Is Europe ready for instant payments? 3 challenges banks face

On the 7th of February 2024, the march towards ubiquitous instant payments in Europe took a huge step forward as MEP’s voted to adopt new rules on Instant Euro Transfer.

SEPA Instant will require all payment service providers (PSPs) to be capable of receiving instant payments by 9th January 2025 and sending them by October 9th 2025. Banks must be capable of offering instant payments as payment method on all payment initiation channels, including bulk, and may not apply a surcharge to clients using instant payments.

PSPs will also be required to introduce a Verification of Payee service on all payment channels by 9th October 2025.

The legislation paves the path for non-bank PSPs to have direct access to clearing systems. And it introduces a harmonized sanctions screening approach, addressing an important source of friction in instant payments.

What do EU banks think about SEPA instant?

In February 2024, we asked 200 senior payment professionals at European banks about the SEPA Instant regulations.

Our research shows that there is clear customer demand for instant payments products and services, with nine in ten respondents stating that demand was growing. So, this regulation is great news for consumers.

For banks, however, the regulation proves to be a challenge – with more than half of our respondents stating that the timelines imposed by the regulation were not realistic.

So, what are the key challenges according to bankers?

1. Adaptations to customer channels, including providing Confirmation of Payee services.

Although Verification of Payee services are available in several countries, including the Netherlands, France, Italy, Spain, and the Nordics, interoperability is limited and there is no standardised pan-European scheme.

The European Payments Council has introduced a draft rulebook exploring how payer and payee banks could communicate to verify the alignment between the IBAN and the Beneficiary Name introduced by the payer, but it does not contain any specifics including how a directory may work, over what network the requests would be sent, or what the commercial model for such a service would be. Banks will be hard pressed to implement a solution that is still being designed with such aggressive timelines.

Additionally, there is no industry consensus on what the customer experience may look like for payments that are initiated on secure corporate channels, that are exempt from strong customer authentication.

2. Implementing the provisions related to KYC and sanctions screening processes.

The legislation states that banks will need to screen their clients against European embargo lists at least daily, and immediately whenever new sanctions are introduced. The latter of these two stipulations can be challenging, as there is currently no structured source of sanctions information made available to banks immediately upon announcement of new restrictive measures.

3. Processing more volumes and scaling throughput.

Of the banks capable of processing instant payments today, only 10% of our respondents were capable of processing over 300 transactions per second, and 50% of our respondents were not capable of processing over 100 transactions per second. Whereas these numbers are perfectly adequate for today’s instant payments world, they are not suited for a world in which corporates can initiate their payments as instant payments through files without surcharge. Just imagine the peaks of volumes required to be processed by both sending and receiving banks as corporations and governments start to initiate their salary and pension payments as instant.

And why wouldn’t they – it doesn’t cost them a single eurocent, and they win at least a value day in adopting the new payment method.

So where does this leave banks?

The introduction of instant credit transfers as the new normal in European payments is an exciting prospect for European citizens and businesses, but a huge challenge wrought with uncertainty for their payment service providers.

To comply with the regulations, some 76% of banks intend to invest in new technology to meet these new regulations. On average, European banks intend to invest between 1 and 3 million Euros in technology. More than half state they intend to offer instant payments as the default payment option for their clients.

Finding the right partner to address the challenges will be critical.

Our report “So, you think you’re ready for SEPA Instant?” reveals how Europe’s banking industry is preparing for instant payments in Europe. Learn more about the challenges, pitfalls and regulations by downloading today.