How to prepare for instant payments?

Following a legislative proposal focused on instant payments, banks and other payment service providers must prepare for the changes ahead.

In brief:

• The European Commission recently issued a legislative proposal that includes new obligations for banks and payment services providers.
• Offering an instant version of credit transfers will become mandatory without extra costs compared to traditional credit transfers.
• IBAN checks and daily sanction screening need to be implemented.

On October 26th, 2022, the European Commission published a legislative proposal focused on instant payments in EUR. This proposal will amend the SEPA regulation and the Cross-Border Payments Regulation.
 

What are Instant Payments?

Instant Payments constitute a much faster alternative to traditional credit transfers, and allow the transfer of money at any time of any day within ten seconds.

Instant Payments, also called Real-Time Payments, have spread quickly in recent years due to increased demand by consumers and businesses for instant money movement. However, the maturity and adoption rates vary by region, with the UK as early adopter since 2008, and many countries such as India, Sweden, Australia and Mexico following. At the end of 2021, only 11% of the credit transfers in the EU were Instant Payments.

Although Instant Payments is a key step toward the future of payments, the true value of Instant Payments is only realized when completed by value-added services also known as “overlays”, such as request to pay, instant cross-border payments and fraud and liquidity management tools.

Financial institutions, Payment Service Providers (PSPs), PayTechs and FinTechs would benefit from providing these “overlays”, to not only increase their bottom lines but also the transactional volumes on the rail itself.

For more information about Instant Payments, have a look at the European Commission’s instant payments factsheet.
 

What is the objective of the European Commission’s proposal?

The key objective of the legislative proposal is to remove the barriers that prevent Instant Payments and their benefits from becoming more widespread. The idea is to achieve this by making Instant Payments in EUR available at no extra costs, secure, and processed without hindrance across the EU.
 

What the impact for PSPs?

The proposal brings four new obligations for PSPs:

1) Obligation to offer instant payments

All PSPs (bank or otherwise) who offer credit transfers in EUR to their customers in the EU will be required to provide Instant Payments, 24/7, 365 days a year.

2) No extra costs

PSPs will have to provide Instant Payment transactions at no extra cost compared to traditional credit transfers in EUR.

3) IBAN Checks

PSPs will need to perform IBAN checks, to verify whether the payment account identifier and the name of the payee provided by the payer match. If a discrepancy is identified, PSPs will have to immediately notify the payer and inform on the risks of authorizing this transaction. PSPs will have to provide customers with the option to opt-out from this service.

4) Sanction Screening

PSPs will need to perform sanction screening on their customers, at least on a daily basis and not during the execution of an Instant Payment.

What are the next steps?

The Commission issued a Regulation proposal. Therefore, the local implementation by the Members States will not deviate from the EU Regulation.

This adopted act is open for feedback until 05/01/2023. The feedback will then be summarized and presented to the European Parliament and Council. Once adopted, the Regulation becomes binding 20 days after its publication in the Official Journal of the European Union.
 

How should Banks and in scope PSPs prepare?

The priority is to perform a gap assessment between existing processes and functionalities and the upcoming requirements. In particular:

• Assess the end-to-end architecture to evaluate real-time compatibility then adapt all batch-based processes to real-time processes,
• Review existing sanctions screening systems, scope and rules,
• Review how to boost fraud detection systems, leveraging the existing fraud transaction monitoring,
• Implement matching systems between name and IBAN of the beneficiaries, and the option to de-activate this service,
• Assess the impact of year-round, 24/7 Instant Payments on system resilience and updates.

In addition to implementation challenges, banks and PSPs should also assess the impact on profits and strategy, considering the resulting increased competition and effects on price.

Therefore, banks should waste no time in mapping out their capacities. This is even more urgent given the tight compliance timelines and the amount of work that will be needed in some EU markets.

Don’t hesitate to contact our dedicated teams if you wish to discuss potential consequences on your business!