How Europe’s PSPs are bracing for SEPA instant payments
Europe’s instant payment capabilities are in the midst of a major revamp that seeks to unify systems and experiences across the single Europe payments area (SEPA) and position the continent as a major player in all-for-one payment innovation.
Europe is well on its way to a future where SEPA instant payments reign supreme
Despite the industry’s constant longing for anything and everything instant, this scenario has struggled to play out in what is still a highly fragmented market. So much so that right now, only around one in 10 of all euro credit transfers in the EU are processed as instant payments.
Regulators are actively recognising room for improvement, and naturally at the heart of the push for better are the European Central Bank, the European Commission and the European Payments Council.
Picking up the pace
The European Payments Council first introduced its system for facilitating instant payments – those that can be settled within 10 seconds or less of an order being made – through its SEPA Instant Credit Transfer scheme (SCT Inst), which launched in November 2017.
The scheme promotes constant availability and an ability to process payments from service provider to service provider at an elite level of speed. As such, it removes the limitations of traditional credit transfers, which are typically bound to the business hours of the handling payment service provider, with credited funds taking more time to appear as a result.
On paper, SCT Inst is everything a mosaic of economically diverse nations would need to achieve single market transactional agility. Unfortunately, the reality is much less harmonious and uptake has been markedly slow.
The European Commission was quick to pick up on the flaws of the council’s scheme, despite the scheme’s initial intention to deliver widespread change for the better, when it proposed legislative amendments that would mandate instant payment capabilities among PSPs on a Europe-wide level.
The benefits identified in the commission’s original proposal last year are strongly centred on the increased efficiency of cross-border payments, as well as wider cost efficiency for receiving merchants.
The mandate requires all PSPs currently offering credit transfers in euros to also offer instant payments, but not at a cost that exceeds those incurred by non-instant credit transfers.
Additionally, the action also recognises that with increased speed comes increased risk, which is why the Commission is now also requiring instant payment providers to instate confirmation of payee (IBAN name checking) as a means to mitigate the potential for fraud and mistakes.
Furthermore, PSPs will be required to check their own clients on a daily basis, shifting from a legacy reliance on transaction-based screening, which according to the Commission, “generates a substantial rate of incorrectly rejected suspicious transactions”.
Intervening for instant
Much like the original scheme it’s seeking to amend, the mandate has nothing but the best payment outcomes in mind for the European community.
When asked by FinTech Futures why a mandate is necessary now, the Commission says that currently, the full-scale benefits for EU citizens, businesses, public authorities and society at large “cannot be fully achieved and the current limited choice of electronic payments, especially for cross-border payments to merchants (in physical shops and e-commerce), remains unaddressed”.
“Five years after the necessary technology was put in place to process euro payments instantly, it is apparent that the efforts of the European payments industry or Member States have not been sufficient to remove these obstacles throughout the EU in a timely fashion,” the Commission continues.
It says that because of this tardiness, a conclusion was reached that “legislative intervention is necessary to unlock the full-scale network effects by connecting all payment service providers to instant payment technology, tackling high prices and frictions, and mitigating the risk of fraud or errors”.
The current state of play
When a new angle of regulation comes into play, especially in regard to finance, there couldn’t be a truer saying than “failing to prepare is preparing to fail”.
European regulators are pushing for continent-wide instant payments adoption
After all, SEPA is a patchwork of varying payment behaviours and needs, stitched together with interlinking but often inharmonious payment systems. The mandate is, above all, seeking to ignite a new level of unification across the region. However, one of the main hurdles in realising this outcome is first understanding where the most leg work is needed.
Take Denmark, for example. The country has been extremely welcoming of instant payments, primarily through MobilePay. First introduced by Danske Bank in 2013, the app enables low-cost instant payment capabilities, and according to Statista, has accumulated a 90% penetration rate amount the country’s adult population.
Furthermore, Danish banks routinely instate IBAN name checking as a rule of thumb, being one of the key conditions of the Commission’s incoming mandate and also in line with the Nordic Payments Council’s confirmation of payee scheme.
Comparing this to countries like France reveals why a SEPA-wide mandate has become increasingly necessary. In France, instant payment adoption has remained markedly low for a number of reasons.
Firstly, users can typically receive instant payments for free, but are likely to incur costly premium fees when standing on the sending side. Secondly, Carter Bancaire, France’s national debit scheme, retains significant popularity, while its proven profitability over recent years has arguably deterred the banks that own the scheme from shifting to instant payments.
In light of the mandate, French PSPs will clearly have more work ahead of them compared to their Danish counterparts. Specifically, they will need to readdress the value proposition of instant payments, while also revaluating their current infrastructures to accommodate the round-the-clock availability required by the mandate.
The Commission identifies the need to pair payments technology, the high price of implementation, insufficient assurances relating to fraud risk, and inefficient transaction-by-transaction sanctions screening methods as four of the key obstacles to instant payment adoption, with around one third of PSPs in Europe having yet to offer any form of instant payments.
Speaking to FinTech Futures, the Commission warns that tentative PSPs may incur heightened compliance costs if they have not already embraced or prepared to embrace instant payments.
“More specifically, compliance costs will pertain to becoming ready to offer the service of receiving and sending euro instant payments, as well as implementing the new service of checking the match between the name and IBAN of the beneficiary,” a spokesperson comments.
Its impact assessment reveals that those costs in practice vary from PSP to PSP, being “significantly smaller” for the majority of small-scale providers.
