SEPA Instant Payments regulation – deadlines and preparation strategies

The deadlines for SEPA Instant Payments Regulations are fast approaching. Banks and Payment Service Providers (PSPs) have just four months to start receiving Instant Payments by January 9, 2025, and a little over a year to begin sending them. The pressure is on to ensure systems are ready for this real-time evolution. Get in touch with us to help you translate the complex regulatory requirements, manage the involved functions and teams to get ready, and equip your institution with deep instant payments expertise.

What are Instant Payments?

Instant Payments, also known as real-time or immediate payments, are fast, account-to-account (A2A) transactions initiated, cleared and settled in mere seconds. Unlike traditional payment methods such as cash or cards, these transactions happen on Real-Time Payment (RTP) networks, offering speed, security, and cost-efficiency. With central and commercial banks behind this innovation, Instant Payments are reshaping the payment landscape.

The evolution of SEPA Instant Payments

Launched by the European Payments Council (EPC) in 2017, the SEPA Instant Credit Transfer (SCT Inst) scheme made real-time euro transactions across Europe possible. While in the Netherlands, the adoption of instant payments has been rapid, with most major banks incorporating this technology into their services, many other EU nations such as Spain and Germany have been slower to embrace real-time payments.

That’s about to change. On February 7, 2024, the European Parliament passed new rules to harmonise and standardise instant Euro transfers, pushing Europe further into the realm of real-time payments.

What does the new regulation require?

From January 9, 2025, banks and PSPs must be ready to receive Instant Payments. By October 9, 2025, they must be able to send them. Here’s a snapshot of the key regulatory changes:

• No extra fees: Instant Payments must cost no more than traditional SEPA credit transfers.
• Verification of Payee service: banks and PSPs must introduce a service that verifies the recipient’s account details before processing the payment, reducing errors and fraud.
• Harmonised sanctions screening: a unified approach to screening transactions against sanctions lists, aimed at speeding up the process without compromising security.

Key updates to the regulation

The European Commission clarified several critical requirements on July 23, 2024:

• 10-second end-to-end processing time: Instant Payments must be processed within 10 seconds, which complicates the indirect participation model. This model, where payments pass through a direct participant before being cleared, adds time and strain to the process.
• Removal of payment cap: the current €100,000 limit for Instant Payments will be lifted, paving the way for more high-value business-to-business (B2B) transactions.

What does it mean for banks and PSPs?

For banks, the road to real-time payments is paved with challenges. Systems must be upgraded for 24/7 availability, scalability, and security. Instant Payments will need to flow seamlessly across all channels, from mobile apps to bulk transfers, while ensuring compliance with new sanctions screening and fraud prevention measures. This transformation impacts every aspect of banking, from core infrastructure to reconciliation and risk management.

How to prepare for Instant Payments

The shift to continuous, year-round processing demands significant operational changes. Here’s what banks and PSPs need to prioritise:

1. Evaluate existing infrastructure and real-time compatibility: assess the end-to-end architecture and use plug-in, cloud-based, composable architecture to accelerate transformation. This approach enables faster adaptation to the introduction of new products and services.
2. Move from Batch to Real-Time: legacy systems need upgrades as incumbent core banking systems, built for batch processing and limited operating hours, are often ill-equipped for the demands of real-time payments.
3. Enhance sanctions screening: Banks must verify their clients against EU sanctions lists at least daily instead of screening each transaction individually. Consider new technologies (data analysis, machine learning, next-gen screening engines) to comply with AML policies requiring screening of all cross-border transactions against different lists (EU, international, domestic, etc.) and to verify these within the 10-second Instant Payments window.
4. Strengthen fraud prevention: learn from global leaders like Brazil’s Pix system, which successfully reduced fraud by bolstering KYC and transaction monitoring processes, to strengthen fraud prevention and AML measures and mitigate risk of fraud.
5. Ensure System resilience: banks must strengthen disaster recovery and business continuity plans in place to quickly recover from system failures as outages or slowdowns have a direct and immediate impact on customer trust and business continuity (no downtime allowed).
6. Streamline Payment Rails and maintain compliance: simplifying and integrating various payment systems—SWIFT, credit cards, domestic transfers—will help reduce costs and risks, aligning with the new regulation’s mandates. Having separate payment rails for different channels requires maintaining compliance across all of them, which is more expensive and introduces more risk. 

In addition to implementation challenges, banks and PSPs should also assess the impact on profits and strategy, considering the resulting increased competition and effects on price.            

The race to compliance

With the deadline fast approaching, over two-thirds of European banks are working hard to comply with these new regulations. However, the path to readiness is far from easy, especially for banks that haven’t yet adopted Instant Payments.  These institutions face a dual challenge: transforming legacy systems and coping with the surge in transaction volumes that the new rules will bring.It is generally recognized that banks are on a transformation wave to become compliant and ready (moving the whole payment cycle to real-time, from payment speed, core banking, reconciliation to fraud detection) for inbound Instant Payments by January 9th 2025.

The Netherlands are a leader in Instant Payments, with nearly all domestic transactions already processed in real time. However, Dutch banks still face compliance challenges as they scramble to meet the upcoming Verification of Payee and sanctions screening requirements. For banks new to Instant Payments, the timeline is even tighter, with only nine months left to overhaul their infrastructure and fraud prevention systems.

 Why partnering matters

For smaller banks that still need to complete most of their preparations for Instant Payments, Connective Payments provides a comprehensive, ready-to-deploy solution (IP-in-a-box). We work with you to create a roadmap and plan tailored to your specific needs. Our services include a quick scan (current state assessment) and delivery of a bottom-up plan, offering you end-to-end recommendations on how to prepare for the IPR. Moreover, we also support you in gathering requirements to enable selection of (new) technologies for Verification of Payee and sanctions screening. Finally, our project managers can guide this process all the way, overseeing build, test, adoption and realization of benefits.

Our team of payment experts and consultants is equipped to guide you through the necessary steps to ensure compliance and execute your Instant Payments strategy. We help define the requirements for building a Verification of Payee service and offer support in deciding whether to buy, build, or outsource the needed IT infrastructure. Connective Payments collaborates with Payment hub or Payments as a Service (PaaS) partners to manage integrations on your behalf or install them for you on-premises.

What does the future bring?

Instant Payments are not just a regulatory requirement—they are a springboard to the future of financial services. With the growth of Instant Payments on robust Instant Payments rails, retailers and other businesses can unlock new revenue streams and leverage innovative payment solutions tied to Instant Payments.

Participants can embrace Instant Payments services to address complexities in the payment value chain. They can benefit from overlay services such as liquidity management, tokenization, fraud prevention services and a consistent regulatory framework. 

Another trend is that, as the infrastructure evolves, we’ll see real-time payments intersect with technologies like blockchain, potentially paving the way for digital currencies and stablecoins.

Finally, another key development signaling potential challenges in the coming years is the integration of domestic real-time systems for cross-border payments. We anticipate that Instant Payments rails will dominate at the infrastructure level, particularly due to their efficiency in facilitating payments, especially cross-border payments. As a result, an increasing number of transactions are expected to utilise these rails.

Connective Payments helps you navigate these changes, ensuring your bank or PSP is not only compliant but well-positioned to thrive in the new real-time world. Get in touch with us today to start your Instant Payments journey!