By Paul Fanon, Managing Director, Global Business Solutions, Bottomline Technologies
The buzz around pan-European regulations for instant payments has died down a bit since Mairead McGuinness, European commissioner for financial services, told a conference in February that regulations for the region would be made this fall. Kind of like halftime in a football match, isn’t it? Like any good team, halftime is the time to assess the first period and prepare for the second. This is the case with instant payments. The year that many thought would be a tipping point for instant payments is almost halfway over and several issues have emerged as banks and other verticals capitalize on consumer demand and prepare for upcoming regulations.
First, let’s quantify this demand. On the banking side, instant payments have taken off in earnest. According to the European Payments Council (ECP), instant payments accounted for 1% of SEPA volume in the first quarter of 2019. This figure is now 11% in just over two years. The current program operates in 26 countries and is offered by 2,328 financial institutions. But other data shows that European consumers are lagging behind this momentum. Payments Europe reports that 88% of consumers are satisfied with current payment methods, as long as they are not cash. And when consumers were asked how they would analyze their payment methods over the next year, instant payments were only mentioned by 7% of respondents.
So there are plenty of avenues for instant payments and hopefully new regulations will push banks and merchants to increase awareness and usage. But at 7% of expected usage, it’s important to understand why they’re such a high priority for the EU Finance Committee. The main reasons are variety and continuous digitization. Banks and other payment platforms want to advocate for innovation. They want more payment methods and they want these new methods to be digital. Anything that helps consumers spend and helps businesses pay and get paid safely is a welcome addition to EU trade.
The case of regulation
When it comes to types of payment methods, the EU is a contradictory study. Its single-currency, multi-country structure adds unique complexity to cross-border payments. Also, it can be seen as a hindrance for a new method like instant payments to gain traction. As a recent report from the European Commission puts it, “the overarching problem is that the basic conditions for the commercial development of innovative European and pan-European cross-border payment products based on instant payments are not guaranteed”. It follows, then, that banks, as well as consumers, would wait for this unifying standard before going all-out with instant payments. Current practices are based on the SEPA Instant Credit Transfer Scheme, which only 64% of FIs use. It is no wonder that regulations have been pushed forward. The belief that the market would drive the business case for instant payments without regulation has been debunked.
In order to prepare for said regulations, a small handicap is not a bad thing. If you want to read the European Commission’s tea leaves, look no further than its response to an invitation to comment on instant payments in May 2021. I expect some of these recommendations to serve as the basis for regulations. Most important: 1) Increase fraud prevention for instant payments, both domestic and cross-border. 2) Consistent fee structures for banks, merchants and consumers. 3) Reconcile instant payments with regulatory compliance and sanction control; 4) Interoperability of SEPA-based systems and technical standards and 5) Consistent liquidity requirements.
All of this leaves banks, businesses and merchants to seek new technological solutions to prepare for the inevitability of regulations. On one level, it’s simple. Preparation spell API. APIs are the intersections of digital data that drive innovation and connect those innovations to consumers. They have often been mentioned in tandem with open banking because data sharing depends on access to APIs. Banks sometimes don’t realize that APIs have current use cases (mobile banking) and are needed for short- and long-term use cases. Instant payments and compliance with regulations around them will require APIs. Legacy infrastructure will not play into the future of EU payments.
No discussion of instant payments – or any other payment – would be complete without mentioning digital currency. The European Commission is currently consulting on the development of a central bank digital currency (CBDC) as part of an ongoing effort to “reduce fragmentation in the European retail payments market and promote competition and transparency”. innovation (including the full deployment of instant payments and industry initiatives) to offer pan-European payment services.So the connection is made early between CBDCs and instant payments.But again, consumer awareness and planned use are far behind on this issue.In March, an ECB report showed that most consumers believed that the digital euro was not a different cryptocurrency from Bitcoin and assumed that this would lead to the phasing out of cash.Some even thought it would be used as a form of personal surveillance.
Conclusion: The development of instant payments is worth the investment in EU resources and bank readiness. The global economy is digital. And while digital currencies are yet to be sorted, the way is clear to implement strong regulations that work for all parties.