The European payments industry marked a significant milestone earlier this month when SEPA Instant came into effect for eurozone payment service providers other than payment institutions. Electronic money institutions will be subject to the regulation from 9th October.
More than 2,700 payment service providers have joined the scheme, which stipulates that if any charges are applied, they must not be higher than those for standard credit transfers. However, figures from the European Payments Council (EPC) show that 23% of European payment service providers have yet to sign up for SEPA Instant, which stipulates that once a payer instructs their service provider to make a payment, the service providers for payer and payee and the clearing and settlement mechanism have to process the transaction and make the requested funds available in the payee’s account in less than ten seconds.
Todd Clyde, CEO of payment infrastructure provider Token.io, notes banks that fail to deliver on the October deadline face administrative sanctions for non-compliance by member states. He says banks should view the EU’s instant payments regulation as a strategic gateway to enable innovative product offerings.
Clyde draws parallels with PSD2, which encouraged banks to introduce new payment services and transform how consumers interact with their accounts and products.
“Banks must conquer technical roadblocks, ramp up real-time fraud prevention, upgrade legacy infrastructure and transition from batch processing to continuous real-time operations — and do it all at breakneck speed,” he says. “But the rewards are immense. A real-time, interconnected and borderless payment ecosystem that spans the continent will benefit financial institutions, consumers and businesses alike.”
Andrew Ng, Partner and Viviana Morariu, Senior Manager at financial services consultancy Valentia Partners agree that SEPA Instant delivers clear benefits for the customer. But they caution that banks face significant compliance challenges in two main areas:
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Fraud prevention – there is lack of clarity from the EPC on the verification of payee.
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Scope of accounts – payment accounts are deemed to be in scope of the regulation but their definition is unclear, which meanscountries have taken different views on the type of accounts to be classified in scope.
Bank connectivity also differs widely across Europe, with Germany’s large number of savings banks connected to a centralised infrastructure, for example.
Then there is the issue of liquidity management. Availability of funds to process instant payments requires reviewing liquidity forecasts (particularly for night-time and weekend operations), maintaining sufficient reserves in various currencies and offering spot rates to clients at any time, even when FX markets might be closed.
While historical trends can help forecast liquidity needs, payment service providers should be aware that instant payments might change customer behaviour and transaction patterns.
Big banks may already have round-the-clock teams but for many smaller payment service providers, the 24/7 coverage required to ensure uninterrupted service marks a big operational change says Martin Hargreaves, Chief Product Officer at digital finance firm Quant.
“For risk and compliance teams, the shift to real-time payments is also extremely impactful,” he says. “Under traditional SEPA payment systems, these teams had several hours to perform due diligence – such as verifying transaction legitimacy, identifying fraud risks and ensuring compliance with AML regulations. SEPA Instant, however, compresses these critical processes into a few seconds. Firms will have already invested heavily in fraud detection technology to handle the increased pressure, while ensuring that legitimate transactions proceed without friction.”
Hargreaves suggests that by matching the instant payment capabilities of the UK, SEPA Instant also puts pressure on the UK to innovate its payments infrastructure.
