Real-time payments, which involve the processing of transfers and crediting of funds to the recipient within seconds, 24/7, are known as instant payments. For consumers, instant payments have become an essential part of the payment landscape, thanks to offerings from some payment service providers such as PayPal, Apple Pay, or Google Pay, resulting in a significant increase in the use of instant payments over the years.
According to the European Central Bank (ECB), the relative share of instant payments in the SEPA area reached an average of 12.44% in 2022, up from 9.5% the previous year:
EBA Clearing reported an average total volume of 363.4 billion euros transferred through real-time payments in the Eurozone in 2022. However, the usage of instant payments by businesses remains significantly lower.
What is the reason for this, and what developments can be expected in the coming years? And what are the implications for financial institutions? The following 3 points should be considered in answering these questions.
One of the significant reasons for the low adoption of instant payments by businesses is the lack of interoperability in Europe. The ECB gave banks the option to choose which clearing and settlement mechanism (CSM) they wanted to use to connect to the instant payment network. The available options were the Worldline CSM (which only allows internal connectivity) and TIPS and EBA (parties that enable connectivity within Europe). This led to a discrepancy, as some banks are connected to all CSMs, while others are only connected to individual ones. Therefore, an issue arises if a bank connected to Worldline cannot exchange payments with a bank connected only to EBA or TIPS. This is a problem that affects the entire European market.
The ECB has taken measures to address this problem, deciding that all European banks in the SEPA area should be fully reachable for instant payments. Banks must now be reachable through the TIPS-CSM channel, enabling them to receive real-time payments from any European bank. However, the ECB has not yet mandated that banks must be able to initiate instant payments via TIPS, so it is unclear which banks are currently capable of doing so.
The European Commission recently approved a draft law that will require banks that already offer standard transfers to offer instant payments. This service will remain mandatory and free of charge for customers, making instant payments more attractive to more companies. Therefore, it is expected that the use of instant payments by corporate customers will increase.
Lack of use cases
Another factor contributing to the low adoption of instant payments in B2B is the lack of knowledge about their use. Few well-known examples exist in the market, as instant payments have only been integrated into business processes to a limited extent, such as in digital invoicing for the immediate payment of receivables. However, demand for instant payments is growing in some industries, and the gap between existing bank offerings and the needs of customers is increasing.
An excellent example comes from the automotive industry, where dealers try to process payments and transfer vehicle ownership over the weekend. If the associated bank does not offer instant payments, the transfer can only be completed using traditional payment methods before or after the weekend. Faster processing not only leads to satisfied customers or trading partners but also, in this example, maintains sales and reputation.
Implications for financial institutions
So far, about a third of European banks have not yet integrated instant payments into their payment architecture or infrastructure. For these banks, it is increasingly difficult to explain to their customers why their payments cannot be processed via instant payments, which would enable the payment to reach the recipient within seconds. If these banks do not adapt to the "new normal", the loss of customers is inevitable.
However, fulfilling this customer demand will require significant investments, as technical and conceptual adjustments or innovations need to be made throughout the transaction process. In addition, conventional infrastructures for recurring payments and direct debits must continue to be maintained.
Instant payment systems can offer several advantages for companies and banks. For example, they can enable faster payment processing and settlement, improve cash flow, and reduce transaction costs through harmonization of settlement options. They can also provide more transparency in payment transactions, which can help prevent fraud and improve risk management.
However, the introduction of real-time payment systems also requires significant investments in both infrastructure and technology and could be associated with legal and compliance challenges.
In view of recent developments, real-time transfers are no longer to be seen as an innovation, but as a cornerstone of payment transactions. Therefore, the implementation of instant payments is a must for every bank that not only operates payment transactions, but also wants to remain a part of the market.
If you have any questions or concerns about this topic, our payment expert team is happy to help!
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