Instant payments in Europe: Set to further enhance consumer experience and foster economic efficiency

In this article, part of a series exploring various topics to be discussed at EBAday 2024, we hear from Roderick Kroon, Executive Consultant at Projective Group, and dive into expected benefits, economic impact and the challenges financial institutions might face in implementing instant payments.

Benefits for consumers, businesses and the European economy

A primary benefit is predictability. This is a boon for both consumers and businesses. In countries like the Netherlands, where instant payments have already become standard, consumers have come to rely on the assurance that funds are transferred within seconds.

"Dutch consumers can act knowing that the money is there instantly in a couple of seconds, rather than guessing and sending days in advance," says Roderick Kroon, Executive Consultant at Projective Group. "This, of course, helps build trust in the system. It's also very transparent - you can see if your payment is working or not immediately." This is particularly beneficial for significant transactions, such as purchasing a car or a house. The heightened transparency and speed of instant payments mean that consumers no longer have to deal with uncertainties about when their payments will be processed.

For businesses for whom predictability can significantly impact financial success, instant payments enable more efficient cash flow management. Companies can pay invoices and salaries instantly, even on weekends, aligning payment processes with the 24/7 nature of modern, cross-border commerce. This immediacy also reduces the need for advanced planning and buffer periods, improving overall operational efficiency.

The introduction of the Instant Payments Regulation is set to bring alignment across Europe, where availability and approaches to instant payments have differed from country to country. "Some European countries introduced instant payments as a premium product, for example, requiring payment as a consumer or corporate client," says Roderick. "This doesn't help; nobody understands the full picture if you play with different rules. We're now back to a level playing field everywhere, which makes sense from a European perspective."

With the infrastructure for real-time payments, businesses can develop new payment methods and services, making it easier for consumers to purchase products and services across the EU market. This can reduce costs for merchants, who may see lower transaction fees and faster access to funds, enhancing their ability to invest in and grow their businesses. A unified approach ensures that all consumers and businesses in the EU have equal access to instant payments, fostering a more integrated and efficient European market.

Increased complexity for financial institutions

Implementing instant payments is not without challenges. Financial institutions must process transactions within a strict 10-second window, requiring modern technology and infrastructure. Banks must ensure that their systems are always available, meaning 24/7 operation with no downtime for maintenance. For many, this necessitates significant upgrades to existing legacy systems and increased investment in technology.

One critical component of the new regulation is verifying payees to reduce fraud. While this adds a layer of security, it also increases the complexity of payment processing. Banks must develop systems capable of handling these checks in real time without causing delays for their consumers. "The new way of working with the new rulebooks means that, as a bank, your endpoints and API, which all the banks in Europe will be using, must work. And that's, again, a significant technical challenge," says Roderick.

Sanction screening is another area that poses challenges. Although the regulation hoped to simplify this by a move to ‘Account holder’ screening, this does NOT seem to be the case as non-EU lists are not covered by the regulation. As a consequence, banks must still execute screening versus various non-EU lists (e.g. OFAC, local lists) within the same 10-second window, requiring efficient and high-speed processing capabilities. Balancing the need for thorough checks (without concessions!) with the requirement for speed is a delicate task that requires careful, precise management.

Pursuing successful instant payments

Banks must shoulder a greater burden when it comes to payments than ever before, needing to perform complex checks, perform real-time monitoring, and ensure compliance with strict regulations. As such, financial institutions should consider leveraging software solutions and partnering with vendors specialising in compliance and real-time processing to effectively integrate real-time payment systems with existing legacy systems or transition to new systems.

By doing so, banks can avoid the pitfalls of developing all solutions in-house, allowing them to focus on areas where they can add the most value. "Third parties excel in specific pieces of the puzzle, eliminating complexity and acting as a gateway," says Roderick. "So, engaging in these services is, for me, a no-brainer, and there are many parties to choose from, offering various solutions and services."

The expectation and requirement for instant payments to be available 24/7/365 means that any system outage or delay can have a tremendous impact. For banks relying on legacy systems or transitioning to newer systems, using third-party stand-in services can also help mitigate the challenges of integrating real-time and legacy systems, which are poorly suited for the demands of instant payments. These services ensure that payments can be processed even when some systems are temporarily unavailable, maintaining overall reliability.

The importance of effective partnerships

Collaboration is crucial for the successful implementation of instant payments, both for business success and the broader uptake of instant payments across Europe and beyond. Financial institutions should seek to share knowledge and resources and pursue effective partnerships with experienced industry players to support efficient services and product innovation. This collaborative approach can drive development and ensure that all participants in the payment ecosystem are aligned with the new standards.

"I think that collaboration is hugely important," concludes Roderick. "For example, partnerships with specialists in fraud detection and verification can enhance the overall security of instant payment systems. And by pooling data and insights, these collaborations can offer more comprehensive fraud prevention measures than any single bank could achieve alone."

In conclusion

The EU's instant payments regulation is set to transform the financial landscape by offering faster, more reliable and transparent payment options. While the transition poses significant challenges for financial institutions (especially the exact interpretation of the regulation), the benefits for consumers and businesses are substantial, and the mountain of challenge is not unsurmountable. By embracing technology and pursuing partnerships, banks can drive innovation and enhance the overall payment experience in the European market.

To conclude, the combination of instant payments and open banking holds immense potential for Europe and the global payments landscape. With seamless access to payment systems, businesses can better develop new financial products and services that cater to evolving consumer needs. Of note is the upcoming Payment Services Directive 3 (PSD3), set to further enhance the robustness of open banking APIs, paving the way for more sophisticated and user-friendly payment solutions.