Instant payments are a relatively new type of credit transfer responding to the needs of an increasingly digitalised society. They allow funds to be transferred in a matter of seconds, at any time, day or night, and any day of the year.
Implementing regulation for Instant Payments
Instant payments are used increasingly worldwide.
They represent a major technological innovation in payments, which allows the releasing of funds that are locked in the ‘back-office’ of the financial system in order to make them immediately available to end users – citizens and businesses in the EU, including SMEs – for consumption and investment, contributing to economic growth.
Instant payments are a very powerful driver of competition and innovation, notably when combined with Open Banking (i.e. allowing consumers to share their payment data with third-party providers in a safe and secure way in order to avail of new payment services).
European Commission Q&A
What is the Commission proposing?
The Commission proposes a set of measures aimed at increasing the availability and use of instant payments in euro:
- All payment services providers (with very targeted exceptions) that offer credit transfers in euro must offer instant payments in euro to all their customers.
- The charges for instant payments in euro must be equal to or lower than the charges for non-instant euro credit transfers.
- All providers of instant payments in euro must offer the service checking the match between the account number (so called ‘IBAN’) and the name of the payment beneficiary and, before the payer authorises the transaction, warning the payer about any detected discrepancy as it could suggest fraud.
- All providers of instant payments in euro must follow a harmonised procedure for sanctions screening, based on daily checks of their own clients against EU sanctions lists while on normal transfers checks are carried out on a transaction-by-transaction basis.
Euro credit transfers are regulated by the Single Euro Payments Area (SEPA) Regulation. As instant payments represent a new category of credit transfers in euro, the current proposal amends that Regulation by introducing additional requirements reflecting the specific characteristics of euro instant payments.
Why is there a need for EU legislation on instant payments in euro?
Today, only around one in ten euro credit transfers in the EU is processed as an instant payment. This is even lower in case of cross-border transfers in euro executed between two Member States.
With these underwhelming volumes, the full-scale benefits for EU citizens, businesses, including SMEs, public authorities and society at large cannot be fully achieved and the current limited choice of electronic payments, especially for cross-border payments to merchants (in physical shops and e-commerce), remains unaddressed.
The Commission analysed possible factors that could potentially influence this slow uptake. Four key obstacles were identified:
- The payment service provider of the payer and of the beneficiary must both use instant payments technology for the instant transaction to be successful. Many payment service providers are still reluctant to invest in instant payments without having the guarantee that other providers will be able to support these transactions. As a result, around one third of EU payment service providers still does not offer instant payments.
- In many Member States, consumers and businesses are put off by the high price of instant payments.
- Consumers and businesses are not offered sufficient assurances to address their concerns about the risk of fraud and errors with this new type of payment.
- Where instant payments are offered, a high number of them fail due to slow and inefficient transaction-by-transaction sanctions screening methods used by the industry which are not fit for these new, fast payments.
Four years after the necessary technology was put in place to process euro payments instantly, it is apparent that the efforts of the European payments industry or Member States will not be sufficient to remove these obstacles throughout the EU in a timely fashion.
Therefore, the Commission concluded that legislative intervention is necessary to unlock the full-scale network effects by connecting all payment service providers to instant payment technology, tackling high prices and frictions, and mitigating the risk of fraud or errors.
What will be the impact for payment service users?
Payment service users will benefit from a broader availability of euro instant payments, at a price that is the same as, or lower than traditional credit transfers.
Consumers and corporates will benefit from both, the speed (<10 seconds) and convenience (i.e. 24/7/365 availability) of instant payments.
Such benefits will materialize in all types of daily life situations, such as receiving funds promptly in case of emergencies, ability to settle shared costs conveniently and immediately in a diverse set of social settings (restaurants, gift purchases) or ability to pay overlooked bills minutes before the deadline in order to avoid late fees.
Businesses, including merchants and SMEs, can improve their cash flow and avail of new digital, affordable and efficient payment solutions.
Consumers and businesses, especially SMEs, will be able to rely on instant payments not only for payments within a single Member State – as is currently often the case – but across the Single Market.
With the expected emergence of solutions facilitating the use of instant payments at point of interaction with retailers across the EU (both in store and online), merchants, including SMEs, should gain from reduced fees for receiving electronic payments, due to the greater competition and choice of available payment means.
This area is currently heavily dominated by international card companies and big techs. Consumers will benefit from a quicker dispatch of goods and services purchased and from a likely pass-on of a share of the savings that are expected to accrue to merchants.
Public administrations are expected to realise fiscal benefits linked to improved tax collection and improved ability to provide disaster and emergency relief payments to citizens without any undue delay.
