offer an “instant” version within a defined period. This states that the bank or payment services provider (PSP) must offer the choice for instant/non-instant in all payment channels, including bulk initiation channels.

A Level Playing Field

The draft legislation goes even further, stating that instant must be the default choice. It is worth noting that future-dated payments (single or bulk) cannot be considered instant. The regulation seeks to drive uptake of instant payments by making euro payments affordable and ensuring total pricing transparency.

PSPs are obliged to ensure that the price charged for instant payments in euro does not exceed the price charged for traditional, non-instant credit transfers in euro. This provides a strong incentive for instant payments to become the preferred choice for consumers and businesses. It’s worth summarizing some of the main benefits of instant payments.

Instant Benefits for PSPs

Reduce costs and accelerate digitalization. The proliferation of instant payments should be universally welcomed by PSPs. As customers adopt the new payments and move away from outmoded payment instruments, such as cheques, PSPs rely less on legacy solutions and processes, which are often time consuming, error prone and costly to run. The increased use of instant payments is a catalyst for PSPs to accelerate digitalization and transform how work gets done. Often processes can be consolidated and operational costs permanently reduced.

Gain customer insight. Although often described as the “new cash”, instant payments provide unique detailed information on customer behavior, which can be used in other services like credit scoring, which can ultimately generate additional revenues or cost savings.

Improve fraud monitoring and detection. A higher volume of electronic payments can help PSPs tighten control, improve fraud monitoring and reduce anti-money laundering (AML) risk. With the growth of instant payments, PSPs have more detailed customer profiles than is possible with cash or cheques.

Think big. Payments is a scale business. As more businesses and government institutions adopt instant payments, PSPs have a real opportunity to gain economies of scale and boost the return on their technology investments. Innovation will also drive uptake as people value the increased convenience, reduced friction and contextualization that’s only possible with instant payments.  

The Need for Trust – confirmation of payee

To realize the above benefits, people need to trust instant payments. The draft regulation obliges providers to verify the match between the bank account identifier (IBAN) and the name of the beneficiary provided by the payer to alert the payer of a possible mistake or fraud before the payment is made. Commonly known as “confirmation of payee” the beneficiary bank is obliged to respond to each payment request with either “match”, “close match”, “no match” or “error”. The draft legislation does not specify the criteria for a close match, or the liability associated with these responses. However, the EPC is drafting a confirmation of payee scheme rulebook and interface specifications, which will soon be available for consultation.

EU Sanctions Screening

Providers of instant payments in euro will be required to follow a harmonized procedure for sanctions screening, based on daily checks of their own clients against EU sanctions lists. This should effectively deal with the high rate of unnecessarily rejected euro instant payment transactions which is the consequence of the current transaction-by-transaction sanctions screening practices, which are not easily reconcilable with this new type of fast payments. Some payment service providers have reported to the Commission that about nine percent of their cross-border instant payments in euro are currently rejected. The proposed approach has been tested by payment service providers in several member states. This will ensure continuous effective compliance of providers with their EU sanctions screening obligations.

Act Now

After a slow start, the new regulation is likely to kickstart the adoption of instant payments across Europe. And experience suggests that uptake will accelerate through the network effect. The compliance burden will vary between banks and PSPs but the potential benefits suggest that instant payments is an attractive investment. Although the proposed implementation deadlines for individual measures have been staggered over time, banks and PSPs should speak to their technical partners and prepare soon.