The European Council and Parliament have recently approved landmark legislation that aims to modernize the continent’s payment infrastructure by requiring payment service providers (PSPs) to enable real-time payments in euros.
The new law sets the stage for a smooth and immediate payment process for both individuals and companies within the single European payments area (SEPA), establishing Europe as a key contributor to unified payment advancements.
This move comes after years of painfully slow progress in updating outdated systems that result in trapped liquidity and high costs for cross-border transactions. Industry statistics estimate over €200 billion gets locked up on a daily basis due to archaic settlement and reconciliation processes. Friction and opacity in payments also increase risks, complicate compliance, and hamper the ability to optimize cash flow – amounting to a huge drag on European economic productivity.
The new legislation represents a watershed moment that could unlock massive efficiencies through unified, transparent protocols for instant payments across Europe. Connecting the disparate proprietary arrangements between providers, banks and national systems is expected to drive down transaction fees, speed up settlement times, improve visibility into transfers, and enhance access to capital across the common payments area.
Yet behind the optimism lies tremendous complexity in modernizing the intricately woven legacy apparatus that has accreted over decades. At present only 11% of euro transfers in Europe utilize instant payment schemes, the majority still relying on card networks like Visa and Mastercard. Within schemes like SEPA Instant Credit Transfers (SCT Inst) meant for immediate clearing, just 14% of total transfer value uses the system.
Status quo
In Europe, the current methods for immediate payments are not unified. Each country has its own protocols and varying contracts with other regions, making the process more complicated. As a result, cross-border transactions are still costly and slow, disadvantaging those who are most at risk. For instance, the fees for international payments currently have an average of 1.5% for businesses
The technology has been available for a while now to facilitate immediate cross-border payments within the Single European Payments Area (SEPA) through schemes like SCT-Inst (SEPA Instant Credit Transfers). This allows for transfers between authorized entities in less than 10 seconds for amounts up to €100,000. However, this limit is often too low for many treasury transfers, which explains the slow adoption of schemes like SCT-Inst.
Currently, only 56% of Europe’s 5,500+ payments service providers (PSPs) have registered for SCT-Inst, with just 14% of total transfer value using this scheme.
To leverage the new legal mandates around instant payments, Europe’s 5,500+ PSPs must now undertake large scale upgrades to handle increased capacity at any time of day while preventing systemic risks. Connecting the various systems throughout Europe will lead to a decrease in the cost, time, and visibility of money transfers.
This will allow for B2B payments to be processed quickly and inexpensively, giving merchants and corporations the ability to maximize their cash flow and improve their cash management practices. Additionally, companies can cut their expenses in transaction and working capital by reducing the time it takes to settle payments and streamlining the reconciliation process.
Similarly, corporates across sectors may need to assess treasury and cash management systems to take advantage of faster settlement cycles that reduce float and allow dynamic utilization of working capital.
Bridging such wide gaps will require concerted collaboration between banks, regulators, payment providers and their customers – the complexity should not be underestimated. Yet pioneering partnerships to smooth the transition could cement first-mover advantages for years.
By removing friction in commerce and cross-border payments, the legislation promises to catapult Europe into a new era, cementing its position as an innovative payments leader on the global stage. But realizing this vision depends entirely on the skill and commitment with which institutions navigate interlinked strategic, technical and regulatory challenges in the months ahead.
Entering a new era?
Overall, the EU’s latest legislation is a positive step towards the advancement of immediate, reliable, and effortless transactions. It has the ability to revolutionise the way companies conduct operations and also offer more convenience and options. Furthermore, by eliminating obstacles and updating cross-border payments, Europe is making significant progress towards becoming a leader in the payments industry.
By collaborating with the appropriate partners, European corporations can enhance their banking experience and optimize their treasury operations, paving the way for a more advanced payment system while still having work to accomplish.
If successful, the effort could profoundly enhance transparency, unlock trapped capital, accelerate settlements and make conducting business faster and simpler across Europe. For forward-thinking banks and corporates, engagement with the right partners is key to extracting full value from the coming revolution while avoiding the pitfalls of this enormous undertaking.
