We’ve looked at how national instant payments schemes are taking off with varying levels of success across global markets – from India, to Brazil, to Sweden, South Africa and the US. Here we look at how cross-border instant payments have evolved within the European Union and what’s needed to enable the mass adoption we’re seeing from these schemes in other close-knit regions.
For many years now, officials have been working to develop an instant payments system that allows bank transfers to settle immediately in accounts across Europe. “Moving from ‘next day’ transfers to ‘ten seconds’ transfers is seismic, and comparable to the move from mail to email,” said Mairead McGuinness, Commissioner for financial services, financial stability and Capital Markets Union.
“This facility to send and receive money in seconds is particularly important at a time when bills for households and SMEs are increasing, and every cent counts. This initiative will directly benefit EU citizens and businesses.”
As transformational as it may be, the roll out of such a scheme has not been without challenges. Instant payments have had success on a national level in certain markets, with countries like India, Brazil and Sweden leading the way. However, regional cooperation has proven to be more challenging. While the EU, with its currency union, is well placed to lead an initiative like this, it has not been an easy ride.
In October last year, the EU mandated that banks across the bloc offer instant payments for all consumers and businesses that hold a bank account in the EU or the wider European Economic Area. European payment service providers were given six to 12 months to comply with this mandate.
This is a more forceful approach from the EU, where, although this technology was first developed six years ago, by the end of last year barely more than a tenth of money transfers were processed instantly. The vast majority still take a day or more. So, what’s standing in the way?
Firstly, it makes sense to explore how the EU’s instant payment scheme works. The Single Euro Payments Area (SEPA) is a payment-integration initiative designed to allow easy transfer of money across participating bank accounts in Europe. Its aim is to make transfers as seamless across borders as they would be within national borders by removing unnecessary friction. It encompasses 27 EU countries, as well as Liechtenstein, Norway, Iceland, Switzerland and the UK. In countries that do not use the Euro, separate arrangements have been made to allow for SEPA transfers. For customers, it means that they can continue to use their home bank account even if they work or study in another SEPA country.
When it was first launched in 2014, SEPA allowed for quick bank transfers that settle within one day. Although innovative at the time, the payments world moved on quickly and, by 2017, a SEPA instant rail had been developed. Today, SEPA Instant Credit Transfer (SCT Inst) delivers domestic and cross border Euro Credit Transfers throughout the SEPA zone. On this rail, customers can transfer up to 100,000 Euros to another account, 24/7, in less than 10 seconds. The payments are cleared almost instantly, instead of in batches at the end of the day.
There are currently two competing schemes that enable SCT Inst transfers: RT1, the Euro Banking Association’s (EBA’s) real-time payment processing facility; and TIPS, the European Central Bank’s Target Instant Payments Scheme. While RT1 currently has more members, TIPS offers fewer barriers to entry for smaller banks or fintechs, who can partner with a sponsor bank to access the scheme.
Despite launching the instant payments rail in 2017, SCT Inst has had varying degrees of success across countries. For years, banks were not obliged to offer real-time services, and that resulted in uneven uptake. In Slovenia, for example, almost all SEPA banks offered instant payments as of June last year, compared to just 1% in Norway and Switzerland. In Sweden, where digital payments have become most ubiquitous, the figure stood at 16%.
Creating a harmonious payments scheme across disparate states, all with their own regulatory environments and clearing infrastructure, has been challenging. In countries like Sweden and the Netherlands, national schemes were already in use by the time SCT Inst came into being, so the impetus at least for domestic uptake was lower.
National competition has posed a barrier to cross-border collaboration, but Professor Niklas Arvidsson of Sweden’s Royal Institute of Technology said the EU’s ultimate aim was for all nations in Europe to build their operations on top of the SCT Inst system, even if they have their own separate currencies.
“[SEPA TIPS] is probably the most interesting route right now,” he said. “Swish (Sweden’s own instant payments scheme) payments are likely to be built, connected or operated on the TIPS system.”
“Originally, the main thing was to integrate the systems for the Euro because they are still quite national in many ways. But then it covers all the European Union, so it's possible for Sweden to use that. The European Central Bank really wants every nation in Europe to build their operations on that.”
Even where banks have embraced the EU’s instant payment scheme, they have run into specific technical challenges. For example, the two underlying rails—RT1 and TIPS—are not interoperable. As well, not all banks use the same infrastructure for instant transactions, which causes instant transactions to fail. That means the headline figures most likely overstate the actual prevalence of SEPA instant transfers in Europe.
Although there is a large appetite among consumers and businesses for instant payments, they too have been held back. Among the major barriers is the fees that banks have been able to levy on such transactions, which has made SCT Inst less competitive than other services in some countries and resulted in it becoming a premium service. Fees vary strongly across member states, which has hindered the harmonious adoption of the scheme.
However, this is all beginning to change.
In October, the EU mandated that all banks and payments service providers (PSPs) offer instant transfers at any time of the day in a mandate . Crucially, they must charge the same—or less—than they do for traditional, non-instant Euro transactions. The legislation already requires banks and PSPs to charge the same for standard SEPA transactions as they do for domestic transactions, among other rulings. Additional amendments to the 2015 Payment Services Directive (PSD2) ruling as of June 2023 include additional measures to combat fraud; allowing non-bank PSPs access to all EU payment systems, and giving them a right to have a bank account; and more, in an effort to increase “the efficiency, transparency and choice of payment instruments for consumers” and to further support the growth of open banking in the region.
These changes will be critical in paving the way for success. Experts and industry insiders will now be watching closely to see if they have the desired effect.
An aggregate of stories told by business and fintech experts and builders globally, Flow was created to explore questions around how money moves today, who is leading the charge to make it better and where further innovation is needed.
Flow is created, edited and managed by the team at Stitch, a global payments service provider dedicated to building next-gen financial infrastructure that can power better money movement for enterprises around the world.