SEPA Instant Payments – A successful (r)evolution in payments?

SEPA – A successful (r)evolution in payments?

Instant payments are payments which are carried out within a few seconds and credited to the recipient's account.

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What are instant payments?

Instant payments are payments which – contrary to conventional transfers – are carried out within a few seconds and credited to the recipient's account. Anytime - 24/7, 365 days a year, during the night, on holidays and weekends, within only a few seconds.

The ECB and the Euro Retail Payments Board (ERPB), the successor of the SEPA Council, have also come to the realization that in the age of digitalization clearing and settlement should occur instantly. In November 2016, the European Payment Council (EPC) will publish a standard scheme for SEPA instant payments, which is to become a reality in November 2017. In two to three years, instant payments could already be a normal feature within the Single Euro Payments Area (SEPA), i.e. no longer a vision of the future.

In summary, the key features of the SEPA instant payments solution are as follows:

  • 24/7 operation on 365 days a year
  • Real-time or fast real-time clearing of payments, including confirmation of payment to the payment recipient (within 10 seconds)
  • Execution of amounts of EUR 15,000 or less (higher amounts can be agreed between payment service providers – PSPs)
  • Irrevocability of payment, i.e. the sender bank has to guarantee settlement in accordance with the scheme
  • SEPA Instant Payments is an optional scheme, i.e. PSPs have the option of offering the scheme to their customers (contrary to SEPA Credit Transfer and SEPA Direct Debit)
  • Multi-channel capability (use of person-to-person payments, point of sale and online)

 

Evolution or revolution?

Real-time payments are not new to consumers, also not in Germany. PayPal and others offer, similar to bitcoin service providers, a comparable value proposition to Instant Payments – such as immediate notification upon receipt of payment within a few seconds after payment execution, irrevocability of payment, maintenance of privacy.

According to a global survey of the market research firm Aite Group among banking representatives, 95% of all those surveyed expect that Instant Payments will help banks increase their competitiveness. This particularly concerns the areas of peer-to-peer payments and C2B payments (online and mobile payments) according to the Aite survey, i.e. exactly the areas in which PayPal and other fintechs currently offer the most innovative solutions and present a serious threat to banks.

The SEPA instant payments scheme however is not a revolution, but an evolution, and not only because of the offers of fintechs. For example, Switzerland has had a real-time payment system since 1987 (Swiss Interbank Clearing), which allows instant payments. Other countries have also offered similar national solutions for several years already. In the SEPA region these include Denmark, Finland, Norway, Poland and the Netherlands, among others. These examples demonstrate that a European solution is urgently needed to prevent the achievements towards a uniform payment system within the SEPA region from being obliterated within a short period of time. The ECB, ERPB and EPC are forced to take action.

According to a study of the University of Regensburg in cooperation with ING DiBa and Van den Berg Payment Services, 71% of the 184 organizations surveyed are satisfied with the current speed of standard procedures such as SEPA transfers, direct debits or card payments. If payments have to be carried out immediately, companies and consumers can use popular procedures such as PayPal. SEPA instant payments will only have a chance of changing payments in the long term, if they offer added value to consumers and companies in addition to speed of execution. It is for banks in particular, in their role as PSPs, to make such added value available.

It is for banks to create added value

How can the new scheme succeed in beating its competitors in the area of point of sale (PoS) payments and becoming a consumer favorite? This requires a precise analysis of the reasons for using the previous payment procedures. Cash remains the payment procedure of choice in Germany, especially at retail outlets. It should therefore be as easy to make SEPA instant payments as it is to use cash. This includes, among others, that invoice data – such as the amount and identification of the recipient – should be transferred directly from the recipient of payment (payee) to the payor.

However, this is currently not part of the SEPA Instant Payments scheme, and neither are other additional services. There is the danger therefore that a variety of different solutions will be created, with one provider eventually monopolizing the market in the long term. Germany's digital association, Bitkom-Verband, has drawn attention to this risk and called for a definition of standards also for the Instant Payments interface.

One point of discussion is whether the instant payments solution should be possible without providing an account number. According to the European Commission, 58 million EU citizens did not have access to an account of their own in 2014. One remedy certainly is the Payment Accounts Directive (PAD), which requires banks to offer consumers a basic account within the EU. Nevertheless, it definitely seems sensible to offer alternatives to account numbers in order to maintain the anonymity of payors, similarly to cash. PSPs should also evaluate incentives such as coupons or the option of participation in customer loyalty programs for SEPA instant payments, in line with other mobile payment solutions already available. It would also allow retailers to gain access to the highly sought after PoS data in a similar way.

However, this surely is not the only benefit that companies can derive from the new SEPA scheme. Instant payments are irrevocable by definition, which is desirable to companies in many instances of C2B payments, particularly in the age of digitalization. This of course is notwithstanding the right of retailers to grant refunds on a voluntary basis.

Another benefit can be derived for companies from real-time reporting of PSPs via payments. Companies could then track the account balance at any time, which offers planning advantages for day-to-day transactions. Moreover, the automatic transfer of invoice data by the payment recipient to the consumer can significantly increase the level of automation during entry and reconciliation of account statements. This certainly also presents opportunities for PSPs to position themselves with respect to previously established providers such as PayPal in order to generate added value. Finance and treasury departments frequently complain that new types of payment such as PayPal and others do not fit into existing IT and process environments. PSPs have been integrated in IT and process environments for years and have the necessary expertise to further improve the integration of banks.

It will all start in November 2017

Even though SEPA instant payments are not exactly revolutionary, there is the potential for banks to regain their lost competitive edge with regard to PayPal and others, if they succeed in creating added value for consumers and companies from the SEPA instant payments scheme. However, banks have some way to go before reaching acceptance in the market with this scheme. The risks of instant payments associated with instant irrevocable execution have to be mitigated in the very least. Other investments in anti fraud and risk management systems are necessary by banks and companies, also to enhance the previously used authentication procedures. Banks do not have much time left before rollout of the instant payments scheme in November 2017.

Author: Thomas Mehlkopf, Manager, Finance Advisory, tmehlkopf@kpmg.com
Source: KPMG Corporate Treasury News, Edition 59, September 2016 

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