Demands Without Delay: The EU’s New Instant Credit Transfer Requirements Create Challenges and Opportunities for PSPs

On October 26, 2022, the European Commission released the Proposal for the Regulation of the European Parliament and of the Council Amending Regulations (EU) No 260/2012 and (EU) 2021/1230 as regards Instant Credit Transfers in Euro (instant payments (IPs) proposal). The IPs proposal aims to advance the development of instant payments in the Single Euro Payments Area (SEPA) by ensuring that euro-denominated credit transfers are available to all European businesses and citizens. Under the European Commission’s IPs proposal, payment service providers (PSPs) that are currently offering euro credit transfers will be obligated to offer the instant version of the transfers in accordance with boosted verification procedures and within a strict timeline.

Depending on PSPs’ particular circumstances, the European Commission’s regime could be both beneficial and challenging — this necessitates a closer critical assessment of its particular details. This regulatory analysis will:

• Look into the background of IPs in Europe and the motivation of the European Commission to take legislative action in this field.
• Provide an overview of the current institutional and legislative framework that applies to IPs in the European Union (EU).
• Explore the key legal obligations and definitions introduced by the proposed IPs regime.
• Examine the implications of the proposed measures for PSPs from a compliance, enforcement and business perspective.

Background

How is SEPA relevant to instant payments?

Cross-border cashless payments denominated in euros across the EU are handled in a harmonised manner due to the SEPA project, which was first implemented in 2008. SEPA is an initiative of the European Payments Council (EPC), a not-for-profit organisation that operates independently from the EU, bringing together EU PSPs with the goal of providing them with a forum to tackle European payment issues.

In terms of geographical reach, as of 2020, SEPA covers the entire territory of the EU, in addition to several non-EU member states, such as the UK and Switzerland. Not all members, however, use the euro as their national currency; this issue led to the 2016 full implementation of SEPA in non-euro areas, following the 2014 implementation in euro-area countries only.

There are four primary payments initiatives that currently form part of SEPA:

• SEPA Credit Transfer (SCT) – a mandatory scheme that facilitates a consistent approach for making simpler, one-time payments across Europe, ensuring European transactions are processed as easily as domestic automated clearing house (ACH) transactions.
• SEPA Direct Debit (SDD) Core – a mandatory scheme that is used for regular payments executed between merchants and consumers.
• SEPA Business-to-Business (B2B) – an optional scheme for regular payments that are being collected from businesses.
• SEPA Instant Credit Transfer (SCT Inst) – an optional scheme for instant credit transfers made in euro.

SCT Inst is based on the basic SCT scheme. SCT Inst has been operational since November 2017 and is the primary focus of the European Commission’s recent IPs proposal. SCT Inst applies to instant credit transfers that have the following features: they do not exceed the upper limit of €100,000; are executed within ten seconds; and are available 24 hours a day, without exceptions on any calendar days of the year.

What motivated the European Commission’s proposal?

The IPs proposal does not come as a surprise, as the commission had indicated its interest in IPs earlier in the year. During her speech commemorating the 20th anniversary of the EPC on June 16, 2022, Mairead McGuinness, European commissioner for financial stability, financial services and the Capital Markets Union, declared that “[i]nstant payments are the new frontier in payments”.

In the same speech, McGuinness highlighted the European Commission’s ongoing work on a proposal for the development of IPs across the EU, as only 11 percent of the credit transfers carried out altogether in the EU are instant. The commission considers this to be a low percentage considering the fact that the majority of the EU’s PSPs, two-thirds, have the capabilities necessary for sending and receiving IPs in euros but do not make these services available to customers.

According to the commission’s proposal, there are four primary obstacles that exist, either on the demand or the supply side of IPs. These four obstacles stand in the way of IPs’ full success in the EU and encompass:

• Lack of sufficient available incentives for PSPs to offer euro-denominated IPs (supply-side obstacle).
• Inefficient sanction screening processes that lead to the rejection of a higher percentage of IPs (supply-side obstacle).
• Dissuasive pricing of IPs in comparison to other existing alternative payment methods (demand-side obstacle).
• Concerns over the potentially insufficient protection against fraud schemes that target payers (demand-side obstacle).

Through its IPs proposal, the European Commission is seeking to address these obstacles, accelerate the deployment of IPs and increase the percentage of instant credit transfers throughout the EU. These obstacles will be examined in further detail in the Key Takeaways section below.

