The European Commission’s decision to mandate instant euro payments should significantly boost trade across the eurozone.
In late October 2022 the European Commission adopted a legislative proposal to make instant payments in euro available to all citizens and businesses holding a bank account in the EU and in EEA countries.
According to the commission, this would free up money currently locked in transit in the financial system – the so-called ‘payment float’ – estimated to be worth up to €200bn.
The motivation behind this proposal is the disappointing take-up of the instant credit transfer scheme introduced at the end of 2017. The European Commission has acknowledged that as many as one third of EU payment service providers don’t even offer the service and only 13% of all euro credit transfers in the EU were instant (processed within ten seconds) as of October 2022.
Katarzyna Kobylińska-Hilliard, a policy expert at the European Commission, says this figure conceals a large variation in uptake across member states from as high as 70% where instant payments in euro have become a ‘new normal’ way of transferring funds to less than 1%.
One of the most important aspects of the proposal is that charges for instant credit transfers will have to be equal to or lower than the charges for standard credit transfers.
When asked for a realistic timeframe for the introduction of eurozone instant payments, Arjeh van Oijen, Head of Product Management at Icon Solutions observes that banks need to be able to perform vendor selection – which typically takes at least six months – and then implement, integrate and test the solution before they are ready to process outgoing and incoming instant payments.
“As the incoming side is simpler, it is recommended to make the support of incoming instant payments mandatory in the first instance,” he says. “Outgoing instant payments could become mandatory a year later and as a final phase, it could be possible that all SEPA credit transactions need to be processed as an instant payment another two years later so that SCT ‘classic’ can be shut down.”
To enable instant payments banks will need to upgrade their systems if they haven’t already adds Steven Anderson, Director, Head of Product Management at Fiserv in EMEA.
“Many already have TIPS [TARGET instant payment settlement] access, meaning they are able to settle real-time payments received by their account holders, so that is a starting point,” he says.
With the use of instant payments, it could be expected a part of the payment guarantees used today would not be required anymore. But it is not likely that all payment guarantees are going to disappear because of instant payments, especially when the actual payment is made conditional to the delivery of goods or services by the beneficiary.
“Having said that, request-to-pay schemes can play a role in simplifying and speeding up the process of providing a (conditional) payment guarantee by the debtor’s bank,” adds van Oijen. “In card payments, the funds are also not received in real time by the merchant. In most cases it takes several days, but a positive response from the issuer to an authorisation request gives the merchant sufficient guarantee to deliver the goods/services to the buyer.”
The key benefits for businesses if they were no longer required to provide payment guarantees are speed and certainty agrees Andrei Cazacu, EU Public Policy Lead at TrueLayer.
“With card payments, businesses must deal with multiple transaction stages and funds take days to settle in accounts,” he says. “In contrast, open banking payments do not require the authorisation message that comes with cards. When paired with SEPA Instant, the merchant receiving an open banking payment gets instant settlement of the funds.”