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John Gaffney: Greetings and welcome to the Payments Podcast where the number one story for this episode comes out of important developments taking place in the European Union. My name is John Gaffney, I'll be your host for a discussion centred around the long awaited proposals for regulating instant payments among the EU member states, both current and future. Our format today will be just a slight departure from normal. I'm going to take a few minutes to provide some background on these proposed changes.
Then we're going to turn to our subject matter expert for commentary. That expert is Bottomline’s Director of Global Marketing for Financial Messaging, Frederic Viard. Frederic has been on the case at Bottomline since 2013 and is one of the most knowledgeable experts in the business of the complex world of cross-border payments. Fred, welcome to the podcast.
Frederic Viard: So, thank you very much, I'm happy to be here. Hello, everyone. And I'm very happy to discuss this important topic about instant payments coming, and this reality in Europe.
John Gaffney: All right, great. Now, as I said before, before we get to Fred’s observations, let's recap these changes. They were announced on October 26th, and the commentary has been coming fast and furiously. I mean, according to the EU Finance Commission, about 10% of credit transfers in the EU are processed as instant payments. For cross-border payments, it's even lower. Why? Interoperability and confidence. The payment service provider of the payer and the payee must both use instant payments technology for the transaction to be successful.
And many on both sides of that equation have bristled that adopting the technology for that lack of commitment. So, no surprise then that a third of EU PSPs don't offer instant payments. And unfortunately, the consumers and businesses that could benefit from the immediacy of those payments and the resulting liquidity have been left in the lurch. Now, the current state of EU regulations rests on the 2012 SEPA regulations, which are obviously in need of an update.
Now that update is here. There are four main aspects: 1) It would make instant payments universally available in euros by six months after these proposals are approved. 2) It would make these payments more affordable, mandating that they stay in line with pricing models for non-instant transfers. 3) It would implement an obligation similar to the UK Confirmation of Payee, which requires PSPs to match the international bank account number to the name of the beneficiary. 4) It requires PSPs to verify their clients against the EU sanctions list on a daily basis.
Okay, too much talking from me, but Fred, let's get to your general take on these proposals. Do you think they'll do enough to move the needle for instant payments in the EU?
Frederic Viard: I think it's very important to continue improving the marketplace. Any mature marketplace needs to continue improving and building the rules for the future to have more financial services available, more speed, more visibility. So, since we have still a fragmented landscape in the EU, because this is cross-border because you have several countries involved in the EU landscape, but you have one single currency. But despite this one single currency, the fragmentation between the various members is still here.
This then it prevents you to have a homogenised landscape that helps to drive instant payments across the EU. So, if we want to have something which is much more harmonised, we need to push a bit on the market players to adopt a new technology and a new method such as instant payment. So, I think it will really help to move towards more homogenisation across the EU landscape and to benefit all the players across the EU to have this instant payment landscape as one single instant payment area.
So, I think it's a really good push in order to keep the marketplace competitive, innovative, and to remove some of the fragmentations, to have really a European Union / European market as a single marketplace where everyone can have an instant payment method available for any types of payments they would like to make.
John Gaffney: Okay, well said. Now, nobody has objected specifically to the proposal. It's been well received. However, Payments Europe, which represents a lot of credit card companies, a lot of banks, has expressed concerns about the timeline. Now, in your opinion, are those concerns justified?
Frederic Viard: I think if we look backwards, the origin of the instant payment in Europe is dated 2017. So, it's not new news. It's something which already exists. So, the marketplace had some time to accommodate that. So, we are not starting from scratch here. We have the basis already available to make instant payment. The regulation here is to push everyone to adopt the instant payment across Europe.
So, I believe that the timeframe is stressed, I agree. Because if you have to do everything today, I think it's a lot of things to do because instant payment is going with the revisiting of the infrastructure, the platform infrastructure, the payment infrastructure, because you have to go very fast, 10 seconds, but you also need to be available on a 24/7 basis. So, it's a crucial element to remain available at any time. So, this is a bit of a change in the way the systems are operating today. So, I think it's really important to remain in that space and to be able to cope with these requirements.
John Gaffney: Now, you’ve mentioned in the past that this is also an opportunity to get ready, to have a checklist and make sure your bank or even business is agile enough to adopt these regulations after they're approved. Could you talk about that a little bit?
Frederic Viard: Going back to the questions about the timeframe, I think the timeframe is something which is stressed, as I said, but I think this is something which you can accommodate with that. But on the other hand, I think that the point around the timeframe has to be seen also with the delay that will be put until the law will enter into force. Because here is the proposal which has been announced, then you have the elapsed time to approve it, and that will last between 6 to 12 months. And then you have 6 months to be able to receive the instant payment.
And then you will need in the next few years to be able to send and receive instant payment. So, we are in a timeframe which is around between now and two years that will drive us towards 2025, which is aligned with most of the marketplaces in the world who are moving towards an instant payment environment by 2025. So, reducing, or let's say at the contrary, expanding this timeline could drive the marketplace to be late compared to the rest of the world.
John Gaffney: Okay. We don't want to see that. You've talked about the advantages here, which we may be overlooking a little bit. I haven't heard a lot about real-time settlements. Can you talk about that a little bit?