Overview of the Current Regime Applicable to Instant Credit Transfers

Institutional framework

The EPC is the independent institution primarily tasked with managing the SCT Inst and other SEPA schemes.

In addition, multiple EU institutions are involved in supporting the advancement of the SCT Inst scheme:

• The European Commission – the body responsible for introducing EU legislation, including payments-related legislative proposals.
• The Economic and Financial Affairs Council (ECOFIN) – a configuration of the Council of the EU, which provides a forum for EU discussions and decision-making on EU policy areas, such as financial services regulation.
• The European Parliament – the EU’s directly elected body responsible for the adoption of EU legislation in the financial services sector.
• The European Central Bank (ECB) – responsible for ensuring that the EU payments system, including SEPA schemes, is operating efficiently. This includes action taken by the Eurosystem, which is composed of the ECB and the central banks of all EU member states.
• The Euro Retail Payments Board (EDRB) – the strategic body set up and chaired by the ECB, which brings together supply- and demand-side players in the banking, payments and retail market.

In its recent IPs proposal, the European Commission has particularly singled out the ECB, which may be invited to provide a separate opinion on the legislative initiative. The ECB’s opinion would be valuable due to the Eurosystem’s monitoring of SCT Inst activities; the Eurosystem also tracks the progress of instant credit transfers throughout Europe through its SCT Inst indicator.

In addition, the Eurosystem is responsible for the TARGET Instant Payment Settlement (TIPS), a harmonised market infrastructure that enables the real-time transfers and final settlement of euro-denominated IPs. A TIPS account is only available to eligible PSPs which have joined the SCT Inst scheme by providing necessary adherence documents to the EPC. As TIPS services can be accessed by any European bank account holder, TIPS is viewed by the EPC as a pan-European solution to the potential disintegration in the IPs market caused by the payment solutions developed at the national level, within SEPA member states’ territories.

Regulatory framework

Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 Establishing Technical and Business Requirements for Credit Transfers and Direct Debits in Euro (the SEPA Regulation) governs credit transfers and direct debit transactions in euros throughout SEPA.

PSPs carrying out IPs denominated in euro are, therefore, required to comply with the technical and business conduct requirements laid out in the SEPA Regulation. In particular, according to Article 1(1) of the SEPA Regulation, the scope of the legislation’s application is limited to transactions where either of the following conditions apply:

• Both the payer’s PSP and the payee’s PSP are located in the EU.
• The sole PSP involved in the payment transaction is located in the EU.

As specified in Article 1(2) of the SEPA Regulation, the following transfers and transactions fall outside its scope:

• Own-account payments by and between PSPs, their branches and agents.
• Payments processed/settled over large-value payment systems (including real-time gross settlement (RTGS) services such as the TARGET 2 system).
• Card payments.
• Transactions denominated in currencies other than euro.
• Money remittances and e-money transfers where neither of the accounts involved is a payment identified by Basic Bank Account Number (BBAN) or International Bank Account Number (IBAN).

In its IPs proposal, the European Commission has also clarified that the application of two additional pieces of EU legislation will remain unaffected after the entry into force of the proposal. These are:

• Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on Payment Services in the Internal Market (PSD2), which introduced new obligations for PSPs and created an integrated payments market including third-party providers (TPPs).
• Regulation (EU) 2021/1230 of the European Parliament and of the Council of 14 July 2021 on Cross-Border Payments in the Union (the Cross-Border Payments Regulation), which requires that the same charges should apply to cross-border IPs in euros as they apply to domestic payments in other domestic currencies.

Key Takeaways from the European Commission’s IPs Proposal

New definitions

Article 1 of the European Commission’s IPs proposal introduces the following four new definitions to Article 2(1) of the SEPA Regulation:

• “Instant credit transfer” as a sort of euro-denominated credit transfer that has the following characteristics: the time of receipt of the credit transfer’s payment order is considered the moment when the payer sends an instruction to their PSP to execute that credit transfer, irrespective of the time of day and whether that particular day is considered a business day; the processing of the credit transfer’s payment order is immediate, regardless of day/hour; the amount transferred is reflected in the payee’s payment account within ten seconds following the time of receipt of the payment order; and the credit value date for the payee’s payment account matches the date on which the transferred amount is reflected in the payee’s payment account.
• “Payment service user (PSU) interface” is defined as “any method, device or procedure through which the payer can place a paper-based or electronic payment order to its PSP for a credit transfer, including online banking, mobile banking application, automated teller machine, or in any other way on the premises of the PSP”.
• The definition of “payment account identifier” corresponds to the “unique identifier” definition contained in Article 4(33) of the PSD2, which is: “a combination of letters, numbers or symbols specified to the payment service user by the [PSP] and to be provided by the payment service user to identify unambiguously another payment service user and/or the payment account of that other payment service user for a payment transaction”.
• “Listed persons or entities” are defined as persons and entities that are subject to asset-freezing measures and other restrictive measures that form part of the EU’s sanctions regimes adopted in accordance with Article 215 of the Treaty on the Functioning of the EU (TFEU).

