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The European Commission has outlined its plans for instant payments regulations, with commitments for the mandatory provision of instant credit transfers.
The significant potential benefits of instant payments for consumers and businesses in the EU have been impeded by the slow rollout and low uptake, the commission said in its latest payments regulatory proposal.
“Moving from 'next day' transfers to 'ten seconds' transfers is seismic and comparable to the move from mail to email,” said EU financial chief Mairead McGuinness in a statement.
The commission’s proposal, which amends and modernises the 2012 Single Euro Payments regulation (SEPA), consists of four requirements regarding euro instant payments.
These include making instant euro payments universally available, with an obligation on EU payment service providers (PSPs) that already offer credit transfers in euro to also offer an instant version within a defined period, as well as making instant euro payments affordable.
The latter will be done with an obligation on PSPs to ensure that the price charged for instant payments in euro does not exceed the price charged for standard credit transfers in euro.
This requirement will apply to all PSPs offering euro instant payments, but payment institutions and electronic money institutions are excluded. The exclusion is due to their restricted access to payment systems, the commission said.
In 2020, the commission called for instant payments to become the new normal, but so far this has failed to transpire. At the end of 2021, for example, only 11 percent of euro credit transfers sent in the EU were instant payments.
"I’m very happy to see this coming to fruition. Finally, this means that the benefits of SEPA are reaching people, almost ten years later,” Joe Morley, TrueLayer’s EU chief executive, told VIXIO.
The EU is lagging behind peers like the UK on instant payments, he said. “I appreciate that it is challenging, particularly for the smaller banks, to invest in this, but it is a necessity to enable cross-border instant payments.
“We have a fantastic common market, but the lack of instant payments is throttling its potential. This is one of the final big pieces to enable efficient borderless commerce.”
Although this proposal has long been anticipated by market participants, there could be negative consequences.
"This will hit like an atom bomb," said Kjeld Herreman, head of strategy advisory at RedCompass Labs. "I would have unitary instant payments to be accounted for, but including file-based credit transfers will be big. If it is free, why would a pension fund not use SCT-Inst as payment method?”
Herreman cautioned that this could lead to literally hundreds of thousands of instant payments needing to be initiated at once. “This is something that banks currently don’t have the capacity to process within the required 10 seconds."
The EU’s proposal also introduces a requirement for PSPs to offer Confirmation of Payee (CoP), a service enabling customers to be notified when a mismatch is detected between the payee’s name and the international bank account number (IBAN), as supplied by the payer.
Commission officials, as well as regulators at member state level, have previously suggested that they want to revisit current payments fraud rules, and are concerned that authorised push payment fraud, such as phishing and smishing, is on the rise.
However, Herreman warned that the lack of standardisation included could pose a problem here.
"By not mandating the European Payments Council to set a standard for CoP, the commission is making the same mistake that they made with PSD2,” he said.
For example, one of the most contentious issues with the revised Payment Services Directive (PSD2), and something that EU regulators have since expressed regret about, is that there was no application programming interface (API) standardisation in the directive, which led to low adoption.
For sanctions screening, meanwhile, the commission has said that “very frequent checking” of clients against EU sanctions lists, as is already done in certain member states for domestic payments, will be required.
This is instead of monitoring each transaction, which will be a relief for some PSPs in scope.
The introduction of the requirements will be staggered, with four separate dates:
- The receiving of instant payments in euro for PSPs in the euro area will be six months after entry into force of the regulation.
- The sending of instant in euro for PSPs in the euro area will be 12 months after entry into force.
- The receiving of instant payments in euro for PSPs outside the euro area will be 30 months after entry into force.
- The sending of instant payments in euro for PSPs outside the euro area will be 36 months after entry into force.
Cautiously optimistic
The payments industry has been relatively pleased about the new regulatory proposal.
“We welcome the European Commission’s proposal to improve instant payments across Europe,” said Nilixa Devlukia, chair of the Open Finance Association. “We are very encouraged to read the commission’s proposal, which understands that instant payments must be available to every European.”
Instant payments cannot be a premium feature, offered at a high cost to only a small number of consumers, as they are today, she said. “At the same time, more must be done to make sure that payments work seamlessly across European borders, to help create a true single market.
“Today’s proposal is a firm step in that direction. We look forward to working with our partners in EU institutions and in industry to create an instant payments framework that will enable the next generation of payments and a thriving open finance ecosystem.”
For the European Third Party Providers Association (ETPPA), it is essential for new or improved European payment solutions. “Today’s proposal on Instant Payments will provide some of the key missing ingredients for EU TPPs and fintechs to thrive,” said the association’s chair, Ralf Ohlhausen.
“Instant Payments must be free to the payer and final to the payee for EU retail payment solutions to be able to compete with those from the East and West.”
The proposed regulation is a great step forward towards fostering EU champions in payment services, he said.
A spokesperson for Payments Europe, however, was more critical: “It is our fundamental view that the market should determine the pricing and commercial dynamics of payment means.
“The market is best placed to distribute incentives between all parties involved, as this will enable support and uptake by the full payments value chain.”
Customer protection is the industry’s top priority, the spokesperson said. “That’s why we believe that, with regards to the mandatory adherence to SCT Inst, the time window to ensure adherence (six months) afforded to euro-area member states payments service providers is too narrow and could endanger the safety and security of transactions.”
In favour of customer safety, Payments Europe is supportive of having IBAN verification mandated by the regulators, with the possibility for consumers to opt out.
“In our view, regulation should allow the market to decide how to implement such IBAN verification and avoid prescriptive rules regarding the form or the messaging used.”
Arun Tharmarajah, head of Europe for Wise, said that the company hugely welcomes the commission’s proposal to make instant payments mandatory. “It is the only way to make instant the norm.”
“Banks have had the opportunity to implement SCT Inst since 2017, so it's not like they haven't had the time. It’s a step in the right direction if we want Europe to continue taking the lead creating the most innovative payments sector.”
Too often, instant payments, if they are offered at all, are considered a premium service banks charge extra for, he pointed out. “We’re glad to see the commission propose an equalisation of fees, which will incentivise consumers to opt for instant payments as the default. The high cost for instant is too much of a deterrent today.
“Yet again, this proposal shows the importance of levelling the playing field and democratise access to payment systems,” he said.
For Tharmarajah, the EU has helpfully broken up the banking licence and designed regulations in a way that a bank is very specifically a designated lender.
The problem, however, is that regulation is still restricting payment systems to lenders. “This is no longer fit for purpose because non-banks are in an inferior position and have to wait for banks to catch up to the latest tech and innovation. We encourage the commission to fix that next."
