Will Instant Payments Legislation Drive Instant Innovation in Banking?
In February 2024, the European Union adopted a regulation mandating that all payment service providers currently offering standard credit transfers also provide customers access to the sending and receiving of instant payments. To meet the standards of the regulation, payment providers must offer 24/7 access to their instant payments service, and transfers must be completed within 10 seconds. This mandate comes with additional mandatory changes, such as the new Verification of Payee (VOP) protocol and adjusted sanctions screening procedures.
While instant payments aren’t a new concept within the financial services industry, their mandatory availability certainly is. To understand the impact this might have on the industry as a whole, as well as how this rule might drive overall innovation for banks, we caught up with Alistair Brown, EPAM’s VP of Open Banking and Payments, and Fabian Meyer, Managing Partner of CORE.
As you’re both aware, EPAM recently published the results of its latest consumer banking research. The global results showed that of all the digital features a bank could offer, the one in highest demand by consumers is instant payments, identified by 78% of our respondents. In your opinion, what is driving this demand?
AB: It would seem to me the general public doesn’t really care about payments. They just expect everything to work, and they really don't think about the logo or the technology behind it. What they want is something that's similar to the mobile phone they have in their pocket: always on, always working, doing what it does invisibly.
The ultimate goal here is a payments system that is always on, totally reliable, devoid of fraud and instantaneous. However, getting there is enormously complicated.
FM: Any prospective payments system absolutely needs to be made available for free for end-customers, as I strongly doubt there’s any willingness by any retail banking customers to pay for payments processing. It also needs to be embedded seamlessly into the customer journey; and I think that gets to the heart of the recent EU instant payment regulation.
AB: Where this gets interesting, and where we’ll see real customer demand, are in the various products and services that can be built out on top of the real-time payments infrastructure. In essence, the EU instant payments regulation – and FedNow in the US – will help to establish a baseline of capabilities that then enables a second wave of innovation.
Let’s discuss that innovation. What impact will the proliferation of instant payments have on consumers and banks alike?
FM: From a European perspective, the impact will be massive. It’s true that instant payments have been around for quite some time, and there are a number of banks who already have some kind of instant payments readiness. Even so, we’re only talking about roughly 15-20% or so of all transactions being processed through current instant payments channels. With the aggressive timelines established for the EU regulation, I would assume that more or less every transaction is going to be an instant transaction soon.
That said, many banks will need to build the infrastructure required to facilitate instant payments. When that happens, just as Alistair noted, you’re going to see a lot of new services and innovation built on top of this layer.
For example, think about the current model of credit cards. If instant credit transfers become regularly available and free for everybody, it could alter the whole payment value chain and drastically shift the profit pools.
AB: That’s a great point. You can think about credit cards as essentially a tax on cash. Following their debut, roughly 75 years later, credit cards are absolutely embedded in global financial services systems. If banks get instant payments right — and to Fabian's point, makes it free for the consumer — then credit card companies and their associated fees are suddenly going to be at odds with customer expectations. It's long overdue because although the current model works, it's expensive.
What do banks need to do to prepare and what changes are they going to need to make?
AB: There are radical infrastructural changes in play here. Technologically, it's a massive revolution, bearing in mind that the tier-one banks have tech stacks that are already a nightmare of overcomplexity. In terms of technology transformation work to be done, it's a huge undertaking. These are complex programs that need to be taken on with great care and that will require many weeks of discovery and analysis followed by massive migrations.
FM: To add to that, the ruling the Council adopted on February 26 essentially states that in nine months from that law coming into effect, everybody has an obligation to receive instant credit transfers, and these need to be at the same price or lower than a classic credit transfer. In addition, there are sanctions and mechanisms that also need to be implemented within this same time frame.
As I noted earlier, this will essentially lead to a situation where each and every credit transfer is going to be an instant credit transfer because there is no argument for a consumer to opt for a credit transfer through legacy options. Many banks will need to overhaul their infrastructure to become instant-payments ready. Not only that, but if you’re one of the players in the payments area generating revenue from the existing model, it’s going to become necessary to have serious strategic discussions on what this ruling means for your business model, as there will certainly be an impact.
Alistair, in EPAM’s 2024 Consumer Banking Report, you noted that instant payments can often be a catalyst for digital innovation. Can either of you speculate as to how the banking and payments industry might evolve as a result of the new regulation?
AB: One of the mantras of the present day is that open banking and instant payments leads to open finance, which in turn, leads to open data. Ultimately, that’s the most important word in play here: data. If you look at the alternative regulations that are popping up outside of Europe to try to address the same set of issues, one of the most interesting is the Australian Consumer Data Right. The reason it's interesting is because it's looking even further into the future where data is shared between sectors, not just within financial services, which frankly is already complicated enough.
But if you look at the use of data extended into healthcare, retail or other sectors that aren’t necessarily obviously attached to financial services — but which inevitably use its services — then you've got some massive innovation opportunities.
As an example, let’s talk about the way people pay for healthcare — it’s an absolute nightmare, often using paper forms that are fed into lots of very confusing, often outdated, systems. These processes are ripe for automation. However, that creates a huge set of challenges, as data needs to flow between healthcare organizations and financial services organizations. If that data flow can be improved using modern technology, it will create a massive leap forward in terms of the quality of the service. Getting there, however, will require the use of data and a system of data monetization.
FM: I agree. The payment process is going to be broken down into much smaller pieces as services that can be integrated into these user journeys across sectors in a much more customized manner than has been done before. Ultimately, digital identity — also referred to as hyper personalization — is the next big game changer, which will only be made possible through the proliferation of data. This represents a large opportunity for financial institutions as they’ll be able to integrate and tailor their offerings directly to the consumer.
