Takeaways From the EU’s Instant Payment Mandate

The EU has a lot to consider as it mandates banks to offer instant payments.

First introduced in 2017, Single Euro Payments Area (SEPA) instant payments have been plagued by a slow rollout and low adoption by banks in the eurozone.

To remedy this, the European Commission (EC) published a proposal in October with the aim to force banks and other payment service providers (PSPs) to offer 24/7 instant euro payment services without charging customers an additional fee.

Once the new rule comes into force, PSPs in the eurozone will have six months to begin accepting and one year to enable the sending of instant payments, while SEPA-connected banks outside of the eurozone will have additional time to comply.

Learn more: New EU Instant Payment Rules to Bolster Mainstream Open Banking Adoption

This legal mandate to provide real-time services was deemed necessary as the EU lags behind other markets in the use of instant payments.

For example, in its assessment of the new rule, the European Payments Council pointed to successful schemes in Australia, Brazil, India and the U.K. that have pulled ahead of SEPA Instant.

Differences Between the EU and the UK

In the U.K. where the Faster Payment System (FPS) was launched in 2008, a highly concentrated banking sector and centralized clearing system have helped the FPS grow steadily in prominence without any legislative push equivalent to the EU’s recent proposal.

As a result, the country’s instant payment rails enjoy near-complete bank coverage, with only a handful of unconnected foreign banks and a few smaller U.K. banks connecting to the system via a sponsor rather than directly.

As the UK Finance annual payments report notes, in 2021, FPS overtook the Bacs Direct Credit system as the transfer method used most frequently by businesses.

In the eurozone, however, only 11% of SEPA Credit transfers sent in the region were instant at the end of 2021, per the EC.

The reasons for this are to do with the size and complexity of the eurozone’s payment system, which is home to thousands of banks and a complex clearing infrastructure spread across member states.

In fact, one of the criticisms leveled against the original SEPA mandate is that it fails to properly harmonize transaction standards, to the extent that payments processor Equens has reported using 140 different SEPA formats across the EU.

Besides the different SEPA formats in use, fragmentation has also occurred at the regulatory level.

As the EC noted in its proposal, a number of national regulatory solutions have already been adopted to increase the uptake of instant euro transfers, a fact that it has used to help justify the new rule.

“National regulatory solutions pose a risk of fragmentation of the internal market, thus increasing the compliance costs due to different sets of national regulatory requirements, and making the execution of cross-border instant credit transfers more difficult,” the proposal stated.

As well as helping to drive down the costs associated with regulatory fragmentation, the EC argues that the cost to banks and other PSPs of updating their systems will be more than offset by a concurrent change to sanctions screening.

Under the new proposal, PSPs will be required to frequently screen individual accounts rather than every transaction as they are currently obliged to.

The parallel changes to sanctions screening may prove to be the real driver that enables the new SEPA mandate.

Consider that according to the Federal Reserve Bank of Boston, it cost participating banks up to £50 million ($57.4 million) each to connect to the new system when the U.K. implemented the FPS, and for those smaller PSPs that haven’t plugged into the FPS, the option of connecting via a sponsor bank has enabled them to still participate.

While larger eurozone banks might barely bat an eyelid at tens of millions in upgrade costs, these have mostly already done the legwork of integrating SEPA Instant. On the other hand, smaller PSPs with fewer resources appear to be among those that have slowed the widespread adoption of the scheme.

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