According to the European Commission, approximately €200 billion are blocked on a day-to-day basis in the EU and EEA by what is termed “float delay”. Namely, the latency between a transfer between two accounts. This is a substantial sum, on which if released could boost consumption and investment. Hence the push from the commission for the general adoption of instant payments between different bank accounts across EU.
To achieve this goal, in October 2022, the Commission adopted a proposal for a regulation making instant transfers the standard. A logical development in a rapidly digitalising world and industry players agree with the principle. Where they disagree is that under the current proposal the fees charged for instant transfers should not exceed those of traditional transfers, which in general, are free or included in the account fees. It’s not as simple as just pushing a transfer button. The integration of immediate transfers requires technological adaptations that necessitate substantial operational investments – ones that now can’t be recouped from higher rates.
Slow progress
“It’s a huge change,” observes Didier Richter, Head of Daily Banking & Payments at Banque Internationale à Luxembourg. “Adopting a system that needs to run continuously, 365 days a year, means that all systems, including anti-fraud and anti-money laundering, have to be updated to be able to respond in less than 10 seconds,” continues Richter. Beyond simply updating systems, it makes liquidity management increasingly complex for a 24/7 model. Banks will need to anticipate the amounts that will need to be placed in reserve at the ECB daily, as well as estimate the amount needed on weekends to ensure pay-outs.
Adopting a system that needs to run continuously, 365 days a year, means that all systems, including anti-fraud and anti-money laundering, have to be updated to be able to respond in less than 10 seconds.
Since 2017, and the introduction of SCT Inst within the Single Euro Payments Area (SEPA), instant payments have grown, but at a relatively slow clip. Currently, only 14% of all transfers carried out within SEPA are instant. This is due to a number of barriers that have yet to be overcome. Approximately 30% of banks in the area do not offer this option for clients. Additionally, for this type of transaction to take place, the two institutions must both make use of similar technology – further limiting the number. Pricing is another obstacle, as is customer fear of the risk of fraud and error. However, the leading obstacle is that given the difficultly of checking all requirements within less than ten second – particularly accounts subject to EU sanctions – a significant number of these transactions risk being cancelled.
Payments specialists Sandrine Munezero and Sylviane Jeanty at ING Luxembourg consider it coherent to standardise rates between instant and traditional payments given the aim to create a new European standard. “Nevertheless, the proposed regulation has raised questions and undoubtedly requires clarification on the implementation of certain functionalities, including relating to deadlines imposed for compliance and the method for verifying consistency between the beneficiary’s name and IBAN,” they note.
Adjusting the scope of the regulation
While PSPs are sympathetic to the Commission’s proposal, due to be adopted in early 2024, they are in regular discussions with authorities to reduce the scope. If adopted as it stands, the new regulation would require all transfers to be processed within seconds, whether initiated from a computer, phone, teller or an ATM. “In its current version, the proposed regulation goes beyond what is necessary. Imposing the offering of instant payment in a branch, for example, will require costly implementation for a non-proportional benefit,” says Anni Mykkänen, Senior Policy Adviser at the European Banking Federation (EBF). She also questions the value of involving the entire EU in the project, rather than limiting it to establishments in the Eurozone. She highlights banks outside the Eurozone where the volume of euro payments is fairly low. The EBF is now aiming to convince the European Parliament and member states to better calibrate the proposal.
In its current version, the proposed regulation goes beyond what is necessary. Imposing the offering of instant payment in a branch, for example, will require costly implementation for a non-proportional benefit.
However, this is not to say that the federation doesn’t realise the benefits of promoting instant payments within Europe. For several years now, European authorities and payments players have seen the value of establishing a system that could compete with major credit card issuers, most American, especially within the e-commerce space. Mykkänen highlights that “by offering instant payment to the seller, new European payments solutions based on instant payments could emerge and challenge cards currently in use and give concrete expression to Europe’s ambition for strategic autonomy in payments.”
At BIL, which launched its instant payments service in July 2020, preparations are underway to make it the standard after a switchover to a new IT system. Richter believes that commercially, success should follow relatively soon. “Merchants have everything to gain. They’ll be able to reduce interchange fees for credit card transactions, while at the same time obtaining an irrefutable payment guarantee for instant payments. Many are now turning their eyes to the Netherlands, a pioneer in the field of instant payments, and the evidence is clear: they already account for more than half of all electronic payment transactions.”