Harmonising cross-border payments is arguably one of the most complex topics in the payments universe. But achieving the combination of cross-border payments and instantaneity, as is planned for roll-out across the European Union, is even more challenging. Interoperability, level of services, security, risk, and costs are all key elements to be addressed across the multiple jurisdictions involved. Even when countries share a geographical proximity and the same currency as is the case in the EU. In front of such a mandate to make Instant Payment universally available across the EU, the European financial industry needs to prepare for in depth change. As said by Mairead McGuinness, Commissioner for financial services, financial stability, and Capital Markets Union: `Moving from `next day` transfers to `ten seconds` transfers is seismic and comparable to the move from mail to e-mail.
Today, despite the fact that two-thirds of the payments services providers in the EU already propose Instant Payments in Euros, the EU market remains largely disjointed, a situation which is leading to a low rate of Instant Payments adoption, with Instant Payment only representing 11% of all payments across EU in 2022. With the European Commission mandating the European marketplace to move to Instant Payments, this fragmentation should reduce, allowing the remaining seventy million accounts that do not allow their holders to send and receive euro instant payments to join the race.
As detailed in the March update of the four-point regulatory proposal, the current SEPA Instant payments structure is one that has been based on a number of disparate national regulatory solutions that, whilst being well-intentioned, are also hard for banks and their customers to navigate. As that March update states: `Those national regulatory solutions pose a risk of fragmentation of the internal market, thus increasing the compliance costs due to different sets of national regulatory requirements and making the execution of cross-border instant credit transfers more difficult.`
Therefore, here is a quick summary of this fast-approaching set of four main changes from the EU government.: 1) Mandate instant payments to the Euro; 2) Make them affordable; 3) Mandate verification between the IBAN and the payee and 4) Mandate verification with sanctions screening lists at least on a daily basis. All of which should make Instant Payments navigable for consumers and standardised for banks. For some banks and PSPs, this will be difficult, but certainly achievable. For others, however, this will be a tough ask.
Whilst there are barriers that need to be addressed and overcome, there are also plenty of opportunities that can be leveraged. To do a deeper dive and provide more clarity we interviewed Frédéric Viard, Head of Strategy – Instant Payments at Bottomline.
Frédéric, we are looking at a substantial set of changes to the current business-as-usual approach. Do you think this proposal was motivated by current problems or a desire to improve the current situation?
The current situation is fragmented regarding Instant Payments. We have some countries and banking institutions ready to process instant payments as we now know them, and then you have other member states or banks that are less advanced regarding Instant Payments. This lack of universal reachability is resulting in friction, and it makes the cost of an Instant Payment pretty high. The new EU mandate will make pricing more affordable and will be a driving factor in bringing the remaining seventy million accounts online to send and receive Instant Payments. Removing frictions thanks to standardisation will also help to grow rapidly the usage of Instant Payments, which is still exceptionally low. So, there is an urgent need for improvement which will be facilitated by pushing the market to provide something which is much more affordable and frictionless.
Please take into consideration that SEPA Inst has been available since 2017; the EU infrastructure has been up and running for a considerable period of time already. So, the timeframe will only be a challenge for those who have not yet considered implementing Instant Payments. But not having the full marketplace interoperable for Instant Payments has driven poor adoption so far. In addition, costs are still high for an IP compared to a standard payment. Finally, the mandate is built on two main steps with an adherence to a first pillar (mandating to at least being able to receive Instant Payments), and then a second one which is about receiving and sending. This, as well as the fact that the mandate has not been approved yet, allows for more time to implement the mandate. As an assumption, if the proposals are approved in October, which is the date that is being bandied around on the grapevine, it means that in April 2024, banks and PSPs must be able to enable the receipt of instant payments in Euros. And in September 2024, they will need to be able to activate the send of Instant Payments. The deadlines for EAA members are 30 months and 36 months, respectively, according to our ‘man- in-the-know, Diederik Bruggink – Head of Payments, Digital Finance and Innovation (WSBI-ESBG).
For those who haven`t implemented SEPA Inst yet, it is particularly challenging because it is not just about making payments faster; it also requires a complete overhaul of your system. Instant Payments run on a different infrastructure, are subject to different procedures and have major ramifications for balance monitoring & liquidity management. There are some PSPs for whom this will be more difficult than others. To a certain extent, this complexity will be dictated by whether banks & FIs need to do a complete overhaul of systems, processes, and procedures. For those that are battling with legacy infrastructure, then the task will be even more daunting. The other side of the coin is that if you already have the agility to move quickly, by using for example SaaS components, then the first part of your implementation roadmap is already in place.
I understand those concerns. Let us also not forget that Instant Payments are based on the ISO 20022 format. Therefore, becoming ISO 20022 Native across your whole ecosystem well before the 2025 SWIFT co-existence period ends will be an added bonus; the rich data from ISO 20022 will certainly provide additional options for banks & FIs to create new services and new potential revenue streams. So, to successfully implement Instant Payments, you must manage the orchestration of processes based on a new 24x7 and ultra-fast paradigm and also have the internal skill sets in place.
There are cost issues to consider, and these need to be balanced against the strength of the business case. Your options include building your own direct connectivity to SEPA Inst on-premise, connecting via a sponsor bank, or accessing the rails via a SaaS platform. This range of options allows an institution to align directly with its own strategy and goals. Once you have looked at cost, then the rest centres around infrastructure. With regards to the expected processing time of 10 seconds, the only option, in any case, is to be fully automated, interconnected, and have an orchestrated end-to-end process with a well-defined SLA for each component involved in the processing chain. But, of course, the beauty of SaaS is that it can support these requirements by design, and it offers a scalable and future-proofed solution.
Maybe not a “reset,” but probably a major upgrade. It is about rethinking everything around the traditional payment process in the context of 24X7X365 functionality and ISO 20022 format. Those banks & FIs that have already moved towards this Instant Payments mindset and capability will have a clear advantage. This coupled with the operational efficiency, access to standardised rich data and interoperability resulting from having ISO 20022 front and centre of your operations will also make compliance even more achievable. There is no doubt that Instant Payments will become the ‘new normal,’ arguably it is already. However, it is not just about speed. Instant Payments are so much more, and it will be the PSPs that embrace all the revolutionary opportunities to create new value propositions and improve their customer’s experience that will gain the competitive advantage.
Watch our supporting webinar in full here: EU Commission SCT Inst Mandate: How to choose the most efficient strategy.
Frédéric Viard is Head of Product – Instant Payments, Securities and Data, Analytics & Insights. With over 20 years of experience in the financial messaging market, Fréderic drives Bottomline’s product road-map to help banks & FIs achieve wider reach, speed-to-market, industry compliance, greater security and improved risk management.
Bottomline delivers a single SaaS platform for payments, securities, and messaging that helps financial institutions and corporations to achieve lower costs, wider reach, speed-to-market, greater security, and improved risk management.
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