Volante recently hosted a panel titled “Outlook on Instant Payments in Europe.” The discussion brought together experts in the European payments space to discuss an array of topics– from how instant payments will evolve in the near term to how collaboration will be essential for all entities, especially in light of the new provisionally agreed rules for instant payments. This article highlights and summarizes the focal points of that conversation.
Instant payments are gaining momentum in Europe as people look for convenient ways to send and receive money quickly. However, pan-European adoption has been slow for several reasons, including an absence of corporate use cases, cost, and a lack of interoperability between domestic schemes.
Subsequently, the current adoption rates of instant payments can vary drastically by region. Austria, for example, has the second-largest number of payment service providers (PSPs) providing services for instant payments; however, the volume of transactions falls below 14%, the European average.
While the Single Euro Payments Area (SEPA) allows customers to make digital euro payments (credit transfers and direct debits) to anywhere in the European Union (EU) and some non-EU countries, it has limitations when it comes to instant payments.
Many banks within SEPA countries utilize SEPA Instant Credit Transfers, which enable settlement within 10 seconds for payments of up to €15,000. The drawback for users is that these instant payments are more expensive than regular credit transfers, there is an amount limit, and not all banks offer the instant transfer option.
This is where the newly minted regulation by the European Council and Parliament may force headway for instant payments. The agreement requires “mandatory provision of instant credit transfers in euros and access to central bank payment rails by non-bank e-money institutions and stablecoin issuers.” More specifically, it stipulates that payment service providers that provide standard credit transfers in euros – including banks – must offer the ability to send and receive instant payments in euros at no extra cost.
The recently released 2023 McKinsey Global Payments Report underscored the potential uptick in adoption due to regulatory intervention, indicating that instant payments – which currently constitute 12% of credit transfer volume in SEPA – could rise to capture a 45% share of SEPA’s 23 billion annual transactions. And while regulatory changes are expected to drive usage, other challenges remain.
Panelists were quick to point out the risk of fraud, especially with the rise of instant transfers in a post-pandemic world. Banks will likely be reticent about pursuing instant payments to that degree until current fraud challenges are solved.
Beyond fraud, the adoption rate will depend on customer education and trust in the system, service availability, and expanding corporate use cases. The panelists pointed out that, since its inception in 2017, close to 90% of SEPA Instant Credit Transfer use cases have focused on account-to-account (A2A) payments and remittances. This underscores the importance of building up value-added services on top of this ability – and finding additional use cases for corporations.
While regulators may push the adoption of instant payments, there still needs to be a customer-centric mindset shift to increase adoption.
Corporate use cases came up more than once during the discussion, with panelists agreeing that these use cases are foundational to broader adoption. In response to McKinsey’s 45% projection, one panelist noted the limited number of corporate customers currently using instant payments due to the national amount limit. With close to 80% of the volume supported by corporations, there will need to be better use cases to increase adoption and volume in tandem.
Payment service providers must find ways to embed themselves within corporate client ecosystems in areas that depend on instant payments. A future-forward approach that utilizes APIs to make instant payments part of the value corporations can deliver is fundamental.
Panelists also agreed on the necessity of collaboration moving forward. For larger banks, partnerships with fintechs – which are inherently more innovative and customer-centric – will enable faster adaptation to market changes. On the other side, banks have established trust with customers via their ability to send payments in a safe, secure, and fast way – trust that fintechs can leverage to build value-added services on top of instant payments infrastructure.
Small and mid-sized banks also stand to benefit from collaboration – both with fintechs and with larger banks. From a resource perspective, smaller banks will find the path ahead challenging. The pace at which regulations are emerging and technology is evolving will be a hindrance to banks that don’t have the financial or personnel resources in-house. Outsourcing can be advantageous for profitability and from a strategic standpoint.
Broader, more affordable access to instant payments as mandated by the European Council and the European Parliament will undoubtedly drive greater adoption. However, banks and other PSPs have more work to do in developing value-added services that appeal to the masses, including corporations. If PSPs can successfully develop critical infrastructure with the right functionality, these instant payment rails will help drive the next generation of payments opportunities.