What will be the impact for EU payment service providers?
Providers of payment services that are already well advanced in applying at least some of the proposed measures are, on balance, expected to incur benefits from this legislation.
Providers that have not yet embraced instant payments may incur greater costs arising from compliance with the proposed measures.
More specifically, compliance costs will pertain to becoming ready to offer the service of receiving and sending euro instant payments, as well as implementing the new service of checking the match between the name and IBAN of the beneficiary.
The impact assessment shows that those costs in practice vary depending on the size of a payment service provider: they are significantly smaller for smaller providers (including SMEs) which constitute the majority of providers.
Innovative start-ups and fintechs see euro instant payments as a key element of their business strategy.
At the same time, payment service providers are expected to make significant operational savings in the area of compliance with sanctions screening obligations as the proposed harmonisation of screening practices of euro instant payments will make this process much more efficient and less dependent on manual work.
Operational savings are also expected due to the reduced need to investigate fraud and errors related to instant payments, once the service checking the match between the name and IBAN of the beneficiary is implemented.
More broadly, the overall benefits of the initiative in aggregate will lead to a more efficiently functioning payment system, with direct and indirect benefits for all stakeholders.
The indirect benefits include business opportunities in the payments market, especially as regards payment solutions based on instant payments (such as new mobile payment applications).
What will be the impact for SMEs?
SMEs are expected to be among the net gainers from this initiative, whether they are users (such as merchants or business users) or providers (smaller PSPs/ fintechs / start-ups).
Benefits for SMEs as corporate users and merchants, in terms of cash-flow management, can be significant given the quicker reception of payments.
In relation to this, SMEs would realise a significant share of the estimated efficiency gains of €1.34 to 1.84 billion per year related to the reduction in the payment float.
SMEs which are merchants have the potential to benefit from any future increased choice of the means of payment at PoI, which could drive down fees charged to merchants by PSPs.
As for SMEs which are PSPs or payment fintechs, their implementation costs are expected to be at the lower end of the spectrum.
Will ‘traditional’ euro credit transfers be phased out by this legislation?
No. The proposal merely requires that payment service providers who today offer euro credit transfers to their customers must offer euro instant payments.
It is left to the discretion of each individual provider to decide whether to offer only instant payments or both the instant and non-instant versions.
Some providers, as demonstrated by the current practice in several Member States, may also decide to process some of the transfers as instant by default (e.g. payments requested by consumers, transactions below a certain amount, etc.).
The focus of the proposal is to ensure that all consumers, businesses and public authorities in the EU that wish to pay and be paid instantly can do so.
How does this proposal fit in the Commission’s Digital Finance Strategy?
The proposal helps to promote the digital transformation of finance and the EU economy and to remove fragmentation in the Digital Single Market.
Instant payments could be used with the European Digital Identity Wallets to facilitate instant, secure and convenient payments in shops, e-commerce or between individuals.
The proposal is also aligned with the Digital Markets Act that addresses certain barriers imposed by gatekeepers on EU payment service providers in accessing important supporting technologies, such as the near field communication (NFC) antennas available on certain mobile platforms, in order to better enable consumers and businesses to make contactless and fast payments.
Which PSPs will be required to offer euro instant payments?
All EU payment service providers that provide the service of credit transfers in euro to their clients will be required to provide euro instant payments.
Payment institutions and electronic money institutions will not be required to do so given that under EU law they are still not permitted to participate in certain designated payment systems and have to rely on banks to get indirect access to such systems.
So it would be disproportionate to oblige those payment providers to offer instant payments.
Nevertheless, payment institutions and electronic money institutions will not be prevented from offering instant payments to their clients on a voluntary basis.
A genuine single euro payments area in the EU, where there are no differences between national and cross-border payments across the EU (including in non-Euro area Member States) can only be achieved for payments in euro.
Therefore, the obligation to provide the service of euro instant payments will apply to payment service providers that operate both inside and outside the Euro area, as long as they already offer credit transfers in euro.
The compliance burden for those providers located outside the Euro area will be alleviated by longer deadlines to apply the new rules, compared to the deadlines applicable to the providers located inside the Euro area, allowing them to spread their implementation efforts over a longer period.
Will payment service providers increase the fees for other services such as traditional credit transfers, as a result of this proposal?
Cross-subsidisation in the banking and payments sectors is an established practice. Currently, many payment service providers offer credit transfers for free, although the transaction costs are not null, thus necessarily subsidising them by other revenue sources.
It is however expected that competitive pressure, scrutiny by consumer organisations and public pressure would reduce the likelihood of such price increases by banks to anticipate the effect of new EU rules proposed today.