Frederic Viard: A lot of these instant payment systems around the world, they are working in a deferred mode. So, when you make a payment, you have, let's say, an interim period where the payment is covered by the bank and then the settlements occur, let's say one, two, or three, five times a day. Within the European context, you have the TIPS set up (which is the central clearing) for clearing an instant payment in real-time. That means as soon as you have made your payment (this is not only the payment, which is covered by the bank), the reality is that the money has physically moved from one account to the other.
So, this immediacy of settlement will probably help to increase the limit of this payment. On the other hand, we will need to have all the other schemes, even those who are deferred in their settlement, to be still available and part of the game. If we want to have these EU market players being reachable everywhere from an IP (instant payment) perspective, we will definitely need to have maximum reach in terms of the number of IBANs that you can reach. So, it's not only about one system, which is a real time settlement, but it is about all the other schemes which are around that that should be part of the game if we want to have a maximum reach of all of that.
So, instant settlement will probably help to have a higher limit, but the other schemes have a place in that context because they will help to reach a maximum number of IBANs across the EU landscape.
John Gaffney: Interesting. So, regardless of the timeline, there's going to be a lot of changes in a relatively short period of time. So, let's talk about compliance. How would you counsel banks in the EU to keep pace with these changes? What do they need from a partner?
Frederic Viard: I think the compliance can be seen at several levels, but I would say since this becomes a mandate, they will really need to move forwards to cope with this mandate of being able to support instant payment. So, they will need to revisit their infrastructure, their architecture. And then here, let's say the technology providers such as us, we can really help because we can help to sort the problem around the 24/7 access, around the various steps that you need to process when you are processing an instant payment. We can also manage the standard because ISO 2002 is the de facto standard to be used in instant payments, so we can manage that, and the life cycle of the various messages that are exchanged to ensure an instant payment is settled properly. So, all of these mechanics which goes around the instant payment is something that we can really help the banks with because we can focus on the parts required to manage and process an instant payment, while the bank will focus on its core business.
So, they can really rely on a third party to help them plug the gap in terms of availability, and speed of access to the various schemes. So, the technology provider can really help the banks to complement their landscape, and for their ecosystems to be part of this instant payment global ecosystem across the EU.
John Gaffney: Very well said. You know, we've talked in the past where you've likened instant payments to 5G. I love that analogy. Could you talk about that a little?
Frederic Viard: Yes. So, I mention that because when we talk about instant payment, you have some people asking, “But do we need instant payment?” So, as I said, I think instant payment is not only about instant payment, it's also about continuing to improve the marketplace, paving the road for innovation and for a more competitive landscape. But to answer the question, “Do we need instant payment?” Of course, but instant payment will not solve all the business cases and all the use cases. Some payments will still remain via our standard RTGS rail for some reason, and some other payments will move to have instant payment.
But the comparison with 5G is that do we need 5G? I think we can watch TV via the standard telco channel that we have today. But if you think in the future you will have the Internet of Things, meaning that you will have much more players connected to the Internet. So, at that point, 5G will become a very nice tool to have to allow all these systems to talk together.
So, this is the same for instant payment. It's not only about solving an issue today to have this immediacy in terms of payment, but it's also about future-proofing the marketplace and being sure that we are building the future, which will become definitely much more real-time.
John Gaffney: Yeah, I love that analogy. Very good. So, here's the killer question, Fred. If you had a roomful of 500 banking execs from the EU, what are two or three things you would tell them they need to do right now as these regulations play out, how do they get ready?
Frederic Viard: So, I would say the first thing is to make sure that they have the checklist, so they know where they are going. Make sure that they understand what the requirements are, they understand how ready they are in front of these changes. So really, the first thing is build this checklist, make sure you are ready.
The second one is to ensure that operationally speaking, what they build for instant payments will allow them to keep providing a competitive price for that instant payment. Because otherwise, if the operational model is not fit for purpose, the price will explode.
So, we don't want that. It's about having something that will ensure that the cost will remain affordable within an environment or an ecosystem that can help to reduce cost.
And the last one, which is for me, and a key aspect for any type of financial transaction, will be around risk control. So making sure that the principles you will use or set up to prevent fraud are efficient, or are efficient enough.
And interestingly, when you look at the European regulation, there is change. Before that, let's say when you want to prevent fraud as an example, you have several tools available to you including sanctions screening, which is about being sure that you have no blacklisted people in your transaction. This sanctions screening has changed with the new regulation in the EU, because it's not required to filter any single transaction anymore. Now, to the contrary, the principles are different, and it is about having KYC on a daily basis for every player in the chain, plus having control of the IBAN benefits to make sure you send the money to the right account and to the right beneficiary. So, the principles are slightly different. I think this is something that has to be considered carefully by the banks, because this is not the usual way of doing the screening. This is a different way.
And it’s important to have that in mind when building your risk prevention system in the context of instant payment in the EU.
John Gaffney: Very well said. That's good. That's a wrap! That's our Payments Podcast. This episode is titled ‘EU Takes a Step Toward an Instant Future’. Fred, I want to thank you for helping us here.
Frederic Viard: Thank you very much.
John Gaffney: Okay, that's the Payments Podcast, ‘EU Takes a Step Toward an Instant Future’. Please listen to us on SoundCloud, Apple or Spotify where you get your podcasts, and we'll see you next time. Thanks.
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