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Gearing up for pan-EU instant payments (Paul Thomalla)

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The European Commission’s draft EU law to regulate instant payment (IP) services has arrived. It’s a development we’ve all been expecting, yet earlier than planned. The intervention and early publication stresses to the industry just how important the Commission views the need for ubiquity in payments pan-EU. Despite its many attempts to nudge and push IP through – such as with PSD and its revision, PSD2 – consumer and business uptake has been painfully slow. By mandating it, banks will have no choice but to facilitate the sending and receiving of IPs, any time or day.

But what exactly has been proposed and why, and when will banks need to comply?

Unpacking the proposed regulation

With only
1 in 10 euro credit transfers
being processed as an IP, the Commission has told the industry that enough is enough. It is forcing the transition from a ‘nice-to-have’ to a ‘must-have’; from a directive to a regulation. The proposal, which is notably short and precise, sets out to amend two pieces of law: the SEPA regulation from 2012 and the regulation on cross-border payments from 2021.

Payment services providers (PSPs), in all 27 countries in the EU, will be required to offer and receive IPs, 24 hours a day and 365 days a year, at an equal or lower rate than the charges for sending or receiving non-instant euro credit transfers. The lack of access to central bank money means this does not yet apply to payments and electronic money (e-money) institutions. However, this is expected to change once the review of the Settlement Finality Directive is published.

Customer interfaces which enable credit transfer orders will also need to support the option to submit multiple, instant euro payment orders in one bulk payment. Additionally, PSPs will be obligated to verify that the name of the payee matches their account number (IBAN) before any payment is authorized. If these do not match, they will be required to notify the payer – suggesting potential fraud – who can then decide whether to complete the payment order.

Finally, PSPs will be required to verify, at least once a day, whether any of their customers are subject to EU sanctions. If they fail to follow this sanctions screening procedure, they may be liable to pay financial damages to the other provider involved in the IP.

Why is this important for banks?

IPs have enormous potential benefits, facilitating the rapid release of funds and bringing ubiquity to the pan-EU payment zone. It allows consumers and businesses to receive and make payments instantly and anytime, solving challenges such as paying employees when payday falls on a weekend, or the impact of late payments on cash flow management for businesses.

It will enable banks to bring new solutions to market that cannot be delivered with the current payment rails, such as the existing SEPA rails, while the new sanctions screening procedure aims to solve the high failure rates of IPs caused by slow and inefficient transaction-by-transaction methods. By capping the charges, the Commission is also addressing the current challenge of IP being a value and cost-added service, which risks pricing it out of the market and stifling adoption.

The immediate benefits for consumers and businesses are clear. However, the Commission also has a longer-term strategy in mind: by implementing IP across the eurozone, it can bring forward Open Finance. Once the review of the Settlement Finality Directive is published, which could appear in the text of PSD3, payments and e-money institutions will have direct access to central bank money and so will be obligated to comply with the IP regulation.

When we link this with the Open Finance framework, the Commission’s vision is clear. It aims to create an environment which strengthens industry competition, encouraging the roll out of more use cases for IP and Open Finance. Put simply, driving open payments enables Open Banking and Open Finance to flourish, which ultimately leads to better, personalized and integrated services for a bank’s customers.

When will banks need to comply?

The draft regulation is estimated to take around 18 months to go through the European Parliament, although this could be shorter or longer depending on how quickly an agreement is reached. The proposal outlines different timeframes for each requirement from when the regulation comes into force, for banks inside and outside of the eurozone:

  • From the point that it is passed into law, banks inside the eurozone will have 6 months until they are required to receive IPs and 12 months to send them. For banks outside of the eurozone, this timeline is 30 months and 36 months respectively.
  • For ensuring charges are equal to or lower than non-instant euro credit transfers, banks in the eurozone will have 6 months to comply, whereas those outside will have 30 months. This also applies to payments and e-money institutions if they voluntarily provide IPs before they are legally required to do so.
  • For facilitating bulk payments through customer interfaces, eurozone banks will have 6 months to receive IPs and 12 months to send them. Those outside will have 30 and 36 months respectively.
  • All banks are required to comply with the requirements for sanctions screening after 6 months.

While at the surface level it may seem relatively simple, this is a huge move for the payments industry and a big undertaking for banks. For banks who have not yet embraced IPs, alongside the new processes required for IBAN-name match checking and sanctions screenings, time and costs for compliance could be substantial. This is why collaboration is crucial.

Compliance doesn’t have to be expensive or disruptive. Partnering with fintechs can help banks seamlessly facilitate IP and implement the value-added services needed for compliance through open technology and access to a wider ecosystem. Streamlining screening and fraud prevention practices will also reduce costs in the long-term. But these timeframes are extremely tight, so banks need to act now.

The Commission’s draft regulation was created with its game face on. By building on existing payments rails, it sets out to provide the necessary infrastructure for fast, ubiquitous and digital instant payments that fuel Open Finance. We believe that finance is already open. If navigated correctly, this infrastructural shift will bring huge benefits for banks, businesses and consumers.

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