Instant Payments Mandate Could Speed Up Adoption, But Comes At A Cost

May 16, 2022
The European Commission is expected to unveil new instant payments regulation this autumn, including mandating banks to accept it, but Brussels has a long wait before it finally becomes "the new normal".

The European Commission is expected to unveil new instant payments regulation this autumn, including mandating banks to accept it, but Brussels has a long wait before it finally becomes "the new normal".

SEPA Instant Credit Transfer (SCT Inst) payments were launched in 2017 as an optional payment scheme.

However, four and half years in, adoption has been low and growth rates are below expectations. According to the European Payments Council (EPC), instant payments across the region accounted for around 10.5 percent of credit transfers in 2021.

Now, to spur adoption and use, the European Union has admitted it is considering a mandate requiring every bank in the trading bloc to have the ability to accept instant payments.

Currently, according to the EPC, 2,356 payment service providers (PSPs) have joined the scheme, equivalent to 65 percent of European PSPs.

“We need to accelerate work on instant payments,” said EU financial services chief Mairead McGuinness during a conference speech earlier this year. “Across the EU, it should be possible to transfer money as quickly as sending a text message, every hour of the day, every day of the year.”

McGuiness, who has come to command respect from financial industry players since unexpectedly landing the role, referred to instant payments as a “simple, radical idea”.

Among the many advocates of greater instant payments support is the European Fintech Association (EFA), which told VIXIO that it “strongly” endorses the commission’s plans.

“If instant payments are to become the new normal, then the availability for consumers to receive and send instant payments needs to be near ubiquitous,” a spokesperson said.

And for this "new normal" vision, first touted in the EU’s Retail Payments Strategy, is to become a reality, then large PSPs need to be mandated to adhere to SCT Inst to ensure that there is a critical mass, the EFA said.

“For smaller PSPs, some proportionality in the form of a longer implementation deadline could be introduced,” the spokesperson suggested. “With regards to fees and pricing of instant payment transfers, the transactional fees for euro instant and regular credit transfer should be equal.”

However, legislation that requires a mandate comes with its own challenges and risks, warned Andrew Foulds, high-value market infrastructures director at Fiserv. “Two interlinked factors have contributed to the low adoption of instant payments, education and awareness. The lack of systematic and widespread education on the benefits of instant payments for consumers and corporates has resulted in a lack of awareness.”

“Instant payments will likely require investments,” said Pierluigi Cuccuru, associate at De Matteis Law. “It is important that regulation allows financial institutions to have a profitable business case to monetise such investments and to innovate on instant payments rails.”

It is also hard to predict how instant payments will change the balance of payments in Europe, the Italy-based lawyer said.

“It is difficult to assess beforehand the impact of cheaper instant payments, as we do not know whether they will eat from other types of electronic payments such as cards or from cash instead,” he said.

According to Foulds, it is also important to consider the commercial realities of card payments as compared with instant payments. “Banks generate revenue from card processing, whereas instant payments do not offer the same level of revenue, skewing the commercials for account holding institutions in favour of cards.”

Instant payments will not reach a tipping point until other factors outweigh this imbalance, he suggested.

“For example, the introduction of value-added overlay services, such as Request to Pay, will be a catalyst for acceptance and adoption of instant payments,” Foulds speculated. “Innovation aligned with consumer demand will prove to be the driver for increased adoption of instant payments.”

However, Foulds did predict that instant payments will eventually become an alternative to card payments, pointing out that on the continent, the EU and European Central Bank (ECB) have both openly stated their ambition to champion alternatives to card schemes.

Similarly, the Payment Systems Regulator in the UK has also stated that it wants to encourage viable alternatives to the card networks.

“Overlay services built on instant payment schemes will be critical in providing a frictionless and seamless payment experience,” he said. “Strong competition to the card networks could well come from payments institutions or fintechs delivering innovative services, rather than banks.”

Instant payments regulation has, so far, garnered tentative support from lobby groups in Brussels.

Card industry association Payments Europe told VIXIO that it welcomes the uptake of instant payments, which will increase the variety of payment instruments accessible by consumers and retailers. “We see that adherence to SEPA SCT Inst is increasing organically and believe this will continue in the coming years.”

At the same time, however, the association cautioned that should adherence to instant payments become mandatory, regulators need to be mindful of the time, resources and investments this will require of market players to ensure the highest levels of safety and security, which European consumers are accustomed to, in all transactions.

“To ensure PSPs can respond to the needs of payment users, be it, merchant or consumers, Payments Europe calls on the regulators to allow for payment instruments to compete in a regulatory-neutral framework,” the spokesperson said.

The European Banking Federation also had a response to the European Commission.

“If adherence were to be mandated through legislation, PSPs must be given a sufficiently lengthy rollout period due to technical build and consumer considerations,” the trade association said in a consultation response last year.

The commission should also carefully consider the needs and costs of SCT Inst for non-eurozone markets and PSPs, and is important to take into consideration that some PSPs have very specific or "niche" customers who do not need instant payments and therefore it would not be proportionate to mandate these PSPs to adhere to SCT Inst, the EBF continued.

“We would also emphasise the importance of resolving issues around sanctions screening as the current situation can present an obstacle to some PSPs wanting to adhere.”

Instant gatekeepers

Sources have told VIXIO that they think financial institutions will continue to apply high pricing for as long as they can get away with it.

It is this high pricing that has triggered the commission’s plans, with the 2021 vision for a better uptake of instant payments never becoming a reality in the end.

Consumer fees for SCT Inst vary considerably across the EU, being up to €7.75 in Italy in comparison with €1.25 in Belgium, according to a report on instant payments published by BEUC, the EU’s consumer lobby association.

“Disproportionally higher fees for SCT Inst vs regular credit transfers work against the commission's strategy for instant payments as the new normal,” said Cuccuru.

The European Commission, he continued, may therefore propose measures to lower/cap instant payments fees, such as a parity rule with regular credit transfers.

“Consumers are discouraged from choosing an instant payment over a slower payment,” complained the EFA.

This, the spokesperson suggested, is because of a number of reasons.

“Higher fees play a huge role in the decision process. However, in some cases, instant payments aren't even available unless consumers have signed up for a premium account, leaving those with basic accounts in the cold.”

“If instant is to become the norm, the commission's proposal needs to ensure instant payments are no longer seen or priced as a premium service,” the spokesperson argued. “It'll be impossible to build innovative payment solutions onto the instant rails if SCT Inst isn't universally adopted.”

This has already been something that has caught the attention of national competent authorities.

For example, in February this year, the Italian Competition Authority (ICA) imposed a €1m fine on Crédit Agricole for pushing its clients towards SCT Inst instead of standard SCT. In this way, the institution could collect the higher fee applied to SCT Inst.

The ICA found that Crédit Agricole insistently offered SCT Inst at the moment of initiating online credit transfers, for example, by re-proposing SCT Inst after the client had already opted for an ordinary SCT and by indicating SCT Inst as the suggested option.

According to the ICA’s ruling, this is an unfair commercial practice that distorts consumers' economic behaviour.

And while the EU negotiates its final package for instant payments, there is a chance of further action being taken by the authorities.

“We would expect national authorities across the EU to sanction banks steering consumers towards more expensive SCT Inst if this is done in a way that is misleading for consumers,” said Cuccuru, pointing out that this practice is prohibited under the Unfair Commercial Practices Directive and its national implementing rules.

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