Banks face tougher requirements as EU reaches provisional agreement on instant payments

The EU has reached a political agreement on its instant payments legislation, which aims to improve the availability of instant payment options denominated in euro across the EU and the European Economic Area.

While instant payments have been offered in the EU for a number of years, under the provisional agreement, instant payments in euro will become a requirement — not a possibility — for payment service providers, according to Dirk Haubrich, head of conduct, payments and consumers at the European Banking Authority.

The proposals will require banks to be capable of receiving and sending instant payments without surcharge and across all channels, with payments capped at €100,000.

Instant payments to permeate banking

Agreed under the Spanish presidency of the Council of the EU, the instant payment regulation will “unleash an enormous potential”, according to Carlos Cuerpo, secretary general of the treasury and international financing of the government of Spain and minister for economy, trade and companies.

Currently, only 11% of all money transfers in euros are instant, Mr Cuerpo says. Based on the European Commission’s (EC’s) impact assessment, approximately €187bn is locked in the financial system on a daily basis, which is unavailable for spending or investing, but rather “floating” in transit in a payment system, he adds. With instant payments, these would become immediately available.

As such, the EU is working to make instant payments the “new normal”, according to Kjeld Herreman, head of strategy advisory at a financial advisory firm RedCompass Labs. 

Offering greater consumer convenience and choice, together with a cheaper platform for merchants, Mr Herreman says instant payments enable increased sovereignty for the EU, with Europe’s retail payments heavily dependent on payments giants from the US.

For European regulators, payment methods using instant payment rails, rather than card rails — which may be subject to US oversight — enhance European sovereignty, he says.

“New payment versus delivery use cases can be unlocked,” Mr Herreman continues, “especially when combined with overlay services such as open banking, request to pay, or the European Payments Initiative.”

But instant payments require a large “step change” from banks, including those for which instant payments are less vital, Mr Herreman says. He points to private banks and investment banks whose systems are not designed or built to “do things overnight”. 

“For these banks, introducing instant payments — which their clients aren’t necessarily waiting for — is incredibly challenging. They are going from zero to 100 very quickly.”

Banks face ‘enormous challenges’

Payment service providers like banks that provide standard credit transfers in euros will be required to offer the option to send and receive instant payments in euro. Any charges that apply must not be higher than the charges that apply for standard credit transfers, the agreement proposes.

Mr Herreman says that instant payments’ technical implementation will be an “enormous challenge” for banks, requiring them to rapidly assess their digital capabilities, with banks facing demanding timelines governing instant payments implementation.

As a result of the banking industry pushing back on formerly proposed timelines, banks will now have nine months to receive inbound instant payments instead of six, and 18 months to process outbound instant payments, up from one year, Mr Herreman says, although the timelines “remain extremely aggressive”.

“Even banks which already have instant payments capability will need to massively invest to scale their payment processing capabilities. Banks will need to be able to receive instant payments at scale by the end of 2024,” he says.

Banks must also facilitate an immediate currency conversion when the beneficiary’s account is not denominated in euro. With foreign exchange markets that are not suited for a 24/7 environment, the technical feasibility might prove “extremely challenging” for banks to address outside of business hours, Mr Herreman says.

Investment in technology will determine banks’ ability to meet instant payment requirements as they grapple with streamlining the process of instant payments, he adds.

“Fraud detection, sanction screening, customer accounting, checking for sufficient liquidity — a typical bank will have upwards of 10 different applications that they need to integrate for an instant payment. And they can only go as fast as the slowest of those interfaces.”

Lacking corporate perspective

Challenges with the proposals stem from their consumer perspective, which suggests a “lack of understanding” about how complex corporate processes work, Mr Herreman says.

“It stipulates that payment providers must have confirmation on payee as soon as the client introduces the payment, prior to authorisation. Yet, for corporates, such payments arrive as pre-authorised files, so it’s not about authorising a payment, but authorising the channel.”

The legislative text also requires payment providers to perform a confirmation of payee, yet process instant payments immediately, which Mr Herreman says is “contradictory”. Although not an issue for retail instant payments, this challenge applies to use cases in which the payment arrives pre-authorised, he says.

In the provisional agreement, the EC and European Parliament recognised that the new rules will come into force after a transition period that will be faster in the euro area and slower in the non-euro area.

Mr Herreman anticipates remaining “incoherences” once the legislation is finalised, by which time it will be up to the national authorities to determine how to deal with inconsistencies or non-compliance, he says.