Instant payments: Gamechanger in payments or challenge for the industry?
Instant payments in a nutshell and their availability
Key features of the instant payment solution are speed and continuous availability. With instant payments, the payee receives the funds within 10 seconds after the payer initiates a transfer. It does not matter whether the transaction takes place on a working day or a holiday, and at what time. In contrast, standard transfers usually require one business day. That means that a late Friday evening transfer is not available on the payee's account until Tuesday. The advantage of instant payments is that the transferred funds are not left hanging in the air and immediately available for consumption and investment.
Instant payments represent a new category of euro transfers. By introducing specific rules for credit transfers in real-time, the submitted proposal will amend the SEPA Regulation, which currently regulates only standard credit transfers and direct debits. According to the Commission's estimates, the share of real-time euro transfers barely reached 11 percent threshold at the beginning of 2022. For cross-border transfers between two member states, the rate is even lower. Moreover, the situation differs drastically across EU countries: while in Estonia instant payments are already more common than the alternatives (67 percent), in France and Germany the rates are only between 1 and 4 percent. In Greece and Slovakia, instant payments are not available at all. The Commission assesses the progress of the European payments industry in expanding instant payment service as insufficient and therefore proposes drastic measures.
Proposed changes briefly explained
The Commission's proposal contains four central obligations that will apply to nearly all payment service providers in the EU:
First, payment service providers in the EU that offer euro transfers must enable 24/7 instant payments 365 days a year.
Second, the fees for the real-time service must not be higher than the fees for standard euro transfers, which take several days.
Third, real-time transfer providers must implement a security mechanism that automatically checks if the IBAN and the beneficiary's name match before enabling the transaction. In case of discrepancies, payment service providers must inform the payer about fraud risks.
Finally, payment service providers must check daily whether their customers are on EU sanctions lists. Sanctions screening will ensure immediate freezing of funds transferred to such accounts.
These rules only apply to transfers in euros but not in other national currencies.
Commission's expectations and perspectives of the industry
According to the Commission, the mandatory introduction of instant payments could boost the innovation of banks and FinTechs in the EU by encouraging them to develop modern technological solutions such as apps and online tools, as well as new financial services and products based on the instant payment solution. This might also contribute to the competitiveness and strengthening of the European market. Currently, the U.S. card-based payment systems Mastercard and Visa dominate in cross-border payments.
Indeed, instant payments can become a convenient alternative to cash payments between individuals, e.g., for private sales or splitting the bill when going to a restaurant. In the B2B area, real-time transactions can improve cash flow visibility. However, compliance with the proposed regulations will come at a substantial cost to payment service providers. At least one-third of payment service providers in the EU do not provide instant payments in euros. Now, they have to build the necessary infrastructures for instant payments. Moreover, they will lose potential profits from transaction fees for instant service. Since most banks offer their standard transfers free of charge, it means that under the proposed regulation payment service providers must offer instant payments for free as well. Alternatively, it is conceivable that payment service providers could raise fees for standard transfers in response to the new regulation and then charge the same fees for instant payments Standard transfers could likely disappear over time. Inevitable losses for the industry and interference with payment service providers' entrepreneurial freedom raise doubts about the proportionality of the proposed measures.
According to the current draft, payment service providers must ensure the receipt of instant payments within six months of the regulation coming into force. Six months later, they must enable the initiation of instant payments. The European Parliament and the Council will now examine the Commission proposal and, if necessary, make amendments to the Commission draft.
Anastasia Kotovskaia, LL.M.
cep-Expert Financial Markets and Information Technologies