digitalisation of the economy has transformed how consumers and businesses
purchase and pay for goods and services. With a thumbprint, a tap of the wrist,
or simply a glance of the face to our phones, we pay for lunch or coffee. We are rapidly moving towards a cashless society, and purchases
from our smart devices can be made anytime, anywhere. In
Sweden, the world’s leading cashless economy, fewer than 1% of payments are
made using cash.
While the velocity of change for consumer purchase habits has been unprecedented, traditional electronic payment systems—designed for bulk and end-of-day processing—have struggled to adapt to the always-on, digital-first economy.
The recent launch of the SEPA Instant Payment Scheme addresses some of these market challenges, providing a pan-European, real-time payments service. The scheme enables transfers of up to €15,000 within 10 seconds, 24/7, to any of 34 SEPA territories, and represents a significant new opportunity, and challenge, for banks to address.
The cross-border instant payment capability certainly looks to be a gain for consumers and increasingly the business sector, though the view from a banking perspective can be somewhat different. The technical demands of processing 24/7/365 10-second transaction window payments across 34 territories is certainly a challenge for existing core banking systems.
The Legacy Challenge
The fundamental IT difference between the current Sepa Credit Transfer product and the Instant Scheme is how they are processed. Sepa Credit Transfers are processed in batch and submitted to the clearing and settlement schemes at set times, and certainly at the end of each business day. Payment instructions are received and paid to the recipient within a window of approximately 24 hours—a vast improvement on past payment cycles of 3-5 days, but still far from instant.
Sepa Instant Payments must be processed by banks at a transaction level and on a real-time basis. The European Payments Council requirement is that instant payments will be in the account of the beneficiary in 10 seconds or less, all within a 24/7/365 period—a truly instant movement of funds.
The batch vs single processing of payments raises many issues for banks and their system providers. Many banks still have to fully work out how they adopt the instant scheme under the EPC SEPA Instant Rule Book, and then consider how they introduce an IT solution to their legacy infrastructure to handle money movements in seconds as opposed to hours. This is not simply doing things faster, but a radical revamp of payment processing with all the resultant business, compliance and regulatory checks (AML) happening at the same pace.
Existing core banking systems are simply ill-suited to today’s requirement for real-time processing of payments on a 24/7 basis. There is no downtime and the highest performance levels are required at all times, with real-time financial crime compliance, notifications, reporting and exceptions management.
The scale and impact of the change is not to be underestimated: the new pan-European, real-time payments scheme will also need to co-exist with others, adding to the burden of managing multiple IT environments with the resultant effect on costs, controls, maintenance, risks and security. Payment solutions capable of ‘bridging the gap’ between legacy batch systems and the always-available requirements of an instant payments environment will certainly be attractive to banks looking to capitalise on the significant growth potential of cross-border, real-time payments.
Likewise, solutions that combine real-time AML and sanctions capabilities will prove increasingly popular as banks struggle to adapt their existing patchwork and more leisurely compliance processes with the very small review times allowed in a real-time processing environment. The growing challenge of payment fraud is further heightened in a real-time environment, and the ability to leverage the unique pattern detection and self-learning capabilities of Artificial Intelligence technology will become essential as banks look to enhance fraud detection and prevention capabilities.
If banks haven’t already undertaken a more radical, strategic review of IT investment and infrastructure, now is probably a good time to do so. While a complete overhaul is unrealistic, you can look at enterprise wide investment and distinguish between high and low value schemes, costs and commercial and strategic partnerships with third-party solutions providers.
The launch of the SEPA Instant Credit Scheme promises to be a boost for consumer and business choice, with take-up likely to build and develop as the scheme matures and market demand become clearer. The initial maximum SEPA Credit Transfer value of each payment is €15,000, and until this increases it will restrict businesses using the scheme. The advantages, however, are evident, as are the more intangible, yet strategic opportunities real-time payments create for banks.
Real-time visibility of collections aligned to payables provides greater visibility of cash positions and cashflow. The holy grail for the treasury is more sophisticated tools to manage working capital. It keeps the treasurer happy, satisfies the FD and comforts the board. Cross-border, real-time payments present banks with a powerful opportunity to develop a closer relationship with their customers, particularly the business sector who bemoan the lack of innovative products other sectors such as retail have benefited from.
Real-time payments can be the catalyst for a new wave of innovative corporate banking, payments and cash management services. Rather than view the fintech community with a wary eye of competitive suspicion, banks, thankfully, have increasingly looked to strategically partner with proven and innovative financial technology partners to help them along their digital journey, often in-housing ‘Innovation Hub’-type ventures with selected fintechs.
It will be the forward-thinking banks, able to see a perhaps longer-term opportunity to innovate and develop new business products and services, that will be the true beneficiaries of SEPA Instant Credit.