New obligations for PSPs

The IPs proposal aims to modernise the regime under the 2012 SEPA Regulation. As the European Commission clarified, to address the four supply- and demand-side obstacles described in the Background section above, the four key changes described below will need to be introduced to the current IPs regime:

1. The EU will ensure that IPs in euros become universally available through imposing additional requirements on European PSPs. In accordance with Article 5a of the IPs proposal, with the exception of the entities mentioned below, certain PSPs (including credit institutions) will be subject to a mandatory obligation to offer euro-denominated credit transfers in their instant version shortly after the new legislation enters into force. To illustrate the significance of this new obligation, at the moment, transfers can take days — this will now change with payment accounts being “reachable for instant credit transfers 24 hours a day and on any calendar day”, as specified in Article 5a(2)(c) of the proposal. Payment and electronic money (e-money) institutions will not be subject to the obligation to offer instant euro credit transfers. As Section 9 of the preamble to the IPs proposal specifies, these entities do not enjoy the same level of access to the necessary payment infrastructure, which is why imposing such obligation is considered disproportionate by the European Commission. However, payment and e-money institutions would be able to offer instant credit transfers to their customers on a voluntary basis
2. Timeline: The requirements contained in Article 5a are expected to enter into force on a staggered basis, depending on whether a SEPA member uses the euro as its official currency or not. According to Article 5a(4), the dates go as follows:

• Receiving of euro-denominated IPs for PSPs in the euro area — six months after entry into force of the proposed legislation.
• Sending of euro-denominated IPs for PSPs in the euro area — 12 months after entry into force.
• Receiving of IPs in euro for PSPs outside the euro area — 30 months after entry into force.
• Sending of IPs in euro for PSPs outside the euro area — 36 months after entry into force.

2. The affordability of euro payments for individuals and companies will be increased by introducing a price cap on how much PSPs can charge for IPs. Under Article 5b(1) of the IPs proposal, “any charges applied by a PSP on payers and payees in respect of sending and receiving instant credit transfer transactions in euro shall not be higher than the charges applied by that PSP in respect of sending and receiving other, corresponding, credit transfer transactions in euro”. In addition, as Sections 19 and 20 of the preamble to the IPs proposal clarify, Article 3 of the Cross-Border Payments Regulation will also be amended to reflect Article 5b(1) and to ensure that PSPs do not charge higher fees for instant credit payments than non-instant credit transfers
3. Timeline: In accordance with the proposed Article 5b(2), this requirement will apply to:

• PSPs in the euro area from six months after entry into force of the proposed legislation.
• PSPs outside the euro area from 30 months after entry into force.

3. The trust in instant payments will be boosted through additional checks, which will aim to prevent payment fraud and mistakes. According to Article 5c of the IPs proposal, all PSPs that offer euro-denominated IPs will be required to check if there is a match between a payee’s IBAN and name. In the event of a non-match, the PSP must notify the payer prior to executing the payment order The new requirement under Article 5c to collect information with the goal of confirming a match between a beneficiary’s name and IBAN details would operate separately from the pre-existing requirements and data elements contained inArticle 5(2) of the SEPA Regulation. Article 5(2) will continue to apply to non-instant credit transfers and direct debit transactions, while Article 5c will govern alerts to customers with respect to instant transactions
4. Timeline: As Article 5c(6) of the proposal stipulates, this requirement would be subject to the same timeline as the abovementioned requirement concerning the sending of euro-denominated IPs:

• For PSPs in the euro area, the provision will have a legally binding effect 12 months after entry into force.
• For PSPs outside the euro area, the provision will have a binding effect 36 months after entry into force.

