European banks need to hurry up for instant payment implementation
At the beginning of November, the European Parliament and the EU Council surprised with the announcement that a preliminary agreement had been reached on the regulation of Instant Payments (IP). These are then to be mandatory for the institutions to introduce, and payments must be executed within ten seconds and at the same cost as common SEPA transfers.
In the draft, only nine months of transition period are provided for compliance on the recipient side and 18 months on the sender's side.
This poses challenges for banks and Payment Service Providers (PSPs) since relatively short transition periods are envisaged for the implementation. Capco experts Thomas Walkner and Wesselin Kruschev expect the regulation to be adopted before the European elections in June. "Implementation must then happen very quickly. In the draft, only nine months of transition period are provided for compliance on the recipient side and 18 months on the sender's side," explains Walkner. Many banks had probably hoped that the regulation would fizzle out. Now they have to hurry to be able to present infrastructure and compliance, adds Kruschev.
Hefty penalty catalog
To spur banks into action, the regulation includes a hefty penalty catalog. "These can be up to 10% of net sales or 5 million euros for natural persons," says Kruschev. Such high penalties are rather unusual in the Eurozone, but they underline that Brussels has little tolerance for laggards in Instant Payments, which is part of the Capital Markets Union project. The two experts expect that payment service providers will have a parallel infrastructure of existing SEPA services and the Instant Payment system, so the old SEPA procedures will remain.
The problem: The Instant Payment infrastructure must run around the clock and also on weekends throughout the year. "The existing IT landscape of banks, including core banking systems, generally does not allow for this, making it very challenging to meet the requirements on time. Those already working on a modern cloud computing system have better chances due to easier scalability," explains Walkner. "Otherwise, only workarounds remain."
If this becomes a mass market, then the systems for account and identity checks would need to be significantly expanded.
It also gets tricky with compliance checks, which must now be completed within the short execution time. "In the first quarter of this year, only 11% of all Euro transfers within the EU were made via Instant Payments. But if this becomes a mass market with thousands of transactions per second, then the systems for account and identity checks on both the sender and receiver sides would need to be significantly expanded to avoid transaction rejections, which is also not in line with the legislator's intent," explains Kruschev.
While the regulation provides an option to conduct compliance checks outside individual transactions by comparing relevant sanctions and embargo lists with the customer base daily, this requires new processes in banks, further increasing operational complexity. The regulation introduces new reporting obligations for banks to monitor the implementation progress. National regulators are obligated to report to the EU Commission.
And what about the compensation for Instant Payments? The two experts remain relaxed about that issue. Although the pricing of execution is limited to the level of common SEPA transactions, adjustments can be made to the "compensation for additional services" aspect. Instant Payments only make sense if the recipient of a payment is informed about the incoming funds; fees could be charged, for example, for notification of a payment.
New account models that include a quota for free Instant Payment transfers in the account model, as well as other value-added services, are conceivable to monetize Instant Payments. Some banks have already initiated projects for this. The EU legislator promises "opportunities for innovative services with additional benefits."
At Capco, close attention is being paid to how the various regulatory strands in payment transactions are coordinated. This also applies prospectively to the digital Euro, where the two experts assume a good fit with Instant Payments – something that would benefit the European Payment Initiative (EPI), which aims to score exactly at this interface.
Framework follows framework
New frameworks keep the Capco experts busy. These include constantly incoming regulations such as the Rulebook of the European Payment Council (EPC) on cross-border real-time payments. Here too, it must be seen how this can be connected with current activities related to Instant Payments. The European Council and Parliament have indicated that the preliminary agreement will also take into account the "specificities of companies outside the Eurozone." The complexity in payment transactions is certainly not decreasing.