Legal Opinion: EU Proposal for the Regulation of Instant Payments

EU Proposal for the Regulation of Instant Payments

The motivations for regulating instant payments

The European Commission believes being able to send and receive payments is core to the integration of the internal market for retail payments.

An EU regulatory framework for instant payments was envisioned in 2018 when the European Commission published a communication for their vision of a stronger international role of the Euro, in which the Commission expressed their support for a fully integrated pan-European payment system.

The role of international card schemes and their impact on the European payment service providers (PSPs) was considered as a major part of the retail payments market, with International Card Schemes constituting 69% of payment transactions in Europe and almost all cross-border card payments in Europe[1].

The Commission’s vision is that an EU instant payment cross border solution would make the EU more efficient and autonomous complementing the existing card schemes.

EU wide standards already exist in the form of the European Payments Councils Single Euro, Payments Area (SEPA) and the ECB’s Target Instant Payment Settlement (TIPS).

However according to the Commission Impact Assessment Report, it appears that the lack of take-up has left the provision and use of instant payments patchy in some Member States and all non-euro Member States. The Explanatory memorandum to the proposals provides that, by the end of 2021, only 11% of euro credit transfers sent in the EU were instant payments.

Instant payments would allow for innovation for new point of interaction (PoI) solutions that would contribute to consumer choice in terms of payment method. New solutions could include person to person payments such as split billing in a restaurant, alternatives to card payments options in store and online.

What constitutes “instant”?

Instant payments would occur almost immediately in less than 10 seconds. PSPs will also be required to receive payment orders and be reachable for instant payments 24 hours a day, 365 days a year. The legislation envisions that new services that facilitate the payment should also offer the same service levels for euro instant payments to ensure instant payments are accessible at all times.

Who is required to offer instant payments?

Under the proposals PSPs offering a credit transfer service in euro will be required to offer Instant Payments in euro. As it stands, payment institutions and e-money institutions which are not currently covered by the Settlement Finality Directive (SFD) do not fall under this requirement. The SFD is currently under review, however until then, these proposals enable payment and e-money institutions to offer instant payments to their customers on a voluntary basis.

The requirements will take effect in four stages.

1. “receiving of IPs in euro for PSPs in the euro area: 6 months after entry into force of the Regulation;
2. sending of IPs in euro for PSPs in the euro area: 12 months after entry into force; –
3. receiving of IPs in euro for PSPs outside the euro area: 30 months after entry into force;
4. sending of IPs in euro for PSPs outside the Euro area: 36 months after entry into force”.

Fee for sending and receiving instant payments

The fee from obligated PSPs, including payment and e-money institutions who choose to offer the service, for sending and receiving euro instant payments should be no higher than the same PSP’s charges for sending or receiving a non-instant credit transfer in euro.

IBAN name verification

All PSP’s offering instant payments of euro will be required to provide their customers with a service to check for any discrepancies between the payee’s IBAN and the payee’s name and are required to notify the customer of any discrepancy. The notification must be given before the PSP executes the instant payment so the customer may decide whether to go-ahead with the payment.

“Confirmation of Payee” (CoP), as it’s referred to in the UK, is a similar initiative aimed at reducing misdirected payments and authorised push payment fraud (APP fraud) in electronic bank transfers by checking the name on the recipient’s account.

Confirmation of Payee was initiated in two phases, phase 1 to the largest 6 banks which has been found to be a success by the Payment Service Regulator (PSR), although the PSR recognise that CoP is only one tool in the fight of APP fraud. Nevertheless the PSR are now expanding the initiative to around 400 PSPs to ensure protection across a variety of payment journeys.

Screening and sanctions

PSPs providing instant payments in euro are required to follow a harmonised approach to EU sanctions by applying a divergent screening process. PSPs are required to verify at least once a day whether any of their customers are designated persons or entities subject to EU sanctions and immediately after entry into force of new or amended designations.

The requirement will apply to all PSPs under Article 5d from 6 months after entry into force.

Penalties

Member States will create effective, proportionate and dissuasive penalties. The minimum levels of penalty are already laid down in Article 11 of the SEPA regulation.

Will it boost Open Banking?

The uptake of instant payments is also meant to increase the success of payment initiation services (PIS) under the PSD2 provisions on Open Banking. Currently providers of PIS are entitled to a “yes” or “no” confirmation from account servicing payment service providers (ASPSP) on the availability of funds.

The proposals is meant to act as a stimulus from the European Commission for new market participants to enter part of the payment chain where services don’t currently exist to support the rollout and success expected for instant payments.

What next?

The proposed act is open for a feedback period of 8 weeks which will end on 5 January 2023. Feedback will then be summarised by the European Commission and presented to the European Parliament and Council, with the aim of feeding into the EU legislative debate.

This article first appeared in a B&B newsletter which can be found HERE