The European Central Bank has progressed with its Single Euro Payments Area system to the point where it is now ready to accept the rising trend of instant payments with a new mandate set for next January.
Raman Korneau, Co-Founder and CEO of neobank myTU, believes that Instant SEPA payments “have the potential to upset the Visa and MasterCard monopoly”, but they first need the overwhelming support from European banks, which Korneau outlines have to overcome various hurdles.
The development of the Single Euro Payments Area (SEPA) payment infrastructure has been a years-long process.
Introduced for credit transfers in 2008 and direct debits in 2009, it reached full euro area implementation in 2014 and non-euro area country implementation in 2016. Cashless euro payments sent as quickly, safely, and efficiently as national payments was the goal from the start, and we’re closer than ever to seeing those payments become truly instant to the tune of 10 seconds or less.
The European Bank is aiming to fully implement instant SEPA payments within the major banks by 9 January 2025, and this push comes off the back of the publication of guidelines for the European Payments Council Quick Response Code (EPC QR) this spring.
Under the European Bank’s current mandate, all banks must implement the EPC QR code by 2027. This is just practical. With instant SEPA and EPC QR code functionality, you don’t need a third-party payment processor like Visa or MasterCard.
Nevertheless – and despite these mandates – many banks still don’t have instant SEPA payment capabilities. They’re only enabled for standard SEPA payments, which settle only from three to five times a day – hardly instant. Unlike instant SEPA payments, standard SEPA payments usually process overnight or the next morning if done on a Sunday.
Instant SEPA payments and EPC QR codes are already hitting some speed bumps. It takes time for people to switch and get used to new payment methods, particularly when the overwhelming majority of people are still paying by card on the standard SEPA protocol.
More pressingly, it takes time on the banks’ side too. Big banks are sometimes unwilling and often unable to switch over quickly, and this in turn stops the adoption of EPC QR code acquisition.
A survey of 200 of senior payment professionals at European banks, conducted earlier this year by RedCompass Labs, found that nearly one-third of banks not currently offering instant payments were “unsure or not confident” they would meet the legislation’s 9 January 2025 deadline of full instant payment integration. That’s no small percentage.
Perhaps if it weren’t for the legislation, some banks would simply feel as though there’s no need to switch. They could still use SWIFT for transactions within Europe and continue with other inefficient and expensive methods. They could stay the course, but even with the legislation forcing their hand, those days are coming to an end.
Going from standard to instant is no small task
The pushback from banks has less to do with some old-school mindset than the sheer scale of the undertaking of switching from standard to instant SEPA payments. Some banks don’t even have a mechanism to check transactions quickly.
The adequate anti-money laundering monitoring is held up by legacy software issues and outmoded organisational processes. There’s a certain element of risk-aversion here. Slow checks are still partially manual, but they work, even if it takes up to two days to ultimately process.
Banks would understandably prefer to stay on the good side of AML measures than risk falling afoul of them by switching to instant and letting more fraud slip through the automated cracks.
A switchover to instant SEPA payments brings with it a totally different schedule and process. Instant SEPA payments must be available 24/7, yet there is no way to make that happen without automated processes and intelligent software that checks payments absent any human involvement.
Old batch systems (such as when alerts are reviewed only once a day) must be swept aside for AI-powered programs that can analyse large volumes of data in real-time. There is no way instant SEPA payments and old-school batch AML and fraud monitoring can co-exist.
The focus must shift to developing the kind of automation that detects fraud without triggering too many false alarms on account of its rules being too general or missing new fraud schemes on account of its rules being too specific.
There is a happy medium to be found, but it has to be done right. With instant payments, once the money is transferred, it is considered irrevocable, making it all the more essential for banks to adapt to new tactics used by scammers.
Future-minded overhauling
If established banks are hesitant, that’s because these new AI-powered systems represent a complete overhaul of old banking systems, and this change involves more than just IT.
AML processes and human-led fraud monitoring will not undergo this shift unaltered. Having implemented it at myTU, I know this switch takes time, and once implementation is complete, actively refining the system after the fact is an ongoing necessity.
No one is claiming this is a small task. This is a full-scale effort to make the European economy as sophisticated and modern as possible. The European Bank recognises this, hence the more direct push for instant SEPA and QR code adoption.
But instead of focusing only on ramming through the transition, no matter how inconvenient, we ought to reshape the narrative. This progress is (to some extent) inevitable, whether that 9 January deadline is made or not.
Instant SEPA QR code payments come with a lower fee – around 2.5 cents per transaction, compared to one-and-a-half or two percent when customers use Visa or MasterCard. (For small merchants, the fee could be three or four percent, or up to 10% for high-risk merchants.)
The benefits to the business community and the broader economy outweigh the risks. Instant SEPA payments have the potential to upset the Visa and MasterCard monopoly to the benefit of the entire European financial system and business sphere.
That’s how we arrive at this point. The 9 January deadline is somewhat arbitrary and already breeding resentment in the banking sphere. We shouldn’t toss it out, but leniency is no bad thing.
The most important task now for the European Bank is assisting banks in the transition and presenting this transition as the march of economic progress that it is. That’s how we make instant SEPA payments the new standard.