Instant Payments Regulation: What it means for Europe

Bringing opportunity and challenge

The regulation offers a wide range of benefits for businesses and individuals and helps to align the EU-wide adoption of instant payments and other digital payment-related services. Foremost, it will enable faster transactions on a broader scale. The speed of instant payments can improve business cash flow and provide consumers greater convenience, reducing the waiting time typically associated with traditional payment methods.

Additionally, the regulation can help streamline cross-border payments within the EU, reducing friction and providing the framework for a unified approach. The importance of cross-border commerce in the modern world has the potential to foster greater economic integration across the EU.

It also encourages financial institutions to adopt advanced technology to facilitate real-time transactions. This push for innovation can empower the development of new payment services, deepening and improving customer experience and encouraging competition among providers.

Financial security is also increasingly important for modern customers. 93% of surveyed customers indicated it is essential to be protected from fraud or payment mistakes when using instant payments. The necessary security measures can take time if member states are not aligned. One of the key requirements of the regulation is Verification of Payee (VoP). This mandates PSPs to perform an IBAN-name check  of beneficiaries. This itself brings further challenges for PSPs in navigating various complexities, such as regional variations in names due to spelling, cultural differences, abbreviations, homographs and more. These same challenges extend to the verification of companies, creating a further layer of complexity for PSPs to navigate. However, by doing so, and investing into faster, more cohesive processing times, financial institutions take full advantage of advanced fraud detection techniques to help them reduce the risk of fraudulent transactions. Some of these VoP related obstacles can be mitigated by the use of data sources, and more often, the integration of AI into operational processes.

Challenges for banks and other PSPs

Obviously, the regulation brings significant benefits. However, it also presents challenges for banks and other financial institutions. Most notably, the challenge of implementing a cost-effective platform, such as a transition to a cloud-based model, to provide immediate payment services while remaining competitive requires infrastructure investment. The challenge here is that banks must, on the one hand, identify and analyse in which form their transformation must take, while balancing pressure from regulatory deadlines and customer need. Whether this involves upgrading existing systems and integrating new models with the old, or developing new processes and technologies, associated costs and the need to implement robust security measures create challenges that banks must navigate.

There is also increased operational complexity. As instant payments demand continuous uptime and immediate processing 24/7/365, banks must ensure their systems are capable of handling high volumes of transactions and that their operations and services are fully available 24/7/365. For some, this represents a significant organisational shift. To reduce the risk of downtime and delays, careful planning and substantial investment in required systems and technology are required.

While the regulation opens the door to further innovation and development, it also widens the playing field for competition. Fintech startups and non-traditional financial players may be well placed to enter the market. As a result, banks must seek to differentiate themselves, develop unique value propositions and strengthen customer loyalty and brand recognition.

With new payment methods come new customer expectations. Banks must educate customers about instant payments, address concerns about security, and help them understand how the new system works. This approach is essential - if a competitor creates a better customer payment journey and provides more information, input and assistance, their value proposition becomes far more attractive.

The regulation also raises questions regarding scalability and connectivity for banks and also requires banks to assess their positions thoroughly via fresh business cases. To successfully navigate the increased demands set out by the regulation, banks should seek experienced industry partners capable of delivering the services that the consumer and the regulation demand.

The road ahead

The regulation represents a significant leap forward for payments across the EU. It promotes efficiency, innovation, and security, driving digital transformation across the payments landscape. However, banks and financial institutions must navigate the challenges presented by this new paradigm and embrace the opportunities it presents.

Banks must invest in technology, prioritise security, and focus on customer education to succeed. By embracing these changes and seeking partnerships with experienced market players in the payments landscape, they can harness the benefits of instant payments and remain at the forefront of digital innovation in the EU and beyond.