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Although it was not packed with surprises, the EU’s instant payments proposal has some cause for concern that will need to be addressed, payments experts have warned.
On October 26, the European Commission released its instant payments proposal, which outlined Brussels' plan to create a better take up of real-time payment methods in the trading bloc.
A majority of payment service providers (PSPs) that offer SEPA credit transfers must also offer SEPA instant transfers to all their customers, according to the proposal.
"This is an extension of the SEPA regulation. It is not a new thing, but a case of harmonising,” said Frederic Viard, global head of marketing at Bottomline Technologies. "In Europe, this has always been the issue. There is a single currency, but transactions happen cross-border.”
In addition, the charge 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 also offer the Confirmation of Payee (CoP) service to check the account number and the name of the payment beneficiary match. Before the payer authorises the transaction, PSPs will also be obliged to warn the payer about any detected discrepancy that could suggest fraud.
"We have been lobbying for this for five years, as it will bring many more PISPs into the retail payment space,” said Ralf Ohlhausen, chair of the European Third Party Providers Association, whose trade association has a focus on instant payments to support retail payments.
“A lack of mandate has meant very little growth for instant payments in the last five years.”
Currently, the European Commission suggests that only around one in ten euro credit transfers in the EU is processed as an instant payment. This is even lower in the case of cross-border transfers in euro executed between two member states.
“This is because so many banks are heavily invested in the cards business and not keen on cannibalising themselves,” Ohlhausen suggested.
Of the proposals, the decision to introduce price caps has raised eyebrows in Brussels.
“I thought the EU was supposed to have a free market,” one EU lobbyist recently remarked to VIXIO.
Although not entirely unexpected, banking and payment stakeholders, such as Payments Europe, have been vocal about their displeasure with the stance.
However, Ohlhausen greeted the pricing rule.
“It is important that instant payments incur no extra fees,” he said. “Stipulating that they can’t cost more than other credit transfers may do the trick, but we now have to make sure that banks do not suddenly start charging for these."
Andrea De Matteis, founder of De Matteis Law, meanwhile, described the commission’s decision as “a bold move”.
"The commission has made a bold move with pricing. The commission says that banks will need to subsidise, which means a lot of pressure on them,” said De Matteis.
He pointed out that this shows how important rules are in the payment ecosystem. “The commission thought this would take ten years if left to the market so that is why they jumped in.
“This is quite revolutionary, it will be a seismic change."
Identity politics
The proposal also came as no surprise to Andrew Gomez, a consultant with Lipis Advisors.
"This has been expected for a long time. It is no surprise that they came out with these proposed changes,” he said.
It is a good start, Gomez said; however, a lot is missing.
“For example, a pan-EU directory, where you can find the people you are paying,” he said. “The prospect of a pan-EU payments system has been scaled back post-EPI. We need to make the market interoperable, as multiple solutions mean fragmentation."
For Gomez, references to the digital identity regulation is also missing, which is problematic as it could complement the EU’s plans.
“There are various schemes designed to make use of e-ID, and we need this in place, considering that these transactions are irrevocable,” he said.
“Digital ID legislation being in place before or at same time as the instant payments regulation would be very helpful."
The European Commission first proposed its European Digital Identity Wallet in Summer 2021 and intends to provide EU citizens with a secure place to store documents in a mobile app.
Possible use cases touted by the commission include requesting access to a public record, such as birth certificate, medical record or land registry, as well as opening a bank account.
However, the proposal does not appear to be treated with the same sense of urgency as other digitisation-focused regulations such as the Digital Markets Act, the Digital Services Act and the single charger rule, which were introduced in a similar time period and have now entered into EU law.
An EU-wide e-ID could be particularly beneficial for helping with Confirmation of Payee rules, an area where the EU appears to be following the UK approach.
EU regulators and those at member state level have expressed concern about whether fraud trends in the UK, such as authorised push payment (APP) fraud, may be about to surface in the EU, which may be what inspired the move from Brussels, considering it was one of the less anticipated elements of the text.
"Introducing IBAN checks and Confirmation of Payee is a huge pandora's box,” said Ohlhausen. “I'm extremely worried about that part.”
Although he was thankful that the sanctions checks shall now be done outside the flow, he said that should not now mean that friction is introduced elsewhere.
“CoP shouldn't apply for retail payments, where the merchant is well known. Unless this is being amended somehow, it would introduce a per transaction process that is complex, costly, has no added value for retail payments and could easily kill this use case altogether.”
For account-based retail payments, there is little evidence of fraud, he suggested. “APP fraud is more likely to happen in other use cases and is largely a UK phenomenon, I believe, because people are so used to making card payments. Elsewhere in Europe, people are more used to credit transfers."
Ohlhausen did, however, suggest that banks need to be transparent about the completion of a transaction.
"The regulation needs to make it watertight that banks would have to notify customers about the success or failure of transactions and that this must be instant and for free as well,” he said.
Considering that the EU has only just unveiled its instant payments proposal, it is likely that there will be a lot of negotiations between the European Commission, the European Parliament and the European Council over what the final product looks like.
For example, the EU’s legal framework for crypto looked markedly different by the time the negotiation process had finished up.
Although the instant payments proposal is likely to be the last payments-related regulation out of the commission this year, payments insiders anticipate a bottleneck next year, with negotiations taking place and other legislation such as the digital euro legal framework, revisions to PSD2 and an open finance framework likely to surface.
