January 13, 2022
Plaid and Instant payments: Allies in Open Banking
Martijn Bos
Payment Initiation Services (PIS) allows users a quick, safe, and convenient way to pay for goods and services directly from their bank account, by relying on licensed providers like Plaid to initiate the payment and send secure messages to banks through APIs to issue a payment order. But, PIS can’t live in isolation–they’re part of a broader stack that is revolutionizing the EU payments space. In order to fully scale and be as impactful as it was intended to be, Payment Initiation Services need to leverage well connected banks that are part of the Single Euro Payments Area (SEPA) and it’s associated schemes.
The European Commission acknowledged in its September 2021 paper Instant Payments, Current and Foreseeable benefits, the combination of open banking and instant payments will strongly impact European retail payments and will be a key success factor for increasing digitisation of the European economy.
More specifically, enter PIS’s closest ally – SEPA Instant Credit Transfers (SEPA SCT. Inst). This premium payment rail is a scheme that banks connect to in order to facilitate transfers, and allows for payments to be settled into the receiver’s bank account at a maximum latency of 10 seconds. This virtually instant movement of funds across banks has great potential to revolutionize payments that do not originate with traditional cards or wire transfers.
How does Instant Payments align with open banking?
Using Instant payments means that in the case of e-commerce transactions, the funds settle instantly into the merchant bank account,meaning a higher degree of certainty with respect to incomings on the balance sheet, a quicker path to action to dispatch goods and services, and less susceptibility to fraud.
Instant payments allows users to seamlessly transfer funds between themselves and a third party, and instantly have access to those funds in the case of an e-wallet top up for use with an app-based service –such as increasingly popular online trading, crypto, and other investment tools. Making a consumer wait for 1-4 business days for their money has a negative effect not only on conversion and open banking growth, but most importantly on the consumer and merchant’s experience and ability to access their funds.
At an average price of €0.002 per transaction, SCT. Inst. payments are much cheaper than traditional card payments, as a lack of interchange and card processing fees means lower overhead costs and higher merchant adoption.
Easy as 1 2 3 - or is it?
Open Banking will only succeed as long as full coverage of SEPA SCT Inst. amongst EU payment service providers underpins it.
We believe SCT Inst. is one of the fundamental building blocks in the successful scaling of open banking across Europe, and a prerequisite to broad adoption of open banking functionalities such as Payment Initiation Services. The graph on the right shows the SCT Inst. volume growth–a steady, if not impressive growth–but only 1 in 10 transactions are currently routed through instant payment rails. For open banking providers, this isn’t enough.
Credit: European Payments Council
Size of the task
There are currently 2,322 banks across Europe which already offer SEPA SCT. Inst.. Although that's a great number, there are two considerations that demonstrate the work is far from finished.
Firstly, there are roughly 6,000 banks in the EU, and theoretically, all of them could join the SEPA Sct Inst. scheme. That’s nearly 4,000 institutions that still need to join the scheme, representing tens of millions of consumers.
Secondly, for the 2,322 banks that do offer SEPA SCT Inst, it isn’t the mandatory rail! That means that banks are free to charge their customers extra fees for faster transfers. That’s incompatible with open finance’s ambitions to make digital finance seamless for people whilst simultaneously deepening the European payments landscape.
Why top load payments with innovation if the systems they run on don’t meet consumer expectations in the first place? There’s a clear need for mandating SEPA SCT. Inst. Hopefully, we will see this on the European Commission’s agenda when they reveal their plans in 2022.
Recap - What we need in 2022
Open Banking will only succeed if it is underpinned by full coverage of SEPA SCT. Inst. amongst EU payment service providers. The European Commission should legislate to mandate access across the EU in 2022.
For 2,322 banks that currently offer SEPA SCT Inst. - it isn’t the mandatory rail. That means that banks are free to charge their customers extra fees for faster transfers. The EU Commission should ensure instant payments are free for users or non-discriminatory vis-à-vis other payment services as a core functionality of the European payments system.
Finally, participating in an instant payment scheme in the year 2022 feels more like part of the implicit social contract between banks and their customers who keep their money with them than a premium ‘at-cost’ offering. At the very least, banks should be chiefly concerned with their customer centricity, allowing their users the freedom and flexibility to move funds and pay for goods and services at their leisure and without delay. This aligns squarely with the European Retail Payments strategy.
PIS has huge potential as a payment functionality, but we need mandated instant payment rails if that potential is to be fully realised.