In a landmark move to modernise Europe’s payment infrastructure, the European Council and European Parliament struck a provisional agreement in November 2023 that will make instant payments in euros a requirement for payment service providers.
The legislation paves the way for a seamless, real-time payment experience for consumers and businesses across the single Europe payments area (SEPA) and positions the continent as a major player in all-for-one payment innovation.
The pressure is now on for traditional banks to update their systems so they can process and deliver instant payments, but what does the legislation mean for corporates?
Currently, only 11% of the EU’s euro money transfers are instant and Visa and Mastercard remain the most prevalent payment options for consumers in Europe. The EU has consistently been transparent about its intention to challenge this duopoly in the payments industry, introducing initiatives like EPI (The European Payments Initiative) and now instant payments.
The new legislation has been provisionally agreed by the EU to make instant payments in euros mandatory for payment service providers and improve the availability of instant payments options denominated in euro across the EU. It requires banks to offer instant payments across all channels without surcharge and paves the way for more innovation.
The European Commission’s impact assessment revealed that nearly €200bn is locked in the financial system every day. Instant payments have the potential to free up this liquidity, unlocking economic growth. Carlos Cuerpo, secretary general of the treasury and international financing of the government of Spain and minister for economy, trade and companies, said that the new regulation will “unleash an enormous potential”.
In addition, with more detailed customer profiles, payment service providers can improve fraud monitoring, strengthen control and mitigate anti-money laundering risks.
Linking the multitude of systems across Europe will make transferring money cheaper, faster, and more transparent
The mechanisms currently in place for instant payments are fragmented across Europe. Countries have different protocols and differing agreements with other jurisdictions, which adds complexity. Cross-border payments remain prohibitively expensive and sluggish, leaving the most vulnerable behind. For example, fees for international payments currently average 1.5% for corporates.
For some time now, the technology has existed to enable instant payments across borders in the Single European Payments Area (SEPA) via schemes such as SCT-Inst (SEPA Instant Credit Transfers). This permits transfers between registered entities in under 10 seconds to a value of up to €100,000. Given that this limit is usually far too low for many treasury transfers, it’s not surprising that uptake of schemes such as SCT-Inst has been sluggish, with only 56% of Europe’s more than 5,500 payments service providers (PSPs) registering for SCT-Inst, and just 14% of all transfers by value using the scheme.
Linking the multitude of systems across Europe will make transferring money cheaper, faster, and more transparent. Enabling B2B payments to be completed within seconds and at low costs enables merchants and corporates to optimise their liquidity, resulting in more efficient cash management. Businesses can also lower their transaction and working capital costs through a reduced settlement lag and smoother reconciliation process.
All in all, this legislation is a welcome move towards the future of instant, secure and seamless payments. Its have the potential to transform how businesses operate, not to mention provide greater convenience and choice. Moreover, by removing the friction and modernising cross-border payments Europe is well on its way to positioning itself as a front runner in the payments space.
However, it is important to note that there are a lot of technical implementations associated with the legislation. Banks will have to update their systems to cope with a high volume of payments and to be available 24/7, while corporates will have to look to integrated treasury management solutions to ensure a smooth transition.
While there is work to do, with the right partners, corporates in Europe can get a better banking experience while being able to improve their treasury operations, taking a giant step into the future of payments.
Laurent Descout is founder and CEO of Neo, a cross-border payments fintech company
