Regulatory change is nothing new for the payments sector, it is a process that stakeholders are well versed and experienced. In the EU, the latest round of changes comes in the form of the first wave of the Instant Payments Regulation (IPR).
Karthik Jagannathan, Head of Payments Advisory at Intix, a payments transaction data platform, shares his views with Payment Expert about what impact the IPR is having on the industry, what stakeholders can expect, and how they can respond.
Getting up to speed on the EU’s instant payments regulation
Europe is entering a new era of regulatory demands, driven by several key changes. From the EU AI Act to the proposed framework for Financial Data Access, businesses across the continent are being compelled to respond to an evolving landscape of measures and requirements. In doing so, many companies, particularly those working across the financial services sector are having to attain new levels of performance to remain compliant.
While these new measures loom over businesses in the region, their shadow is perhaps not as large as that of the impending Instant Payments Regulation (IPR). Adopted by the European Council in February 2024, this regulation has its first milestone scheduled for 2025. Consequently, payment service providers (PSPs), including banks across Europe, are under significant pressure to expedite implementation and meet the requirements.
What does the IPR mean for PSPs?
This new regulation mandates that all PSPs offer their customers the ability to send and receive payments in euros 24/7, 365 days a year, both within the same country and across other EU member states. Additionally, the end-to-end time available for processing these payments has been reduced to ten seconds. Businesses that fail to comply within this timeframe risk facing non-compliance penalties of ten percent of their turnover.
Amidst a blizzard of additional regulatory pressures, many PSPs are assessing where to allocate resources to stay ahead of the regulatory curve. The severe consequences for missing the IPR deadline underscore why this must be a priority. While many businesses have responded positively and appear on track to meet the impending deadlines, others still face a challenging road ahead.
The hidden cost of compliance
Meeting the requirements of a regulation like the IPR is always challenging. However, within the context of the broader regulatory changes that many PSPs currently face, it has become particularly demanding. As we push towards the first IPR milestone in early 2025, companies must find ways to balance overcoming the challenges in offering instant payment services with other essential aspects of business development.
On paper, this isn’t easy. IPR will require PSPs to implement and maintain the advanced infrastructure needed to ensure real-time processing and settlement of instant payments. For many PSPs, this process will demand investment in technology and cybersecurity. Moving forward, the systems that PSPs use to manage transactions must be robust to handle 24/7 operations with minimal downtime, while ensuring high levels of security.
Instant challenges for PSPs
IPR also necessitates PSPs to offer instant payments at the same price as standard transfers. For many PSPs this requirement could lead to a considerable squeeze on profit margins. As such, PSPs must manage operational costs efficiently while ensuring the quality and speed of service. Once again, the need for effective systems capable of providing this service reliably and without the need for intervention is huge here.
Many of the EU’s recent regulations have consistently emphasised the importance of preventing fraud and money laundering. This is also the case with IPR, which requires PSPs to be more responsive to regulatory concerns, such as anti-money laundering (AML) and Know Your Customer (KYC). However, for PSPs, ensuring real-time compliance and monitoring for instant payments offers a greater challenge than traditional transfer methods.
Finding a solution
PSPs in this situation need strategies to help them meet new compliance requirements while addressing ongoing business concerns. Although the concept of a ‘silver bullet’ solution may seem fanciful, it is an attainable goal for many PSPs, particularly banks. By prioritising the implementation of modern, data-first payment system infrastructures, PSPs can ensure they not only meet IPR requirements but also deliver more value to customers.
Ultimately, by adopting cutting-edge technology, PSPs can innovate and adapt to market trends, staying ahead of fintech competitors. Advanced systems streamline processes, reducing operational costs and enabling PSPs to offer instant payments at the same price as standard transfers. Automation and data analytics optimise resource allocation and fraud detection, minimising manual interventions and errors.
Speed and security
What’s more, modern infrastructures integrate robust security measures and real-time compliance monitoring, ensuring adherence to regulatory standards. Additionally, by leveraging these systems, PSPs can offer personalised services, improve user interfaces, and quickly resolve issues, thereby enhancing overall customer satisfaction. Simply put, real-time data access enables faster, more informed decision-making and responsiveness.
This is crucial, as regulations like the EU’s IPR will drive a surge in payment transactions, leading to a corresponding increase in data volume. If not properly organised, managed, and analysed, this data has the potential to overwhelm organisations and cause them to miss out on valuable insights. Effective data management strategies are essential to avoid this situation.
Here, modern, data-first payment systems are the most suitable, as they enable PSPs to meet regulatory demands while delivering superior, cost-effective, and secure services, thus overcoming operational challenges and enhancing customer value. As PSPs look towards meeting a wave of new regulations imposed by the EU, including IPR, the adoption of such systems stands out as one of the most effective ways to achieve compliance.