SEPA Instant Payments

Announcer  00:01

Craig, welcome to the Treasury Update Podcast presented by Strategic Treasurer. Your source for interesting treasury news, analysis, and insights in your car, at the gym, or wherever you decide to tune in.

Craig Jeffery  00:16

Welcome to the Treasury Update Podcast. I’m your host today, Craig Jeffery, our episode is called SEPA instant payments, and I’m delighted to be joined by Kate Pohl. Kate, welcome to the podcast. Thank you so much for having me. Craig. At ABA day 2024 78% of attendees said the need to adhere to instant payment mandates was currently their top priority. And in Europe, according to the European Central Bank, the use of instant payments has risen from 5.2% of all credit transfers back in October 2019 to 17.8% in February of 2024 and finally, with the first deadline coming into force on the ninth of January, 2025 when payment service providers in the Eurozone need to be able to receive instant payments in euros, the pressure is truly on, and this is the context for SEPA instant payments. Kate, just to get started, maybe you can give us the really brief definition of what are instant payments versus quick payments?

Kate Pohl  01:22

Well, instant payments, as you said, there’s an instant payment regulation the IPR and it, they’re very clear rules around what it is and how it has to be handled, etc. So that, I guess, the first thing that everyone focuses on is there’s a, you know, a 10 second deadline, so within 10 seconds, whatever is going to happen has got to happen. So whether that is receiving the message, whether it’s, you know, doing sanctions, checking fraud checking, whether it’s even doing an FX, which is another issue altogether, whatever happens, it has to happen within 10 seconds, and the client has to receive it in their account.

Craig Jeffery  02:03

That forces the use of certain types of technology that’s perhaps less batch oriented, instant payments run over new payment rails for the most part, I think, across the world. What are the, what are the barriers, from a regulation or regulatory standpoint, to, you know, to offering and delivering instant payments.

Kate Pohl  02:24

I think the problem today for for many of the banks is, you know, you you mentioned technology, you mentioned core systems. I mean, it’s not just the bank getting ready, it’s all their systems. Providers being ready. They have to be able to to handle the deadlines. I mean, one of, one of, you know, two things that people talk about all the time is, first of all, you have to be able to do verification of payee. That’s part of the new regulation. So in other words, the Iban has to match the actual payee in the message so that’s being checked, and if it doesn’t match, so if that account and the person don’t match, you get either a near match, which is then think of it as the orange stoplight or the yellow stoplight, which means that it’s probably okay, but there might be the name is spelled differently, or instead of Incorporated, or AG, or whatever at the end of a company name, That’s something like that, and then there’s also no match, which is the red transaction. And then the company has the choice of whether they still want to carry that out and ask the bank to do so or not. And that becomes a huge problem when you’re in a batch, which we can talk about later. The other, I’d say big change. I mean, there’s so many changes, but the other, perhaps big change, is the sanction screening piece. So the regulation says you no longer have to screen on a transaction basis, but you screen on it on an account holder basis. So you have to do that once a day, as opposed to every transaction. However, then comes the big rub is that many of the banks and the big banks certainly have international transactions, so all of a sudden they need to use the OFAC rules. They need to look at, you know, rules from different countries and different jurisdictions. So they end up having to screen on a transaction basis. Anyway. However, just one more point on that. I’ve been told by the practitioners in the Netherlands who were probably the first to embrace instant payments across the board, that the problem isn’t the technology or that it isn’t the 10 seconds so much as booking the payment and letting the pay or know that the payment has been received. It’s it’s all these other sort of bells and whistles that are on top.

Craig Jeffery  04:50

Diving into the verification of pay. I think that’s a really strong play in many, many payment rails. It’s. It’s the account number that designates where it goes. And so if you gain control of an account, a criminal gains control and account, they alter the account number, bank and account number, they can leave the payee name the same as it originally was, but money will go to the account based on account number. So this seems to be both a good general control qualification, but a good security standard.

Kate Pohl  05:25

In principle it certainly is, I think, what we’re seeing today and talking to various and sundry folks about this, it is solving one problem in a big way. Because, as you said, you know, people were, you know, one of the big fraud methodologies with supplier payments was, of course, to, you know, change either the account or the or the name whatever, just to funnel it in a different direction, right? So the the fraudster or the bad actor would take, take the money. But the problem that that has cropped up is this is now pushing fraud and cyber crime, if you will, in a different direction. So people are saying, Okay, we’re not going to get you know, the bad actors are saying it’s not going to work this way. So we have to figure out different ways to disrupt the system, if you will.

Craig Jeffery  06:13

Instant payments can happen within a country. Some instant payments go across borders, particularly to different currencies, right? If you’re in the Eurozone, or you’re in the UK or in the you’re in the US, they all stay in the one currency when you cross borders. There’s another element to that. There’s a FX on the receiving side. How are they handling this? Let’s say pricing for the FX activity.

