On the customer side, the future of payment in Europe looks astonishingly good! Payment done from my Lux account will be on my German account in a matter of seconds and on top of that free of charge.
This is the new legislation coming up in January 2025 and is very promising as a bank customer.
But for banks there are a couple of challenges that need to be thought through regarding those payments.
For consumers, the future of payments in Europe appears exceptionally promising! Transactions, such as those from a Luxembourg account to a German account, will be completed in seconds and, moreover, will be free of charges. This improvement is part of the new legislation set to be implemented in January 2025, offering considerable advantages for bank customers.
However, while customers stand to benefit greatly, banks face several challenges that need careful consideration.
Review your fees. Instant payment must be free of charges.
Compliance checks for payment.
Payee checking, the nightmare of “close match” possibilities.
Review your fees. Instant payment must be free of charges.
Charges should not apply to instant payments. This legislation could result in a loss of revenue for banks, which will also need to incur costs to maintain and update systems whenever there are changes to the XML layout. While retail banks might cope with this change since most of their payments are already free, private banks may feel a greater impact. They may need to reassess other charges, such as those for account maintenance and trading, to offset the costs associated with maintaining instant payment systems.
Compliance checks for payment.
Compliance checks for payments, particularly in the context of instant transactions, present unique challenges. It is understood that the beneficiary’s bank is responsible for checking the beneficiary of the payment. The process for verifying the payee is clearly outlined in the requirements for instant payments. However, the main issue arises with anti-money laundering (AML) and fraud checks. Given that payments must be completed within ten seconds, the feasibility of conducting AML and fraud checks within this timeframe is questionable. It seems that these checks might have to be performed retroactively, based on our current understanding. This approach and its implications should be discussed further within your institution to ensure compliance and security measures are effectively integrated.
Treasury/Position management.
Treasury management in the era of instant payments poses specific challenges. Instant payments operate around the clock, allowing clients to conduct numerous transactions over the weekend when banks are traditionally closed and not actively managing their cash positions or nostro accounts. This can lead to potential cash or position discrepancies that become apparent on the next business day.
To address these challenges, it may be necessary to establish predefined cash flow parameters for each nostro account to better anticipate and manage weekend activity. Additionally, modifications to treasury controls might be required, particularly on Monday mornings. For instance, a routine procedure could involve conducting a foreign exchange transaction first thing on Monday to cover transactions in different currencies, such as the Polish Zloty (PLN), that occurred over the weekend.
Reconciliation management.
Reconciliation management must adapt significantly in the context of instant payments. Unlike traditional SEPA payment systems where transactions are bundled and processed in bulk at predetermined times—resulting in a single movement in your nostro account—instant payments are processed individually. This means each transaction triggers a separate debit to your nostro, leading to numerous individual movements.
This shift will inherently increase the volume of transactions that need to be reconciled, placing additional strain on existing reconciliation processes. Financial institutions must ensure that their systems are equipped to handle this increased volume efficiently. Moreover, with the rise in transaction volume, there’s also the potential for an increase in exceptions, which could complicate the reconciliation process further.
Payee checking, the nightmare of “close match” possibilities.
Banks must ensure that IBAN and beneficiary names match. Typically, for payments reaching a threshold, this involves manual checks by most banks. With instant payments, even a payment of 10 euros must undergo payee checking by the issuing bank before being sent. This could result in a “close match” scenario, where the IBAN and beneficiary names almost match. For instance, the client ordering the payment might have written “Dani” instead of “Daniel,” or “Cristof” instead of “Christophe.” The possibilities for such “close match” scenarios are unlimited.