Everything you need to know about One-leg Out Instant Credit Transfers (OCT Inst)

A one-leg out transaction can happen from Europe to anywhere in the world – from Euro to any currency – (and vice versa). Instantly.

OCT Inst will change payment transactions by connecting people – friends, family, businesses, customers – across borders in seconds. It is a real-world example of a cross-border, (potentially) frictionless real-time payment.

That’s important; as payment velocity increases and friction is minimized, businesses and people need fewer cash reserves. The result? Greater stability, prosperity and fewer costs.

But how does the OCT Inst scheme work? What drove the EPC to publish the OCT Inst scheme? And how does OCT Inst fit in with the SEPA Inst scheme?  

How do one-leg out payments (OCT Inst) work?

OCT Inst streamlines and accelerates cross-border transactions within the Eurozone and beyond. It does so by connecting the instant rails of two separate regions – Europe and another – by leveraging real-time processing capabilities and existing SEPA payment infrastructure.

It’s designed for executing the Euro Leg of international instant credit transfer-based payment transactions and involves the quick and seamless transfer of funds between the accounts of payers and payees. One-leg out payments are defined by the following:  

• Geographical Scope: At least one payment service provider (PSP) must be located within the Single Euro Payments Area (SEPA) Schemes’ Geographical Scope.  
• Real-Time Clearing: Real-time clearing means transactions are instant. This is a huge benefit for time-sensitive payments (like emergencies) and boosts cash flow for businesses.  
• Connection with Non-Euro Area: The European Union’s real-time clearing systems connect to corresponding systems in the non-euro area, which channels the flow of funds between these regions.  
• Payment Limits: Payments up to €100,000 are transferred in real-time using the existing SEPA payment ‘rails’ such as TIPS (Target Instant Payment Settlement) and RT1 (SEPA Instant Credit Transfer).  

What drove the EPC to publish the OCT Inst scheme?

A combination of industry demand and a regulatory push. The banking industry campaigned to include incoming Euro One-Leg Out credit transfers following the publication of the 2019 SEPA Credit Transfer (SCT) rulebook. The rules, which defined the standards of real-time or near-real-time payments in the EU, garnered stakeholder interest. The practical need for this type of transaction demonstrated the demand for a mechanism that would facilitate it and likely helped to bring the OCT Inst into existence.  

The adoption of ISO 20022 also played a crucial role. ISO 20022 offers opportunities to enhance international payment services. That means a faster system, better transaction tracking and payment finality, and cost-effectiveness. The industry’s move towards ISO 20022 likely influenced the development of OCT Inst to align with these advancements.  

Things started to heat up on the regulatory side in September 2020 when the European Commission issued a communication focusing on strengthening the Euro internationally. The Retail Payments Strategy came not long after. These regulatory initiatives could have prompted the EPC to explore and develop mechanisms like OCT Inst to support and align with the objectives outlined by the European Commission.

Finally, the Financial Stability Board (FSB) and the G20 Roadmap for Enhancing Cross-Border Payments likely provided additional impetus. Recommendations from influential bodies can drive changes in the financial industry; the EPC may have responded to suggestions by introducing OCT Inst to align with the broader goals of improving the efficiency, transparency, and interoperability of international payment services.  

What’s the difference between SCT Inst and OCT Inst?

It may seem like one, but OCT Inst is not an extension of the existing SEPA real-time payments infrastructure. Rather, both systems are independent services and PSPs do not have to participate in the One-Leg Out Instant Credit Transfer Scheme.   

Consider Euro/Euro payments. OCT Inst exists to help Euro account holders outside the SEPA area conduct financial transactions with account holders within the SEPA area. Meanwhile, SCT Inst facilitates transactions within the Eurozone.

When there is no need for a currency conversion – when a Euro/Euro transaction happens entirely within the Euro Zone – SCT Inst is the default. This is to avoid conflicts among the existing Euro Clearing services.

Who’s involved in the OCT Inst scheme?

Each participant plays an essential role. Here’s how they work together: 

• The Payer: is a natural or legal person who provides PSPs on both sides of the transaction (the non-Euro Leg Payer’s Financial Institution and Euro Leg Based Payer’s PSP) with an international instant credit transfer instruction. This is the start of the OCT Inst Transaction.   
• The Non-Euro Leg Payer’s FI: receives the international instant credit transfer instruction from the Payer and makes the payment to the Euro Leg-Based Payee’s PSP in favour of the Payee’s payment account.  
• The Euro Leg Entry PSP: a Euro Leg-Based PSP introducing Instantly international instant credit transfers into the Euro Leg offering intermediary services.  
• The Euro Leg-Based Payee’s PSP: receives the OCT Inst Transaction from the non-Euro Leg Payer’s FI and makes the funds instantly available on the Payee’s payment account, according to the information provided in the OCT Inst Transaction.  
• The Euro Leg-Based Payer’s PSP: receives the international instant credit transfer instruction from the Payer and pays the non-Euro Leg Payee’s FI in Favour of the Payee’s Account.  
• The Euro Leg Exit PSP: is a Euro Leg-Based PSP that offers intermediary services for the non-Euro Leg of an outgoing OCT Inst Transaction to the Euro Leg-Based Payer’s PSP.  
• The Non-Euro Leg Payee’s FI: receives the OCT Inst Transaction coming from the Euro Leg-Based Payer’s PSP and Makes the Funds Available on the Account of the Payee.  
• The Payee: is a natural or legal person identified in the international instant credit transfer instruction who receives the funds.  

What’s not covered by One-leg Out transactions?

The OCT Inst scheme leaves it up to the PSPs to decide who will perform a currency conversion (if needed), which fee structure they’d like to use (though the Shared (SHA) fee option is preferable), and the processing time in the non-euro leg. This allows for some flexibility.

What are the challenges for OCT Inst?

Despite its successes, there are bumps in the road ahead.  OCT Inst must navigate the technical and legal differences between other real-time payment systems. There are currency fluctuations, risks, and liabilities to manage, and a need for clarity on processes. And a robust regulatory and operational framework must be established to ensure a conducive environment for stakeholders. 

Major banks like HSBC and Deutsche Bank could resist OCT Inst because of the impact on their profitable currency trading systems. Which begs the question: Will major banks get on board with OCT Inst? Or will they adjust their strategies?  

Neo-banks may lose out, too. Revolut, Ripple, and digital wallets like PayPal could lose business and trigger a price war.  Striking a balance in the interests of traditional and emerging players will be key to the success of OCT Inst.