The new EU Regulation for Instant Payments – Reading between the lines

At the end of 2023, the provisional agreement for the new EU regulation for SEPA Instant Credit Transfers (SCT INST) was published, including the results of the trialogue between the European Commission, Parliament, and Council.

The agreement sets out the timelines and legal framework, but the question is: are the timelines feasible? And are the legal provisions clear to everyone? Roderick Kroon, Payments expert at Projective Group supporting multiple clients with the road to Instant, shares his view on the regulation and some interesting discussion points.

To which Payment Service Providers (PSPs) does the new regulation apply?

On close inspection, the scope of the regulation appears to be related to ‘payment accounts’, but its definition is unclear. Funnily enough, we had the same discussion with PSD2, so it would have been a lot better if the regulation provided better guidance this time. At the moment there are multiple stances from different countries on what type of accounts (or flows) are in scope. This once again leads to fragmentation between countries; the same fragmentation was one of the reasons the regulation was introduced in the first place.

At the moment there are multiple stances from different countries on what type of accounts are in scope. This once again leads to fragmentation between countries.

A good example is whether banks acting with a strict ‘Fixed Contra Account’ model (where the originator and beneficiary are the same for outgoing AND incoming payments) fall within the scope of the regulation, as it can be argued that these accounts do not act as ‘payment accounts’. Countries like the Netherlands, where the FCA is not in scope, seem to take a different position than for example Belgium or Germany, where the FCA is in scope.

This ambiguity especially impacts banks that provide asset management and/or savings accounts. If no better guidance is provided, these banks will have to make their interpretation which may lead to differences and possible ‘non-compliance’ depending on any final decisions made later in the process.

What are other ambiguities in the new regulation?

In the regulation, the timeframe for an Instant Payment transaction is defined as a 10-second end-to-end processing time. If it takes longer the transaction can (and will!) be rejected. However, the way this 10-second rule is formulated is different to what is described in the current SCT INST EPC rulebooks. This creates uncertainty and, in the eyes of many parties, provides unnecessary new (complex) requirements.

Let me give two examples of possible consequences of the current 10-second ruling:

It would mean that any variant of non-time-critical Instant Payments, one of which is offered in the Netherlands by Worldline CSM, does not comply with the rules.

So, what happens then? Does this variant cease to exist? One Tier 1 bank in the Netherlands stated that they simply consider the non-time-critical flavour as a variant of the ‘normal’ SCT instrument, and it can therefore still be used in specific situations agreed with customers (like for standing orders). This highlights that the role of the traditional SCT flows are not disappearing but still can be expected to coexist next to Instant Payments.

Another example is the question of when to start measuring ‘time’ and whether there is room for pre-processing (e.g. fraud checking) outside the 10-second time frame. This is a common practice with banks currently already supporting Instant Payments without it impacting the customer experience. Redesigning the current flows in line with the way the current regulation is formulated will have significant consequences for banks that have already implemented Instant Payments and is unlikely to be the true intention behind the regulation.

Is the IBAN-name check (or Validation of Payee) mandatory?

Yes. Although it is not new to the Netherlands, where the ‘Surepay’ Name-Number check has already been implemented bank-wide, there are also some interesting developments here. To start with, I just learned last week that we can expect a new EPC Rulebook on Validation of Payee (VoP) soon (Q1 2024). In pursuit of interoperability between VoP service providers, this new VoP scheme will introduce responsibilities for both the originating and beneficiary PSPs for the VoP process. In particular, it introduces stricter responsibilities for the beneficiary PSPs that will have an impact on the market.

In addition to a new Rulebook, it has become clear that the obligation is not only linked to Instant Payments but also to normal SCT transactions. PSPs may decide to use technical or operational service providers but remain fully liable for any errors. This requires a more careful supplier selection, supplier due diligence, and risk assessment responsibility.

Another interesting point on the VoP is the requirement to also implement the VoP service for bulk payment flows. In our discussions with clients, many questions are being raised about the opt-in/opt-out mentioned in the regulation, about the missing views on ‘unhappy flows’, and about the additional complexity associated with its implementation in the payment process (debulking and (partial) rebulking). Also, the ambiguity around the extent to which it is commercially permissible to charge customers for VoP service elements remains unclear.

Another interesting point on the VoP is the requirement to also implement the VoP service for bulk payment flows.

Can you say more about the requirements for sanctions screening in the regulation?

The new regulation introduces a liability of the beneficiary bank towards the originator bank, as the screening of transactions will be replaced by the screening of ‘account holders’. This obligation currently does not exist and is not made explicit in the scheme. Furthermore, there is uncertainty about the use of ‘national screening lists’ (specific lists present in specific EU countries). With the shift to screening of account holders by the beneficiary bank, the bank may not include these locally required lists in its screening processes. It is unclear how regulators will deal with this potential gap.

Also, it appears that the shift from transaction-based screening to account holder screening only applies to SCT INST transactions and not to normal SEPA SCT/SDD transactions. Knowing that the same account holders are used for both flows, this creates a strange situation and asks for a decision like the VoP example above to introduce the same requirements for both instruments.

What is your advice to PSPs on the regulation?

Because some issues critical for the designs are still unclear, our advice is to look at the regulations in a ‘pragmatic’ rather than literal way. We learned from a Tier 1 bank that their decision is to stick to the current SCT INST rulebook in case of inconsistencies (so NOT follow the regulation) and simply wait for a new formal SCT INST rulebook version for any required changes at the scheme level. Another Tier 1 bank advocates a pragmatic approach to work ‘together’ on design principles for matters that are not completely clear or logical. Knowing that banks seem to follow a similar approach on specific topics makes it easier to accept a solution, especially when it is not clearly defined in the regulation. At this moment, the consensus from our discussions with many parties is that the regulation is perceived as too strict, deviating too much from existing practices and is sometimes not specific enough. What does not help is that no feedback loop or Q&A process is foreseen for the market to provide further feedback.

Our advice is to look at the regulations in a ‘pragmatic’ rather than literal way.

Since all EU banks will sooner or later have to start their project on the new SCT INST EU regulation, the fact that open questions remain does not make things any easier. With experience in leading Instant Payment projects across many banks and multiple countries, Projective Group can help you make the right (pragmatic) decisions using our network and in-depth knowledge of payments.

Sessions such as those organized in the Netherlands by the Dutch Payments Association on January 16 are crucial for a successful introduction of Instant Payments as the ‘new normal’ in the EU. The fact that external advice helps a lot when implementing an Instant Payment process was once again confirmed by the Van Lanschot bank who shared insights about their SCT Instant implementation and the crucial role that Projective Group played in it.

About Projective Group

Established in 2006, Projective Group is a leading Financial Services change specialist.

We are recognised within the industry as a complete solutions provider, partnering with clients in Financial Services to provide resolutions that are both holistic and pragmatic.  We have evolved to become a trusted partner for companies that want to thrive and prosper in an ever-changing Financial Services landscape.