How will the mechanism against fraud and errors work in practice?
In the last few years, there has been an increase in fraud that is not prevented by the current fraud prevention measures based on ‘strong customer authentication’.
In some cases, payment service users incur losses due to them supplying inaccurate information to their providers about the beneficiary.
According to the Payment Services Directive (PSD2), providers of payment services are not liable for losses incurred by the payer if a payment transaction is executed using the beneficiary’s IBAN as supplied by the payer.
Much of these fraudulent or erroneous cases could be prevented if the providers checked whether the beneficiary’s name and IBAN match and warned the payer of any discrepancies.
Therefore, the proposal includes an obligation for all providers offering euro instant payments to offer this service.
Users can decide to use this service.
In such cases, checks are carried out and notification is provided to the payer before they authorise an instant payment transaction.
In cases where a mismatch is detected, the payer will receive a warning about possible negative consequences of proceeding with a payment transaction.
The service would have to be available to all payment service users.
The proposal does not limit the ability of payment service providers to charge a fee for this new service in order to allow them to recover the related implementation costs.
However, such a service is already offered free of charge in one Member State and has been effective in tackling fraud and errors.
Those payment service users (citizens or businesses) who will not be willing to take advantage of the service will be able to opt out from using it.
Is this proposal consistent with the requirements on anti-money laundering and countering the financing of terrorism (AML/CTF)? Could the speed of instant payments undermine the payment service providers’ ability to ensure appropriate AML/CFT checks?
When providing instant payments, as any other types of payments, payment service providers must ensure that they have in place appropriate and real-time fraud and money laundering/terrorist financing prevention tools, in full conformity with existing legislation.
The provision of instant payments does not undermine payment service providers’ obligations under existing AML/CFT legislation.
In particular, the instantaneity of these payments, within less than 10 seconds, does not affect in any way the obligation from obliged entities to perform their required AML/CFT checks and, if necessary, to introduce suspicious transaction reports (STRs).
These are usually ex-post requirements, contrary to sanctions screening obligations which must be performed before the transaction is executed (so within 10 seconds for IPs).
Nor does this proposal affect in any manner the effectiveness and timeliness of the examination by the Financial Intelligence Units (FIUs) of such STRs.
How will sanctions screening of instant payments be carried out?
Each payment service provider that offers euro instant payments will be responsible for screening its own clients both, at the moment when a payment account is opened and via at least, daily updates, of its customer records vis-à-vis the latest applicable EU sanctions lists.
On days when a modification to those lists is made, additional update of customer records will have to be carried out immediately after the update entering into force.
The new procedure is expected to significantly reduce, if not eliminate entirely, rejections of instant payment transactions sent by or destined to clients whose name is the same or very similar to the name of sanctioned persons or entities.
This is because the proposed approach will enable the payment services providers of the payer and the beneficiary to clarify, which payment accounts truly belong to persons and entities that are designated on EU sanctions lists and take an appropriate and timely action.
More specifically, the payment services providers will be able, with no need to carry out transaction-by-transaction screening, to i) prevent the initiation of transactions from payment accounts, belonging to persons or entities designated on EU sanctions lists, and ii) immediately freeze funds made available to them.
This measure will have no adverse impact on the effectiveness of the EU sanctions policy.
When will the new rules become applicable?
The obligations set out in this legislative proposal will be introduced in steps, allowing payment service providers to spread their internal resources over a longer period of time and thus optimise their implementation costs.
In line with such approach, the obligation to offer the service of receiving euro instant payments will apply six months after the entry into force of the legislation, followed by the obligation to offer the service of sending euro instant payments which will apply 12 months after the entry into force of the legislation for payment service providers located in Euro Area Member States.
The service of notifying any discrepancies between the name and IBAN of the beneficiary is only relevant for payment service providers offering the service of sending euro instant payments.
Therefore, the obligation to offer such service will apply from the same time as the obligation to offer the service of sending euro instant payments.
The obligations related to charges for euro instant payments and to harmonised procedure to ensure compliance with obligations under EU sanctions regulations will apply as soon as payment service providers are obliged to offer the service of receiving instant credit transfers, i.e. six months after the entry into force of the legislation.
In order to allow payment services providers located in Member States whose currency is not the euro to efficiently allocate the resources needed for the implementation of instant payments in euro, it is proposed that all the respective obligations to such providers apply 24 months later than the dates that are applicable to providers located in Member States whose currency is the euro.
Only in the case of implementation of the harmonised procedure designed to aid providers’ compliance with the Union sanctions regulations the same deadline across the Union is necessary, in order to ensure that compliance with the sanctions screening obligations continues to be effective.
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