4. Under Article 5d of the IPs proposal, instant euro payments should be carried out in a frictionless manner, which will be achieved through PSPs’ daily checks of their customers against the designations under EU sanctions lists. With respect to this provision, the European Commission has emphasised that, whereas all types of customer checks are still necessary, not all regulatory requirements are the same — there is an important distinction between ex-ante and ex-post regulatory requirements. Anti-money laundering and counter-terrorist financing (AML/CTF) checks would be considered ex-post requirements, i.e., they would need to be carried out after a payment has been executed. The regular sanctions screening obligation classifies as an ex-ante requirement and needs to be met prior to executing the transaction. This sanctions verification must occur within ten seconds, which would only be possible where the divergence in all PSPs’ practices has been eliminated through a harmonised EU approach to Article 5d.
5. Timeline: In accordance with Article 5d(4), all PSPs will be legally bound by Article 5d from six months following the entry into force of the proposed legislation, regardless of whether they are located in the euro area or not.

Implications

Strict enforcement of new obligations imposed on PSPs

The four measures described in the previous section would be subject to stricter enforcement by EU member states. As the new Article 11(1a) of the European Commission’s IPs proposal specifies, the non-compliance penalties imposed by the respective national authorities must be “effective, proportionate and dissuasive”.

To clarify, the criteria of penalties being “effective, proportionate and dissuasive” is not clearly defined in current EU legislation, which leaves the application of the criteria to the discretion of each member state. However, additional guidance regarding the EU’s interpretation of the criteria in practice can be found in EU case law. In paragraph 24 of a case widely cited in later jurisprudence, Case 68/88, Commission v Greece, the European Court of Justice (ECJ) clarified:

“[W]hilst the choice of penalties remains within their discretion, [member states] must ensure in particular that infringements of Community law are penalised under conditions, both procedural and substantive, which are analogous to those applicable to infringements of national law of a similar nature and importance and which, in any event, make the penalty effective, proportionate and dissuasive.”

In the context of the European Commission’s IPs proposal, all PSPs should carefully examine the sanctions screening obligation under Article 5d, as the provision is not subject to exceptions. EU member states would not be given much room to determine what enforcement measures would be “effective, proportionate and dissuasive” at the national level. The newly proposed Article 11(1b) specifies the precise minimum levels of penalties that EU member states’ national authorities would need to impose in the case of infringements:

• For a legal person, administrative fines should not fall below 10 percent of that person’s total annual net turnover in the previous business year.
• For a natural person, administrative fines should not fall below €5m; for member states that do not use the euro as a national currency, this fine should correspond to the value in the particular state’s national currency.

In addition, under Article 5d(3) of the IPs proposal, if a PSP that may be acting for either the payer or the payee fails to meet its sanctions screening obligations during a transaction, it would incur financial liability for causing financial loss to the PSP on the other side of the transaction. In such a case, the non-compliant PSP will be required to grant compensation to the other PSP.

The European Commission’s timeline for the sanctions screening obligation is also strict. For example, as mentioned above, under the proposed Article 5d(4), all PSPs that are subject to Article 5d would need to comply within six months of the proposed legislation’s entry into force.

Impact on conducting business and consumer welfare

Section 2 of the preamble to the IPs proposal expresses the European Commission’s goal when it comes to the effect of the proposed measures on the state of the European payments market:

“Only a widespread and rapid increase in that uptake can unlock the full-scale network effects of instant credit transfers in euro, leading to benefits and economic efficiency gains for payments services users (PSUs) and providers, reduced market concentration, increased competition and choice of electronic payments, in particular for cross-border payments at the [point of interaction].”

The faster settlement of credit transfers in euros and the accelerated access to funds may benefit both natural and legal PSUs. As the European Commission clarified in the questions and answers (Q&A) accompanying its proposal, through the proposed measures, PSUs will be given more control over the management of their own household expenses. With an increased speed of fund transfers, consumers will be able to avoid penalties incurred as a result of late payments.

The commission’s Q&A points to the business advantages for companies, including small and medium-sized enterprises (SMEs), which would be improved fund management and decreased strain created by cash flow issues. For smaller merchants and players in the e-commerce market and their service providers, for example, an accelerated turnaround of funds may make a difference when it comes to the height of their cash flow solvency ratio — a benefit that could classify as one of the “economic efficiency gains” discussed by the commission.

