Instant Payments - between Trend and Necessity

According to the European Payments Council, instant payments are the next step in the harmonization of SEPA payments and they will be the main focus in the following years.

Defining the Context: Overview

It is widely accepted that real-time payments are necessary in terms of supporting Europe’s economic growth, especially since its digitalization leads to new expectations from consumers and retailers alike. As e-commerce exhibits a regular and continual growth in Europe, customers expect to receive purchases as fast as possible, bypassing holidays and weekends, whereas suppliers want to have the certainty they are paid sooner for what they provide, instead of waiting up to one or more business days for payments to be settled and confirmed.

Instant payments are thus a win-win solution, being processed in a matter of seconds – less than 10, to be more specific, and they may be seen as a natural extension to nowadays’ instant communication and latest technology developments.

The waiting time in most of today’s electronic payments is caused by daily batch processing, clearing and settlement and correspondent banking architectures. Ideally, they are processed on a transaction-by-transaction basis, as soon as the payment reaches a PSP system. But in current environments, this would come at a very high cost. A better solution for instant payments is thus needed, making them a near-substitute for cash, as the transfer would be immediate and available around the clock, irrespective of the underlying payment instrument used. Becoming a viable alternative to the widely used cash, real-time payments may furthermore reduce managing costs at the level of the entire economy.

The need for creating a pan-European instant payments solution emerged from the intention of several European countries to launch their own solutions, which wouldn’t have been interoperable, hence prejudicial to the e-payments harmonization across Europe.

The solution proposed by the EPC is currently transposed in the SEPA Instant Credit Transfer (SCT Inst) scheme, with a first version of the rulebook being published in November 2016, based on the 2009 version of ISO 20022. It is to be enforced on November 21st 2017 (effective until November 2019), and the next scheme change management cycle will take place in 2018.

This optional SCT Inst scheme is designed for euro transactions (up to 15,000 EUR per instruction), available 24/7/365, whether the payment accounts (for sending or receiving) held at the PSPs operating within SEPA are denominated in euro or another currency.

Obvious benefits for all parties involved

As expected, consumers, businesses, governments, and payment service providers alike are to benefit from instant payments.

As far as consumers are concerned, they’ll be able to make and receive payments with immediate transfer of funds (especially useful in case of emergency payments), optimizing cash usage in a flexible and convenient way. Besides enabling immediate person-2-person mobile payments, this scheme also facilitates future cutting-edge payment products via smart devices.

Businesses should benefit from the increased efficiency of e-invoicing, improved cash flow and optimized working capital management, to name a few. The instant transfer of funds would reduce late payments, improving both e-commerce and check-out processes at physical points-of-sale. On the same level, governments would be able to integrate tax, social insurance and other related payments, thus increasing efficiency.

PSPs are motivated to offer instant payments by being provided with a competitive advantage on the market and strengthening the relationship with their current customers. They could also use the instant payment infrastructure as a building block to develop other real-time financial services and products, thus attracting new clients.

Key characteristics and challenges

Instant credit (within 10 seconds) Fraud risks
Cost of implementation
Irreversibility (initiated payments cannot be canceled by the payer)
Certainty (immediate confirmation of payment success)

The ability to make SEPA payments anytime, any day and within a few seconds comes with a real challenge in terms of fraud detection, as there should be no room for error. Real-time payments raise flags when coming across failures and this obviously has a huge negative impact on a bank’s reputation, as bad news in the digital age travels faster than ever.

Real-time capabilities must be thoroughly evaluated throughout the entire payments processing chain, from accepting and authenticating a transaction to processing and back-end systems, making real-time fraud checks and sanctions the main focus of this service. Furthermore, KYC and AML regulations will definitely play a vital role in an instant payments type of configuration.

The 24/7 society we live in is not just about making things faster, but also keeping everyone compliant and safe, and this is where experienced FinTech players, like Allevo, will have a key role in implementing applicable standards and best practice methods for aligning financial services to current regulatory requirements.

In fact, as soon as banks decide to provide this service, Allevo’s open technology will be ready to accommodate the necessary changes, given that real-time resilience at transactions level is already an operational feature in FinTP.

These being said, dear banks, the ball is in your court. Just let us know where to draw the line.

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