It also expects these costs to be offset by the operational savings inspired by the mandate, namely in the area of sanctions screening obligations and fraud mitigation as a result of implementing IBAN name checking.
Consumer benefits
As with all innovations in financial regulation, the end consumer sits at the heart of the intended benefit. Previously, consumer credit transfers have been hindered primarily by operational delays and costly price requirements, both of which appear to have been addressed by the agenda of the mandate.
For the Commission, these benefits will materialise “in all types of daily life situations, such as receiving funds promptly in case of emergencies, the ability to settle shared costs conveniently and immediately in a diverse set of social settings (restaurants, gift purchases) or the ability to pay overlooked bills minutes before the deadline in order to avoid late fees”.
Adding to the conversation, NatWest’s head of international payment products, Simon Flitton, recognises how consumers “increasingly demand the ability to make purchases anywhere and at any time”, and says the UK high-street bank sees “a number of benefits to our customers” using SCT Inst.
“SEPA instant credit payments gives us the platform to meet this requirement and enhance the European Payment service NatWest provides,” Flitton says. “We also see future opportunity in the transformation of our processing across re-usable payment flows. However, to create true future value, we believe it will be necessary for industry-wide adoption and innovative solutions.”
Despite this opportunity, he also acknowledges that the implementation of SCT Inst will require “significant change” across the bank’s current technology, which incurs “a number of challenges across our operations”.
For these reasons, NatWest is expected to impose “a carefully managed migration plan” with a specific focus on “scalability and resiliency”.
Practical progression
Major banking players like NatWest will naturally have the bandwidth to adapt to the requirements of the mandate with greater ease, assisted by the Payment Systems Regulator’s (PSR) legislative efforts to mirror those set out in neighbouring Europe.
“All the key ingredients for an international global standardisation approach are there”
The bigger and perhaps more pressing question around SCT Inst is how it can be implemented effectively for smaller PSPs.
This pressing matter was recently analysed by the US payments technology provider Volante Technologies through its whitepaper, ‘Outlook for instant payments in Europe’.
The whitepaper assessed the readiness of the market to establish connections with real-time payment networks, and considered factors concerning sanctions screening, liquidity requirements and pricing dynamics.
Speaking to FinTech Futures, Volante’s global head of product, Nadish Lad, explains how he expects the implementation of the mandate to differ from institution to institution.
“Some institutions are very tech savvy, and so would look at probably doing something internally with their own teams. But largely financial institutions’ main job is to focus on the financial aspects of banking, rather than technology.”
When questioned on whether or not all institutions have the same internal leverage to manage the requirements of the mandate, Lad says it’s unlikely, which he expects will inspire a heightened level of outsourcing to experienced vendors with an established history of implementations in other countries.
“That’s where it becomes a much more compelling business case,” he says. “If you have implemented it in other countries, you know the pitfalls, you know what needs to be done.”
“And that is where we think that a lot of the preference is going to be more on using a vendor rather than doing something internally.”
Developing on this, it’s important to remember that although the mandate underlines SEPA-wide connectivity, it also champions a more global view of interoperability with other international markets, for example the Middle East and the US.
Given the fragmentation in European processes at the moment, and in light of the differing levels of leg work required by each player to meet the regulation, Lad argues that European payment providers should pay equal amounts of attention to instant payments’ global developments as well as the pursuit of the standard domestically.
“If we look at the steps where we are heading now, it is probably important to look at a more global scale, because the concept is that, at the end of the day, we are looking at Europe today, but within a few years, we fully expect some key corridors, for example, USD to euro.”
Lad says the advent of these “key corridors” would champion a new level of globalisation powered by instant payments, delivering lasting benefits to businesses and banks alike.
“All the key ingredients for an international global standardisation approach are there. If you have to do it, let’s think about where it’s heading and think about the next steps.”
Next steps
SEPA instant payments have inarguably taken centre stage within Europe’s pursuit of payments innovation, and it’s a pursuit that is gaining increasing speed.
Its progression has been most recently noted by the European parliament voting in favour of implementation deadlines for the mandate on 7 November, setting the rules up to be actioned and instated at the close of a scheduled transition period.
In terms of the Commission’s “progressively applied” timeline for implementation, all PSPs will need to have instated the technicality needed to support incoming instant payments, and the associated sanctions screening requirements, by May 2024 at the latest, including the compliance of eurozone PSPs with pricing requirements.
By next October, eurozone PSPs must be able to support outgoing instant payments as well as IBAN name checking requirements.
Fast forward to April 2026, the receiving of instant payments in euros for PSPs outside the eurozone must be enabled, while these PSPs will also need to comply with pricing requirements by that time too.
October 2026 is when the industry can expect to see the sending of instant payments in euros outside the eurozone to be enabled, at which point PSPs outside the eurozone will also need to company with IBAN name checking requirements.
A phased approach it most certainly is, and one that appears to accommodate the fact that PSPs have varying levels of improvement to instigate.
There is little doubt of the functional and operational benefits of mandating instant payments and SCT Inst specifically, or of the Commission’s accommodating approach to standardisation. The proposals are inspiring the industry to rise to a new level of service by tackling areas of slow or difficult adoption.
As of right now, it’ll be most interesting to see how PSPs adjust to the mandate through their structures, partnerships and collaborations, and particularly, which ones are set to fly or fail in keeping up with Europe’s insatiable need for speed.
