Infrastructure enabling instant account-to-account payments has existed for several years but consumers and banks in the EU have been relatively slow to pick it up. The European Commission has proposed changing the law to spur a more radical shift. The plans involve requiring nearly all banks to provide affordable instant payment services to their EU customers.

How does the EU regulate payments?

Cashless or electronic payments are regulated through a variety of laws in the EU. These include PSD2, which places various obligations on payment service providers (PSPs), and a regulation on cross-border payments, which limits the charges that can be imposed on cross-border euro-payments.

Another important piece of law is the regulation on the Single Euro Payments Area. The SEPA Regulation creates and harmonises standards for cross-border and domestic payments in euro, categorised as “credit transfers” and “direct debits”. Credit transfers, which are also known as wire transfers, credit a payee’s account upon a payer’s instruction to its payment service provider. In contrast, direct debits are initiated by a payee on behalf of the payer (e.g. automatic monthly deductions for an online subscription).

The European Commission classifies instant payments as a subset of credit transfers. These are payments that, among other attributes, are available round-the-clock and ensure the receipt of funds within 10 seconds of a payment order.

In its proposal for a regulation, the Commission now seeks to develop the SEPA Regulation to mandate the provision of “instant credit transfers” in euro.

What changes are proposed?

The legislative proposal puts new obligations on payment service providers relating to instant credit transfers. These are intended to apply in addition to the general requirements for credit transfers under the SEPA Regulation. They include the following.

Mandatory instant payments

EU PSPs offering credit transfers will have to offer instant credit transfers to customers in the EU and EEA.

E-money and payment institutions are exempt from this obligation. However, this position may be revised if they are given access to certain payment systems under the EU Settlement Finality Directive. In the meantime, any e-money and payment institution which chooses to offer instant credit transfers must comply with the requirements described below.

PSPs that offer instant credit transfers, either by mandate or choice, will have to ensure that the service:

• is available on the same user interface as the one that provides non-instant credit transfers;
• is reachable every day and at all times; and 
• conducts verification and settlement immediately.

Affordable charges

PSPs will not be able to charge for instant credit transfers more than they do for non-instant credit transfers.

To allow PSPs located in countries with a non-euro domestic currency to comply with this requirement, the Commission proposes an exception to the regulation on cross-border payments. Specifically, the charge for a cross-border instant credit transfer will not need to be the same as that for a domestic instant credit transfer if doing so would result in a higher charge than allowed by the latest legislative proposal.

Security checks

PSPs offering instant credit transfers will have to match the payee’s name against their unique identifier (such as an IBAN) immediately after these details are entered by the payer.

If there is a discrepancy between the payee’s name and the unique identifier, the payer will have to be notified and warned before authorising the transfer. PSPs can potentially charge for this service.

Sanctions screening

PSPs remain bound by all existing sanctions screening requirements. However, to maintain instantaneity, PSPs will not need to screen instant payments on a transaction-by-transaction basis. Instead, PSPs will have to identify if any of their customers are subject to EU sanctions at least once a day, as well as immediately upon a new person being designated as a sanctioned person in the EU.

If a PSP fails to conduct appropriate (daily) screening and executes an instant credit transfer involving a sanctioned person, it will be liable to the other PSP involved in the transaction for financial damage resulting from penalties.

Why are instant payments being mandated?

The Commission foresees various benefits to a wider adoption of instant payments. Real time payments mean that funds do not remain locked in the financial system but become immediately available to end users to spend or invest. More generally, European supervisors have expressed concerns about increased reliance on largely American-dominated card schemes and Big Tech payment solutions and a need to promote the “strategic autonomy” of the EU. Instant payments may help the development of alternative homegrown and pan-European payment solutions.

The uptake of instant payments in the euro has been slow. According to the Commission, this is down to factors such as high prices and security concerns. The Commission therefore sees coordinated policy compelling the adoption of instant payments as the way forward. This also addresses the risk of market fragmentation within the EU posed by varying national regulatory frameworks.

What next?

The European Council and Parliament are considering the Commission’s proposal. They are expected to focus on aspects such as the definition of instant credit transfer, the cap on charges for instant payments and the liability of PSPs for checking unique identifiers. The Commission’s proposal was originally released in autumn 2022 and the ordinary legislative procedure typically takes around 18 months which means that there should be time to agree and pass the law before the end of the current parliamentary session in 2024.

Once passed, the requirements will be introduced in a phased manner, depending on the location of the PSP. For PSPs in the euro area, the requirements are expected to kick in from end-2024, i.e. 6 months after the new rules are expected to enter into force. For PSPs outside the euro area, the requirements will not start applying until a year after entry into force. Though the UK is still a member of the SEPA, these proposed amendments to the SEPA Regulation will not automatically apply in the UK.

Mandating and regulating instant payments forms one of several initiatives in the pipeline per the Commission’s retail payments strategy. A comprehensive review of PSD2 is underway, which will account for changes introduced by this proposal and extend consumer protection measures to instant payment customers. The Commission hopes that this and complementary projects for open finance and digital euro will help “future proof” the EU payments landscape.

With thanks to Oorvi Mehta for writing this post.