Kate Pohl  06:39

Well, the problem that we’re seeing today, we have to split it up when we talk about today, the foreign exchange issue that the banks are facing, and it’s a big one, what they’re talking about is actually a Euro payment. So we’re talking the first step with instant payments in the IPR is to deal with just the European countries or the separate countries that are dealing in Euro. But the problem is that there are, of course, non Euro accounts in Europe, so there are dollar accounts and slaadi accounts and all kinds of accounts. And also, it gets even more complicated, to the point of almost impossible. To keep in mind is there’s deadlines for whether you’re in a Euro country who has a non euro currency, or whether it goes, it goes, there’s like about five or six or seven. Now, I think it is different, different deadlines in terms of when they have to be ready. But let’s take the the key case. The key case, just stay within Germany, for example, there’s a Euro payment that comes in to $1 account, and it comes in on Saturday, so there has to be a conversion from that Euro amount to dollar to be credited to the proper account, right? The VOP worked, so the verification pay is correct. So how do you make a price when there’s no market? And that terrifies the banks, rightly so. Now some would argue, I’ve heard one argument I’ve heard from some of my peers is, well, that’s a very small use case. It’s usually you already or why you worried about it. I can tell you, the banks are worried about it. It’s not the fact that it’s going to be maybe hundreds of 1000s or millions of payments, but the one or two that are going to really you could if you’re off on your rate when, when you don’t have a market, do you take the closing rate on Friday? Do you pad it significantly so that everybody’s going to be or somebody’s going to be very unhappy? One thing is absolutely clear, that these banks do not have a choice. The regulation is very clear they must credit that dollar account. So they must create a price. As far as cross border, cross border. That hasn’t happened yet, but it certainly, it certainly will be an issue eventually, also with the IPR, it will, it will go in different stages, and we will see that. But right now, this is the issue that’s that’s really attracting attention because of the 24/7 availability and the need to be able to credit at any time 24/7.

Craig Jeffery  09:19

Thanks for going into some details on that. You know, making a bank ready for changes to support instant payments, whether it’s supporting the regulations or the overall process, some banks build this on their own, and others are relying on their suppliers. That always seems like a good opportunity, but Is everybody ready for it? Where do you see this as an issue?

Kate Pohl  09:41

I’d say the bigger banks have built systems, they tend to I say this very carefully. I think the bigger the bank, the more likely it is they might have built their own system or built from scratch. But that’s perhaps, you know, a vast generalization many have used supply. Lawyers who have solutions, say worldline, for example, others have gone with gateways or other banks where they’ve become, you know, they’re indirect, and the bank is then direct. The bank they’re using is the direct participant, pros and cons there. So if you’re working if you’re working through if you’re a smaller bank, and you’re working through a direct participant, that might also alleviate some of the problems in terms of the liquidity on because, again, you also have a liquidity issue on the weekend if your treasury isn’t working. But I think it’s very much a cost versus a convenience play to get back to your specific question. So there are banks who say, Why should I invent the wheel? There are very good providers out there. You know, that’s a cost issue. It will cost something, obviously, if you’re using a provider, and it’s a variable cost, which will continue, or a fixed cost plus a variable cost. On the other hand, if you do it yourself, you have perhaps less convenience, but you have more control over costs. We see it every which way. And let me say this, if they haven’t started like two years ago, they only have really one choice, which is to choose a provider.

Craig Jeffery  11:11

That’s certainly a challenge. You mentioned that the two different models direct and indirect, and you mentioned cost and convenience, how much of it is, and maybe convenience has to do with flexibility, like if you’re if you’re seeing payments as defensive, I have to protect payments because it’s a huge piece of business for banks. They need to protect it. Others are making points of distinction, not just to support what’s new, but to add value to it, because it’s such a revenue provider. How do they decide between these two? Is it I’m going to be a leader. I have to do the direct model. I build it myself. And if I’m not, I just I buy versus build?

