The importance of EU regulation for instant payments in 2023

Since its introduction in 2017 by the European Payment Scheme, the SEPA Instant Credit Transfer has experienced many hurdles to becoming mainstream. From the slow adoption of the scheme to high infrastructure costs, the journey to ubiquitous pan-European instant payments has only just begun.

In this article, we run through a short history of the SEPA Instant Credit Transfer scheme, where instant payments currently stand in terms of adoption in 2022 and finally analyse the recent policy push from the European Commission aimed at accelerating instant payment adoption.

A slow pan-European adoption

Following the introduction of the SEPA instant credit transfer scheme, the first step to building a pan-European instant payment infrastructure has been to ensure that all the major banks and PSPs were participants in the SCT Instant scheme. 

The ECB put dedicated efforts into driving the scheme's adoption over the first few years. It launched TIPS, a dedicated clearing and settlement mechanism to complement the existing Clearing and Settlement Mechanisms (CSM) from EBA Clearing called RT-1. At this point though, only direct SEPA participants to SEPA could access the CSM. In 2020, the ECB then decided to implement two additional measures in TIPS to extend its reach.

Firstly, TIPS enabled indirect participation in the scheme by making PSPs adherent to the scheme and the existing TARGET2 CSM (the main Eurosystem large volume payment system) reachable in TIPS. Secondly, all CSMs offering instant payment services migrated their technical accounts from TARGET2 to TIPS, simplifying the onboarding of financial institutions.

As of June 2022, 71% of banks adhering to the SCT scheme were adhering to the SCT Instant scheme, according to the ECB, ensuring that most accounts are now reachable for instant transactions.

The ECB also took steps to make SCT Instant more cost-effective for PSPs to operate. The cost for processing transactions for PSPs has been set at €0.002 per payment in TIPS, the same price as a regular credit transfer in the SEPA largest retail CSM STEP2. It is yet to be seen how banks will translate over time this pricing to their customers. 

A major barrier to adoption indeed remains bank pricing. Current catalogue prices of banks are on average five times more expensive for an instant credit transfer compared to a regular credit transfer. However, there has been momentum across Europe for banks to reduce the unit costs of SCT Instant payments or even make them free.

Source: Bank information, Numeral benchmark

Reaching an inflection point in 2022

Despite those hurdles, the SEPA Instant Credit Transfer seems to be finally catching on in the eurozone. While it accounted for only 5.2% of total credit transfers in October 2019, SCT Instant accounts for 11.3% of total credit transfers as of March 2022.

Looking at growth rates over 2021-2022, the SEPA instant credit transfer appears to be currently the fastest-growing payment method among all payments processed.

Source: EBA Clearing, RT-1 Jan 2021-July 2022

But compared to countries like Mexico, Switzerland or Japan where instant payments are the norm for credit transfers, the SEPA Instant Credit Transfers adoption is still broadly limited. 

The policy push towards ubiquitous instant payments

On October 26th, 2022, the European Commission further affirmed its ambition to make instant payment ubiquitous across the EU and EEA by releasing a policy proposal to further accelerate SCT Instant adoption. The proposal aims to ensure that instant payments are affordable, secure, and processed without friction across the EU and EEA. To do so, it focused on four main objectives:

• Making instant euro payments universally available: EU PSPs that already offer SEPA credit transfers will also have to offer their instant version within a defined period.

• Making instant euro payments affordable: PSPs will have to ensure that the price charged for instant payments in euro does not exceed the price charged for SCT payments.

• Increasing trust in instant payments: providers will have to verify the match between the bank account number (IBAN) and the name of the beneficiary provided by the payer to alert the payer of a possible mistake or fraud before the payment is made.

• Removing friction in the processing of instant euro payments while preserving the effectiveness of screening of persons that are subject to EU sanctions: PSPs will have a standard procedure to verify, at least daily, their clients against EU sanctions lists, instead of screening all transactions one by one.

While the timelines for implementation of the policy are not yet set at the time of the redaction of this guide, there is no doubt SCT Instant will become the norm for bank payments. The only remaining question is how quickly.

Appendix: Instant Credit Transfer scheme adoption by country

Source: EPC June 2022