Real Time Payments in Europe
by Emmanuel de Bouard, Co-Global Head of Cash Clearing Services for SG GTB, Jean-François Mazure, Co-Global Head of Cash Clearing Services for SG GTB & Frantz Teissèdre, Head of Interbank Relationships for SG GTB
“There are constraints on the industry when it comes to real time payments because a balance has to be made between speed and controls. There is probably a need for some urgent payments to be made in real time, but this could be only a fraction of the payments in Europe and the case for real time is even less obvious when it comes to cross-border transactions.” Emmanuel de Bouard, Co-Global Head of Cash Clearing Services
Consumer expectations and mobile technology have driven take-up of real time payments and implementation has increased dramatically over the last few years. Increasingly, corporates are looking to enjoy the same speed and transparency. What is happening in the real time space across Europe and what challenges does this payment evolution present for market participants, existing payment infrastructures, interoperability and new services?
- Whereas real time payments have gained a foothold in consumer markets, there is little evidence to suggest a business case for real time payments exists in the corporate world. Much of the drive for real time payments in Europe is coming from regulators, who are keen to promote innovation and the latest technology and believe that “if you build it, they will come”.
- Despite regulators’ ambitions for Europe to be a single domestic zone this isn’t the case. Tax and legal aspects across the region are not harmonised and not all transactions are denominated in Euros. In Europe, payments between corporates often involve a foreign exchange transaction. This lack of harmonisation becomes a significant challenge when considering real time payments in Europe. How, for example, will real time payments work if an FX conversion is involved?
- In order to achieve the transaction speeds required for real time payments, a balance has to be struck with ensuring the necessary controls are in place for regulatory compliance. There is a danger that these controls for requirements such as AML and sanctions checking may be sacrificed in order to process a transaction quickly. It is unlikely that there is technology available at present that would enable a payment transaction to pass between the sender bank and the receiving bank, with all of the necessary controls undertaken, within 20 seconds. Banks face very big fines if they violate regulations or OFAC lists, so controls are extremely important. Security is one of the biggest advantages and assets that banks have and they should be reluctant to compromise this for anything.
- The way payments are moved between private individuals and between corporates is not the same. Corporates do not necessarily require speedy funds transfer, rather they need predictability of pricing and also a guarantee that a payment will arrive at a certain time. Transparency is important for retail and for corporate customers, but for corporates it applies to a number of different areas including how costs are shared between the issuing party and the receiving one and also includes assurances that the way the payment is processed is the most efficient and protects a corporate’s interests. Corporates have a stronger requirement for transparency when it applies to reconciliations – they need information to accompany a payment so they can understand what that payment is and where it has come from.
- Corporates would need to make significant investments in real time reconciliation and accounting systems in order to achieve real time payments in Europe. Real time reconciliation is difficult for banks, but for corporates it is even more challenging.
- There is a likelihood that real time payments in Europe will develop in a variety of regional flavours. There is disagreement between countries about how fast real time systems should be, ranging from a few hours down to a handful of seconds. There is also a divergence when it comes to the upper value limit of real time payments transactions. This is because there is a different perception of risk among the countries of the European Union. In Europe, the regulatory focus is on the possibility to immediately reuse the funds rather than on the transfer of information or on the predictability of funds receipt. To meet this reuse requirement is very demanding on banks and on corporates.
- By the end of November, there should be more clarity on real time payments in Europe when the Euro Retail Payments Board (ERPB) issues more details about the pan-European instant payment scheme, SCTinst. This will be based on the SEPA credit transfer and the plan is to implement it by November 2017. There are many questions to be answered, including how clearing systems will interoperate. SEPA is a very good starting place because clients and back and middle offices understand the SCT. But we also have to find real time services that customers want and will be happy to pay for. At present finding that business model is difficult while ensuring that payments remain safe and resilient.
“To achieve real time payments in Europe the industry will have to move forward together and above all be patient. Authorities have opened the door to bilateral and multilateral agreements regarding value limits and speed of transactions. The industry has to move together in order to avoid local variances. It will take time, but we will get there.” Frantz Teissèdre, Head of Interbank Relationships
“The pressure from financial regulators on banks to introduce real-time payments does not reflect a requirement among corporate treasury clients. For this sector, security is the paramount concern, rather than speed of payment. My belief is that regulators are interested in encouraging banks to move to modern and efficient technology systems without paying enough attention to the business case.” Jean-François Mazure, Co-Global Head of Cash Clearing Services