The deployment of EU instant payments will require patience and vision

It was Bill Gates who in 1996 wrote “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”. He could have been describing the state of play around the new European Union instant payments regulation proposals released on October 26th, 2022. The pace of change has never been this fast and it`s consumers who stand to benefit most. The industry has responded in a thoroughly cooperative manner, which is not easy given the scope of these regulations. But the timeline for those changes has drawn pushback from some quarters, and I’d like to respond to that here. A slight natural reticence will occur in front of any change, but as Winston Churchill said, “To improve is to change; to be perfect is to change often.” 

First, a bit of brief background is in order because these proposed changes (and it’s important to remember they’re still in the proposal stage) are complex. I’ll try to simplify them for our purposes. In its current state, according to the EU Finance Commission, about ten percent of credit transfers in the EU are processed as an Instant Payment. For cross-border payments amongst EU countries, it’s even lower. The reasons have to do with interoperability and confidence. The payment service provider of both the payer and the payee must use instant payments technology (at least for being reachable) for the transaction to be successful. However, many parties on both sides of that equation have bristled at adopting the technology for that reason. No surprise then that about a third of EU PSPs don’t offer Instant Payments. Consumers and businesses that could benefit from the immediacy of the payment and the resulting liquidity have been left in the lurch. 

The current state rests on the 2012 SEPA regulations, which are obviously in need of an update. If I had to boil that proposed update down to four main aspects they would be 1) making instant payments universally available in euros within six months after said proposal is approved 2) making these payments more affordable, mandating that they stay in line with non-instant transfers 3) implementing an obligation similar to the UK’s confirmation of payee which requires PSPs to match the international bank account number (IBAN) and the name of the beneficiary and 4) requiring PSPs to verify their clients against the EU sanctions list at least on a daily basis. Aspects 3 and 4 aim at replacing the traditional sanction screening of each individual transaction, which is a process generating too many rejections for Instant Payments.  

Now, about that timeline. No organisation or individual company has objected to the proposal. However, Payments Europe, which represents a wide range of credit card companies and banks, has expressed concerns about the timeline. As it stands that timeline mandates that PSPs are equipped to receive Instant Payments six months after the legislation is passed. Being able to send Instant Payments will be enforced a year after ratification. If that timeline were set in stone, and if the European Finance Commission were completely averse to amendments, I would be thoughtful. After all, six months is a heartbeat in the life of a bank. However, this process will take time. The proposition will have to follow an administrative process that will take at least several months before it enters into force. This is an excellent opportunity for banks and FIs to produce a checklist to make sure they know what they need to do to be ready: ensure that your infrastructure for instant payment orchestration is in place, running on a 24x7 basis including the liquidity master, and that all the compliance and screening needs are covered. Because the advantages here are significant. 

Covering settlements

One of those advantages I haven’t heard much about is the real-time settlement piece on a 24x7x365 basis offered by TIPS. Every company wants their central bank payments settled in real-time. Well, if you want to have your settlement in real-time, then you need instant payments technology. In the past, we have had a lot of deferred settlements, followed by a clearing process being run several times during the business day. That became a big problem with, according to the European Finance Commission, up to EUR 200 billion being locked in the financial system every day. With instant settlements this settlement really is in real-time, resulting in economic benefits in the range of 1.34 to 1.84 billion per year according to the Commission.   

Instant Payments is just one of the things on a very busy banking agenda in the EU. In my opinion, they have to make this a priority as it requires an in-depth rethink of their current architecture. And the first thing they need to do is protect their business (by remaining compliant) and ensuring business continuity (by upgrading their ecosystem and managing customers expectations). Of course, with digital payments transformation, this goes hand in hand with Cross-border Instant Payments which is the ultimate goal on a global scale. Under that umbrella, they can provide better services to their customers as well as improve profitability and enhance customer experience. When Instant Payments are made more consistent across borders, the volume will increase. More volume equals potentially more revenue, and in turn, better margins. 

I fully understand Payments Europe’s position. But again, let’s remember it’s not locked in yet. What will happen next is that firstly both the European Parliament and the European Council will start looking at this proposal and so have the opportunity to make amendments if required. Only after that can the process be finalised. The law will be adopted at some point in a time still to be published and that could potentially take another 6 to 12 months before that selection process has been entered. And, as a result of this process, also the timelines in the proposal can be changed by the amendments. 

And to revisit Gates & Churchill, the willingness to change approaches perfection. Patience will be necessary.