Interoperability: the Key to Wider Adoption of Instant Payments across Europe

by Jules van den Berg

Last year saw instant payments grow even faster than anticipated due to the need for immediate availability and accessibility of funds, for instant confirmation and information about a payment, and as a result to the overall increase in digital transactions. As it is generally accepted, this change in consumer behavior, prompted by the COVID-19 pandemic, has compressed years’ worth of digital transformation into the payments space into several months. Thanks to this, more people and businesses globally can access real-time payments for their needs, and countries can easier maximize liquidity in their economies and stimulate recovery and growth.

Gradually, real-time payment schemes have started answering the needs of corporates as well, leaving room for more innovation in the B2B space, besides the well-known peer-to-peer (P2P) and customer-to-business (C2B) payments use cases. Backed by regulatory bodies, central banks, and governments, there is increasing confidence in the reliability of instant payments. On European ground, SEPA Instant Credit Transfer scheme (SCT Inst), the instant payments scheme launched in 2017, is expected to be leveraged by new initiatives aimed at assessing potential ways of creating a pan-European payment solution and addressing some of the most important use cases for consumers and merchants. In this context, banks, processors, acquirers, and payment networks are expected to rapidly modernize their systems and infrastructures by migrating to modern data standards and launching new real-time systems and value-adding services.

Instant payments is one of the trends that is seen defining the future of commerce payments, according to a research note by Gartner. However, innovation in the payments ecosystem is hindered by fragmentation, by multiple systems and standards that do not interoperate at a satisfactory level. This lack of interoperability and sometimes ineffective payment processes greatly impact consumers and businesses in their digital transformation journey. The instant payments system needs to address challenges to interoperability in order to ensure a level playing field for all solutions seeking to enter the market. This can be achieved by applying technical standards, developing digital identities in a coordinated manner, and providing broad access to settlement mechanisms across different solutions.

Recent European initiatives addressing instant payments  

Currently, the level of interoperability needed in an instant payments environment is still a work in progress in Europe. While SEPA Credit Transfer and SEPA Direct Debit are well established, the SCT Inst comes with infrastructure that is currently ahead of the products and services that participants are able to offer. Therefore, certain initiatives have been launched or have set clear objectives towards ensuring a higher level of interoperability for instant payments in Europe.

Retail Payments Strategy

In September 2020, the European Commission published the European Retail Payments Strategy (RPS), which will constitute the base for the strategy on payments-related regulatory changes in Europe for the following years. The RPS covers the matter of instant payments, which is expected to become the “new normal”. The RPS points to a possible need for a legislative initiative for instant payments, in order for it to become widely used in case adoption is not the desired one. This proposal could make it clear which payment service providers (PSPs) should be subject to obligatory participation in the SCT Inst scheme. Moreover, the RPS proposal points to a revision of the Second Payments Service Directive (PSD2) and states that ways to promote the use of electronic identity (eID) and solutions based on trust services will be explored as well in order to support the implementation of strong customer authentication (SCA) requirements under PSD2 for account login and initiation of payment transactions.

Euro Retail Payments Board (ERPB) Framework for interoperability of instant payments at the point of interaction

In March 2020, the ERPB established a working group on a framework for interoperability of instant payments at the point of interaction. In the context of this document, an instant payment at the point of interaction is a transaction based on SCT Inst, by a consumer to a merchant at the point of sale (POS) in a store or a payment page on an ecommerce/mcommerce website. Furthermore, it analyses instant payments and the point of interaction models involving a Payment Initiation Service Provider (PISP) or a Collecting Payment Service Provider (CPSP) as a collecting entity of transactions on behalf of the merchants and their respective impacts on the interoperability of instant payments.

In this document, it is also pointed out that a standardization of the message content/data would be needed on how the consumer or merchant data are exchanged between the consumer and the merchant. The interoperability solutions at this layer will depend on the type of transaction data that has been exchanged. The infrastructure needed to exchange the notification messages to the consumer and merchant would need to be developed as well as the standardization of the minimum data elements required in the message flows between the participants in the transaction.

Public Consultation on Instant Payments

In March 2021, European Commission launched a public consultation document that is aimed to inform the Commission on the remaining obstacles to the wide availability and use of instant payments in the European Union. The consultation also seeks to identify factors that would stimulate customer demand (corporate users and merchants alike) towards instant credit transfers.

According to the document, for an instant credit transfer to be successfully completed, at each end of the transfer there needs to be a PSP adhering to the same set of rules, practices, and standards for the execution of a transfer, such is the SCT Inst scheme. An interoperable system that would lead to a broad level of participation by PSPs is a key precondition for the wide availability of euro instant transfers at the European level. As of March 2021, only 64.6% of PSPs from the member states have joined the SCT Inst. In addition, the consultation tackles the idea of incentivizing payments market players to offer convenient pan-European payment solutions based on instant credit transfers. The results of this consultation will be used to support Europe’s open strategic autonomy in the macro-economic and financial fields.

Conclusion

Even though there is much that needs to happen before interoperability can be achieved, these initiatives prove that exciting opportunities for players and consumers alike are ahead in the European payment ecosystem. In order to reap the benefits of instant payments to the fullest, all ecosystem participants will play an important role in ensuring a smooth transition towards efficient pan-European instant payment solutions.

About Jules van den Berg

For the past 25 years Jules has been active in software development, holding various management roles and focusing on building operational excellency within the organisations he worked with. Since 2005, when he joined Maxcode, where he is currently Managing Director, he has been involved in delivering many projects in fintech, healthcare and e-invoicing, and has acquired a great deal of knowledge in the process. Jules believes that the recipe for a good development team is to enable everyone to assume accountability, to provide them clear data and insights, to have transparency in operations, and last but not least, to continuously read and learn on the domains we develop products for.

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