Instant payments in Europe: moving from theory to practice
We live in impatient times – everyone wants to be able to pay who they want when they want, instantly and regardless of location. The UK has had instant payments since 2008; Faster Payments volumes have exceeded all predictions and now exceed 135 million per month.
The push towards real time is global. In Europe, instant payments are progressing on several fronts, driven by regulations and market-led initiatives. The second Payment Services Directive (PSD2) will increase competition, drive innovation and open up new business models, while market initiatives such as ISO 20022 and the Eurosystem 2020 vision promote standardisation and interoperability.
If instant payments are attractive to consumers, they also deliver benefits to corporates and the broader economy. A real-time payments backbone boosts efficiency and is a catalyst for innovation, fuelling the creation of products and services for a range of customer segments – from new P2P apps for consumers to just-in-time supplier payments and real-time liquidity management for corporates.
However, real-time transactions demand significant infrastructure and process change; this means that, from an individual bank perspective, the business case may be elusive. Building and operating an integrated instant payments platform takes time, investment and resources. Although banks set out from different starting points, a lot needs to happen to turn theory into practice.
The practicalities are substantial and daunting. Payments touch almost every part of a bank’s infrastructure, so all core banking systems must be available 24/7 and react immediately to instant payment-related queries and processes. Banks need to consider the impact of instant across each involved application and ensure that all supporting systems – from fraud detection to reporting – can support real-time operations.
The success of instant payments in Europe will most likely be measured in domestic transaction volumes; but its future will have to be built across borders within the European Union. And this will require interoperability. Europe is becoming a patchwork of instant payment infrastructures, adopting the SEPA SCT Inst scheme with some customisation to fulfil domestic payment habits. Despite the efforts of the various European instant payment platform operators, it seems difficult to overcome the obstacles to interoperability. Because of this, some operators are now thinking of building technical facilitator services for their communities.
On the regulatory side, PSD2 comes into force in January 2018. It requires banks to open-up their customer payments and accounts information to accredited third parties, which are then free to develop payments and information services for these customers. This is why PSD2 is not only a challenge in terms of technology and regulatory compliance, but is a strategic and operational game changer. Combine this step-change with a move towards instant payments and we enter a new era in European financial services that is a major milestone on the way to a real-time digital economy throughout Europe.
As new payment service providers (PSPs) work to take a bigger slice of the payments business, banks and other players will also need to carve out their role in this changing landscape. Many are adopting innovative new ideas, co-operating with fintech companies and extending their services to compete with these emerging PSPs.
So, where are we in terms of products and services? In November 2017, EBA Clearing, STET and Equens will go live with their euro instant payments offerings, and other clearing and settlement mechanisms are there already. In June, the European Central Bank announced that it will offer an instant settlement service, called TIPS (Target Instant Payment Settlement), which will go live in November 2018. So, the move toward instant payments in Europe is gaining momentum. However, banks and PSPs have a lot to consider when deciding which role they wish to play in the instant payments value chain – and how they will make it pay for them.
There is clearly a strong collective will to make instant payments a reality in Europe and an active dialogue is driving progress. As is often the case, the road to competition will be paved with cooperation.
By Carlo Palmers, head of market infrastructures, Swift
This article is also featured in the Daily News at Sibos 2017 – Day 2 edition.
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