An undeveloped EU instant payment landscape and the EU Commission’s push
Although they promise rapid payment processing within seconds any day of the year, instant payments (IPs) are currently used only hesitantly by customers and are rarely offered by payment service providers (PSPs).
At the end of 2021, only 11% of euro credit transfers sent in the EU were IPs. One third of PSPs do not offer IPs at all. This slow roll-out was not foreseen when the instant payment regime was launched in November 2017, which – as major technological innovation – was intended to create a significant benefit for consumers and businesses. One reason for this development was certainly that IPs currently come only with a price tag: PSPs are currently allowed to set a charge for sending or receiving euro IPs at their discretion.
The EU Commission wants to overcome the impediments to make IPs affordable, secure and ensure a consistent application across the EU. On 26 October 2022, it has therefore adopted a legislative proposal which provides for amendments of the SEPA Regulation (Regulation (EU) No. 260/2012) and the Regulation on cross-border payments in euro (Regulation (EU) No. 2021/1230). Most importantly, the proposal sets out that PSPs must offer IPs without charging costs that are higher than typical euro credit transfers. We have summarized the key proposals in our blog post recently.
On the one hand the proposal was received positively, not least because it would no longer be appropriate for payments to take days to be processed. However, others see the proposal critically: in particular German banks say that
- product requirements should be market-driven and not imposed by the legislator;
- many institutions would still have to build up the necessary infrastructure;
- the usual fraud or money laundering controls are overly burdensome for IPs; and
- the Commission's timetable would be too ambitious. Especially banks that have not yet offered real-time payments would be put under enormous investment pressure.
The ECB sides with the Commission
The ECB has now taken the side of the Commission and strongly welcomes the initiative of the Commission to promote the provision of IPs. In its opinion issued on 1 February 2023, the ECB suggests only minor amendments to the Commission’s proposal:
- Scope: According to the Commission, the IPs regime should not apply to electronic money institutions and payment institutions as defined under PSD2 (Directive 2366/2015/EU), i.e. they should not be obliged to offer IPs and charge a fee to payers. It would not be proportionate to impose on them such an obligation considering that they are not regarded as eligible participants in a payment system designated in accordance with the Settlement Finality Directive (Directive 98/26/EC) and therefore do not have the necessary infrastructure to process IPs. The ECB notes that if the scope of the Settlement Finality Directive is extended to include EMIs and PIs, which is currently under review, these should then also comply with the requirements to offer Ips all of their payment services users (PSUs).
- Sanction Lists: The Commission proposes that PSPs should verify whether any of their payment services users are listed persons or entities which generally means a natural or legal person that is subject to an asset freeze or a prohibition to make funds available to it. The PSP must carry out the verifications immediately after any such measure entered into force. If a PSP has failed to carry out the required checks and thereby causes that another PSP fails to freeze assets of a listed person or entity, the former must compensate the financial damage caused to the other PSP resulting from penalties. The ECB suggests clarifying that the PSPs should carry out verifications as soon as possible following the publication of the restrictive measures in the Official Journal of the EU and in any event before their entry into force.
- IBAN-Name-Check: The draft regulation provides for a mechanism when discrepancies regarding the name and the payment account identifier of the payee (i.e. IBAN) are detected. As a general rule, the PSP shall verify if these details, provided by the payer, match. If they do not, the PSP shall notify the payer of the discrepancies together with the information that an authorisation may entail that funds are transferred to a payment account not held by the indicated payee. Nevertheless, payers should in any case be able to authorise IPs concerned. However, they should have the possibility to opt-out from receiving this service at all. PSPs may charge an additional fee for the service of detecting discrepancies between the name and payment account identifier of a payee. The ECB suggests including an explicit provision and oblige PSPs to inform PSUs about the possibility to opt-out from the service. Further, the ECB proposes to offer the check without additional costs to avoid that PSUs do not use IPs or opt out of the discrepancy checking service due to the fees associated with it.
- Penalties: The Commission’s proposal provides that Member States should lay down rules for penalties in case of infringements of the new IPs regime. The ECB clarifies that penalties shall not be applicable in the highly exceptional scenario that the SEPA Instant Credit Transfer (SCT Inst) scheme is unavailable for a short period of time.
Outlook and implications
Apparently, the credit industry has suffered a setback in its fight to introduce mandatory IPs solutions considering the ECB’s opinion that indicates that the Commission’s proposals are kind of set in stone. But a lot can still happen: the ordinary legislative procedure typically takes around 18 months which means that, assuming that trilogue meetings will start soon, the final text can be expected not before the end of the parliamentary session in 2024.
Other regimes such as PSD2 already apply to IPs and will continue to do so after the entry into force of the new IPs regime. The ECB also suggests aligning certain definitions such as “payment account identifier” or “credit transfer” to ensure consistency with existing defined terms PSD2 and the Payment Account Directive. Furthermore, PSD2 is currently under review (see our blog post), and any possible amendments will take full account of the present proposal. The EU Commission has emphasized that the new requirements regarding IPs will not affect the obligations to carry out proper KYC/AML checks as the security of IPs will be fundamental.
Establishing an EU-wide obligation for certain PSPs (i.e. basically credit institutions) to set up a payment service of sending and receiving instant credit transfers may revive, but also reshuffle the market for IPs solutions and their workarounds. While the proposal leaves it open which payment service should be used, it may result in a strong push for the SCT Inst scheme, that was introduced by the European Payments Council already in 2017. The widespread use of SCT Inst may also be to the disadvantage of other instant payment solutions, such as e-money. It also questions the necessity for some workaround solutions that provide the payee with sufficient comfort that the funds will arrive, albeit not transferring the money instantly. Providers of payment initiation services, but also credit card schemes should therefore consider the developments closely. By means of instant transfers, traditional payment methods are also catching up with digital central bank currencies (such as the planned Digital Euro) and other blockchain-based payment methods, where instant execution is also a key advantage.
