Instant payments - A gateway to digital finance in Europe

Instant payments are electronic retail payments that are settled virtually in real-time, all the time—including weekends and holidays—via the Single Euro Payments Area Instant Credit Transfer Scheme (SEPA SCT Inst.).

Encouraging the widespread adoption of this payment scheme could challenge the dominance of traditional cards or wire transfers, resulting in further competition in the market. Instant payments could become a gateway to digital finance across the single market, providing consumers with real-time insights into their finances, while also enabling consumers and merchants to pay anywhere in the eurozone as easily as paying in their home country.

The European Commission will likely bring in legislation mandating an EU-wide instant payments scheme (SEPA SCT Inst.) by the end of 2022. In light of this, we outline five features the Commission must include in future legislation to ensure instant payments become the gateway to the open finance ecosystem.

What are the benefits of instant payments?

Europe already accounts for over half of the global market in instant payments and adoption of this payment option accelerated ten-fold between 2019 and 2021. Instant payments bring a range of benefits to consumers and merchants alike, including: 

• Versatility: Instant payments could replace almost all existing payment solutions, including card payments and direct debits if additional functionality is added, such as Request to Pay (R2P), where a payee initiates a payment. Currently, instant payments are most frequently used for peer-to-peer transactions, yet they are gaining ground for online purchases and for services provided by a third party. 

• Speed: Instant payments typically take ten seconds or less to process. Funds are therefore almost immediately available for the recipient to use, in contrast with alternative payments, such as SEPA Credit Transfers (SEPA SCT), that typically take one business day to settle. Instant payments are particularly popular with businesses in Europe, enabling them to manage their liquidity and cash flow risk. In addition to enabling consumers to manage their finances in real-time, the speed of instant payments could accelerate refund times in e-commerce, among other benefits. 

• Certainty: The real-time nature of instant payments means that recipients and senders know if there is an issue with the payment, which can be rectified quickly.

• Cost-effectiveness: Instant payments are cheaper to administer and process than the manual processing required for cash, costing €0.002 compared to €0.22 to €0.60 respectively per transaction. They are cheaper than card payments because they use the existing bank infrastructure, rather than relying on the private infrastructure administered by card companies. Merchants would also avoid having to pay significant fees to card schemes.

The current challenges with the SEPA SCT Inst. scheme

Account Servicing Payment Service Providers (ASPSPs), typically banks, facilitate instant payment transfers by connecting to SEPA SCT Inst., a premium payment rail. However, there are ongoing challenges with this scheme, including: 

1. Participation by ASPSPs in SEPA SCT Inst. is voluntary: Currently, uptake of SCT Inst. is lower than the SEPA SCT. Across the eurozone, 70 percent of ASPSPs adhering to the SCT scheme also offer SCT Inst.

2. Cross-border instant payments are hindered by inconsistent adoption across countries: Adoption of SCT Inst. ranges from 0 percent in Slovakia to 88 percent in Germany, which prevents consumers and merchants from using this payment method across borders.

3. Instant payments are prohibitively expensive: ASPSPs are currently charging consumers anywhere between a few cents to as high as €8 per transaction - despite instant payments being cheaper to administer and process than other payment methods. This discourages customers from using these payment options, thereby reducing uptake. 

4. Lack of interoperability between Clearing and Settlement Mechanisms (CSMs): SCT Inst. participants must connect to several CSMs, such as RT1 and TIPS, at both a national and/or European level to facilitate seamless instant payment transactions. RT1 and TIPS are not interoperable, which creates additional barriers. Participants must also put aside multiple liquidity pools to cover these CSMs, which is inefficient and costly.

5. Low transaction limit: Payers are currently able to transfer up to €100,000 in a single payment via SCT Inst. In contrast, payers can transfer almost €1 billion using SCT (€999,999,999.99 to be precise). Corporate users need higher payment limits for B2B transactions, which means that many businesses cannot use instant payments for large transactions.

Instant payments in Germany: Widespread availability but barriers remain

Focusing on instant payments in Germany highlights how the challenges outlined above have affected the adoption of this payment method. Over 1,200 German payment service providers (PSPs) have signed up to SCT Inst. - the highest of any EU country and accounting for more than half of the eurozone total. Most (88 percent) of all adherents to SEPA SCT also offer SCT Inst. in Germany. More than 75 percent of German consumers have access to instant payments. 

Yet instant payments remain a niche product: only 25 percent of Germans use SCT Inst. more frequently than conventional transfers. Forty-five percent of consumers report that they paid more for instant payments than for standard transfers, with one in three reporting that they paid more than €0.40 per transfer. Many banks are pushing back on making instant payments free by default, advocating instead for market-based remuneration. However, 69% of German consumers said they would use instant payments if there were no fees, which would encourage wider adoption of this payment method.

Widespread adoption could bring German businesses significant value beyond managing their liquidity and cash flow risk. This will require additional functionality, such as R2P, or through investing in downstream processes such as near real-time shipping for e-commerce retailers or in upgrading IT systems to allow real-time transfers for payroll accounting, for example. However, the challenges outlined above will need to be addressed in order for businesses in Germany and across the EU to benefit from the full value-add of instant payments. 

What’s the call to action for the European Commission?

Mandating adherence to SEPA SCT Inst. is an important step in encouraging the adoption of instant payments across the EU. In order for instant payments to become the gateway to digital finance, we strongly believe that the Commission needs to include the following features in future legislation:

• Any adherent to SCT should be obliged to offer SCT Inst. as their primary offering. This will also require adopting STEP2 clearing to enable SCT Inst. STEP2 clearing is a pan-European automated clearing house with full disaster recovery and resilience mechanisms built in. It allows banks to send and receive SEPA payments as well as reach all other financial institutions in SEPA. STEP2 clearing was built to be the standard rail for SEPA Inst., addressing the interoperability issues outlined above.

• Both sending (R2P) and receiving instant payments must be supported. The current instant payment rulebook focuses on ‘reachability’, whereby allowing incoming payments is sufficient for adherence to the current playbook. This means that the use of instant payments in retail payments is limited, because not all payers can initiate an (outgoing) instant payment. 

• Instant payments should be free for consumers. Brazil introduced Pix, their instant payment method that works on mobile phones, as a tax-free transaction for individuals and entrepreneurs. Since November 2020, over 70 percent of Brazilians have made a Pix payment, which has enhanced financial inclusion in the country.

• There should be more protection on payment certainty for merchants to put instant payments on par with credit transfers. Eighty percent of merchants believe that failed transactions are higher for real-time bank transfers than for card payments.

• Consumers need more assurance that instant payments are less risky than alternative payment options. Eighty-nine percent of consumers believe instant payments are more risky than other payment methods.