Instant Payments Within the SEPA Region – Transfers at the Speed of Netflix

As of November, money transfers within Europe are set to take place in real time. Five countries will take part in the initial live operation, which will actually be more of a pilot scheme. The real joint platform will come into operation a year later—and will radically transform the payments market.

There are few topics on which opinions are so united. Everyone involved, from financial experts to politicians to customers to retailers, is in favour of instant payments. A survey carried out by ibi Research [1] showed that both private individuals and companies welcome the idea of instant transfers—even although individuals, particularly, noted that there isn’t necessarily always a need for transactions to take place in real time. But faster is still much better for many users, since waiting isn’t what people do nowadays. Instead, we’re used to watching films and TV series at any time of day or night via Netflix, placing midnight supermarket orders online from the comfort of our couches, and using our smartphones to pay bills on the way to the station. It’s hard to understand why the money transfer we initiated takes 1 to 5 days to reach the recipient’s account, and yet an Amazon delivery driver can be on our doorstep three hours after we place an order. Such benefits come courtesy of real-time payment services like the Dutch iDEAL, Austria’s eps or German giropay. In this respect, therefore, customers are well served, but payment providers still have responsibilities and carry some risk that the money may not arrive.

Real-Time Transfers within Europe

Transfers within Europe are now set to take place in real-time. Just like Netflix, they will be at our fingertips 24 hours a day, 7 days a week, 365 days a year with no waiting, and will be completed at the touch of a button. The European Central Bank (ECB) and the European Retail Payments Board (ERPB) are leading the field in this respect, by driving the development of a SEPA-based real-time payment system. In this, the ECB is reacting to those countries going it alone with real-time transactions, as well as to the increasing impact of payment service providers crowding their way onto the market with real-time services.

Instant payments are the next biggest payment issue in Europe after the SEPA changeover. In November 2017, Austria, Spain, Finland, Italy and Latvia will join the pilot scheme, but a common, real-time platform will not be launched until a year later. Germany, Portugal, Belgium, Sweden and the Netherlands are also set to be on board then, with the remaining countries following in 2019. 600 banks are expected to offer instant payments right from the start [2].

Simple Plans, Major Obstacles

But what exactly does “instant payments” mean? The ECB’s plans are extremely simple. They aim to eliminate “business hours” for money transfers: instead, transfers will be made in real time, 24/7, 365 days a year. After lengthy discussions, it was agreed that there is no need for payment recipients to receive a confirmation within the initially proposed period of 5 seconds. Instead, the new target is now 10 seconds. The current framework concerns payments of up to 15,000 euros, with higher amounts being possible at the payment service providers’ (PSPs) discretion. One important detail is that instant payments cannot be reversed. This means that a payer cannot recall a real-time money transfer as they can a SEPA direct debit, for example. The SEPA instant payments scheme is not mandatory for banks. Instead, PSPs can decide whether or not to offer it to their customers. Real-time transfers will be possible online, at cash registers, and also as cash alternatives (person-to-person payments). Although this all sounds extremely simple and logical, implementing it is a major challenge for banks, whose IT infrastructure is not designed for real-time operations.

SEPA Transfers As A Basis

In June 2015, the ERPB tasked the European Payments Council (EPC) with developing a specific proposal for a real-time European payment method. The initial concept for the “SEPA Credit Transfer Instant (SCT Inst) Payments Scheme” was presented in 2015 and the complete guidelines were approved in November 2016. As the somewhat cumbersome name suggests, the EPC uses SEPA transfers as the basis for the new regulations and for the technical standards for real-time transfers that will apply for the 34 SEPA countries. One of the main aims is to keep the costs manageable for all those involved. Although there are, as yet, no specific figures, the goal is to leverage the comprehensive investments in SEPA compatibility when it comes to integrating IBAN and BIC, processing data records, or reacting to accounting errors. Direct debits, credit cards and other payment instruments will not be included initially. Instead, they will be made “instant” later, once the instant payments scheme has been successfully launched.

Suspense Surrounds Pilot Scheme

Excitement is building around November’s pilot launch. The SCT Inst draft purposely does not define how and by whom clearing and settlement should be handled. Instead, these details will be determined by the service providers involved, provided that they adhere to the prescribed standards. Here, however, is precisely where the main difficulty lies. How quickly can the clearing process be completed if every bank uses a different service provider? (Not to mention real-time settlements or handling money laundering.) It remains to be seen whether accurate and meaningful checks can be completed within just a few seconds, or whether transactions will need to be verified after the fact. By contrast, the current SEPA transfers seem painfully slow. Whereas most payments are now cleared several times a day, they are only credited (settlement) once a day. Seven major clearing and settlement mechanisms (CSM), including EBA Clearing, Equens Worldline, Iberpay and Stet [3], will take part in November’s pilot launch.

Majorities Could Decide

It is doubtful whether speed will be enough for instant payments to succeed. Experts [4] believe that banks will need to offer additional added value, particularly because they will be competing with cash, which in many EU countries still is the favourite payment method, at brick-and-mortar retailers. In order to win through, therefore, SEPA instant payments must be extremely convenient: customers must not be scared away by intermittent internet connections to payment service providers or fiddly QR codes. Value could be added by linking coupons or rebate programs, but whether these will be sufficient to outdo the likes of PayPal remains to be seen.

Conclusion

Customers and companies are not taking to the streets to demand real-time payments. Instead, many of them have simply resigned themselves to the waiting times. When asked, however, everyone involved is in favour of the rapid transfers. Real-time payments have potential, whether they are made online, at POS terminals, or as alternatives to cash. Customers like the shorter waiting times and retailers appreciate having money in their accounts immediately. Having said this, most online retailers are already offering real-time payment methods, giving them an instant payment guarantee, which is sufficient to please their customers with an instant shipment of the purchase. Another advantage is that instant payments cannot be reversed, which also eliminates the chargeback risk. For customers, of course, this is a disadvantage. In five years’ time, according to the EPC, half of all SEPA transactions will take place in real time.

Perhaps instant payments really should be run along Netflix’s lines. Although the service is by no means revolutionary, it works well—and the bosses clearly have a knack for discovering what users want.

[1] vdb.de/2016-07-27-Studie-Instant-Payments-eine-neue-Revolution-im-Zahlungsverkehr.pdfx

[2] europeanpaymentscouncil.eu/news-insights/insight/update-implementation-sepa-instant-credit-transfer-scheme

[3] finextra.com/newsarticle/30838/epc-gears-up-for-pan-european-instant-payments