From a competition perspective, it is important to point out that Section 8 of the commission’s IPs proposal aims to ensure a level playing field for all types of PSU interfaces:

“There is a variety of interfaces through which PSUs can place a payment order for a credit transfer in euro, including via online banking, a mobile application, an automated teller machine, in a branch, or by phone. To ensure that all PSUs have access to instant credit transfers in euro, there should be no difference in terms of the interfaces through which PSUs can place payment orders for instant and other types of credit transfer transactions.”

Ensuring that all types of payment methods (and respectively, PSPs) remain competitive could potentially boost innovation due to the wider range of instant payment options provided to consumers. In particular, companies that properly manage to optimise a customer’s payment journey could stand to gain a lot, and more quickly. Tapping into the potential new business opportunities created by the combination of instant credit transfers and open banking is a benefit that was quickly recognised by the European Third-Party Providers Association (ETPPA), the European association bringing together bank-independent third-party providers (TPPs). In a statement released on October 26, 2022, in response to the European Commission’s proposal, the ETPPA stressed that “instant payments have long been the missing brick in the PSD2 ecosystem”. The ETPPA welcomes the proposed regime, which will ensure that payment initiation service providers (PISPs) and fintech companies properly utilise the payment infrastructure in which these entities have invested as a result of their PSD2 commitments. The ETPPA may welcome, then, the potential for customer data sharing with TPPs to unlock additional payment options which have not been fully explored by customers yet, both in their payments online and at the physical point of sale (POS).

Despite the benefits emphasised by the European Commission, not all PSPs have expressed support for the initiative. On October 26, 2022, the Association of German Banks clarified in a statement that it considers the proposed instant payment measures to pose “a far-reaching and inappropriate market intervention” and that “[p]roduct requirements should be market-driven and not be prescribed by the legislator”. This reaction could be explained on the basis of the new requirements that will be applicable to banks, as described in the Key Takeaways section above, including caps on banks’ chargeable fees for instant transfers. The association also proposed a closer analysis of the increasing costs in payment processing and fraud-related risks.

The polarising reactions to the commission’s IPs proposal were examined in a VIXIO insight from October 27, 2022. Based on market commentators’ reactions described in the article, the promise of eliminating borders in commercial affairs through IPs seems to stand in contrast with the limited capabilities of banks, including smaller banks, to process potentially “hundreds of thousands of instant payments needing to be initiated at once”, among other matters. The suggested measures may come with practical and financial challenges for some banks, especially commercial banks, particularly those that have been slower to accept faster payment settlement procedures and systems.

Next Steps

The European Commission has clearly highlighted its intention to achieve growth in the IPs market, and to do so quickly: “There's a whole lot of power in the idea of being able to transfer within ten seconds […]. And there are so many possibilities for individuals and businesses from this facility that we want to unleash that power and we want it to happen more rapidly.”

As part of the EU’s ordinary legislative procedure, the next stage of this proposal will involve a vote in the European Parliament and the Council of the EU. In light of the strict timelines described in the Key Takeaways section above, as well as the potentially far-reaching nature of the proposed new obligations for PSPs, interested stakeholders would benefit from ensuring that they stay informed during this decision-making process.

Conclusion

The European Commission’s recent proposal may unleash the full potential of IPs throughout SEPA, if there is a clear commitment to innovation, coupled with well-targeted and timely compliance with all newly proposed obligations applicable to PSPs.

The indiscriminate nature and increased affordability of IPs achieved through lower IPs fees could result in further financial inclusion across the EU; in this case, it is best to also keep in mind the needs of consumers and the demand-side obstacles related to high pricing and fraud risks that have stood in the way of effectively introducing IPs in the past.

Despite the mixed reactions from different stakeholders, this time around it does not seem that PSPs will be adopting a passive approach to IPs. This is reflective of the European Commission's efforts to accelerate the adoption of IPs throughout the EU. With the appropriate amount of regulatory intervention, instant credit transfers can be used by PSPs as a springboard to new business successes. A key consideration in this respect is PSPs’ ability to encourage new use cases for IPs at the cross-border level, which would stimulate market growth. Addressing the speed of credit transfers may not be an all-encompassing solution to all SEPA issues, especially where payment companies struggle to innovate. In terms of reaping the benefits envisaged by the European Commission, it is yet to be seen whether and what kind of amendments would be introduced to the IPs proposal during the later stages of the EU’s legislative procedure.

In the words of the EU commissioner for financial services, the commission sees a future where “instant payments will be a standard and affordable feature, not a premium service”. The future will show, however, whether or not the IPs legislative proposal will live up to the European Commission’s high hopes for SEPA.