Kate Pohl  11:53

Yeah, I think. But I think you put your finger on it right there. I think if you’re a leader in this business, you probably end up building your own. Because if you’re really a bit clearer, it just won’t make sense. But again, I say this carefully. I you know, there’s no vast generalizations. Collaboration and cooperation sometimes is, is an even smarter path, depending, depending. But I tend to what I’ve seen in the market is that the bigger players, you know, for the most part, have developed their own because let’s, let’s look at it this way. They all have, all the European banks deal with separate credit transfers. So the normal SEPA payment, the normal transfer, if they have that, they must also offer instant. On the other hand, if you offer instant you don’t have to offer the normal credit transfer, which is interesting, but that’s another that’s another story. But if they’re already doing it, and they already have the engine, most of the big clearers then tried to modify, and if that didn’t work, they might have added a new path. Actually interesting to think about is whether, over time, banks will offer both, because will it make sense to keep two systems alive, whether they’re doing it themselves or whether they have a provider? Depending on who you talk to, most banks today will tell you there’s a there’s definitely room for both. I see it as a big cost situation, because another big rule, or another subset of the rules, let’s say, is that a SEPA incident cannot cost more than a separate credit transfer. And in fact, in Germany, small anecdote, I don’t know if this is the case in every country in Europe, but the regulator here, boffin, has said that they will do some checking to see that banks have not raised their prices very recently in order to compensate so that the instant payments cost the same, but all payments, all of a sudden cost more. It’s an interesting little fact that’s making people crazy here, because the regulator can actually ask for proof, try to prove that you haven’t, you know, changed your pricing on, you know, millions of payments. It’s an interesting conundrum, let’s just say.

Craig Jeffery  14:15

Are you seeing that as a you know, some of this is of views of markets open or regulated for pricing, as we’ve seen, you know, conversions to digital methods, prices start high and they keep driving lower, because the the model goes that way, and so the the price tends to scale down when it’s set at a certain level. Does that restrict supply, if people, if banks, can’t make it work? Or does it just start at does it? Do you? Do you think it starts at a level that’s affordable, that enhances adoption, because it’s not starting as high of a price? Now, there’s two different views on that, I’m sure, but I’ll just be curious as to what you’re seeing with where they’ve set the regulations.

Kate Pohl  14:58

You ask a really important question. Sorry, so I can get this all in a form that makes sense. I think it all begins with the fact that it’s sort of the consumer side, where I think the regulator wanted to make sure that consumers would not be penalized for using instant, because the driver for instant, by the way, is more on the consumer side, on the retail side, it is on the corporate side. Because I think, as you and I have talked about before, the corporates for the most part, if they look at their supplier payments, which is 90% of what they do, 85% of what they do, they have such intricate, you know, well, thought through systems for their supplier, slash HR payments, that they’re not really looking to instant as a big new tool for them. On the other hand, of course, on the Treasury side, it’s slightly different, and, you know, that’s a different issue. But for Treasury payments, it probably wouldn’t, wouldn’t make the same impact if it was a, you know, a cent more, or two cents more, or even slightly more, because the volume is volume of payments, of transactions, is quite low. So I think indeed, one of the reasons that the regulator did this, other than to protect the consumer, was to make sure that the usage would go up, because we can see, for example, in Germany, basically for every bank, instant payments were more expensive, and therefore the volume was extremely low.

Craig Jeffery  16:27

Just wanted, just want to hear where that’s going. I mean, there’s some over time, the pure competition will do better, but at startup points, an elevated price reduces adoption. And so sometimes these cases where, you know, banking regular, which is a very regular industry, says, Do this with the price, or you have to offer, you know, images, or, yeah.

Kate Pohl  16:49

One thing that’s very important about the IPR. I mean, why do we have a regulation at all? Let’s think about that. I mean, the reason we have regulation is because the banks could have offered this without being regulated, but they didn’t. Why didn’t they? Because it’s expensive and there’s not sorry, I may be talking out of turn, but I’m neutral, so I can, you know the use case right now on the corporate side is not overpowering. Let’s say it’s improving. There’s more to be said. You know, you have embedded payments. You have requests to pay. You have different, different use cases that are coming up, you know, just in time, use cases, all of that, but it wasn’t compelling. So the only way to get really amazing adoption was to regulate. It was to insist that the banks could, not only would not only be able to receive, but to mandate they would receive and also be able to send if they maintained accounts where you have. You know this inflow of funds in and out. There are exceptions if you don’t have payment accounts where you have. You know the inflow and outflow through clearing systems, such as restricted savings accounts they do not have to offer instant I mean, if you have a mixed bag, of course you do. But if you only have restricted accounts you’re in it, you may be in a different category. So why did they do it in the first place? Of course, to to make sure that it was adopted, and in order to make that adoption like more palatable for the, I would say, for the consumers and the corporates to actually take it up. They were, you know, the price was kept to it has to be pari with the with the regular credit transfer. And yet, the cost for the banks is, is huge.

Craig Jeffery  18:39

It helps take away some of the the negative aspects of first mover first mover disadvantage, right? If you do that, you’re spending a lot of money. And if the adoption doesn’t take off, it’s a problem. And so in some of these industries, that make sense? Well, that’s a that’s a good philosophical discussion as well. I think it’s um, like, your answer on that. Another, another thing I wanted to talk about, Kate was there just here, use cases. What are some of the most important use cases you see for instant payments? And I’ll give a little bit more background. When I think about instant payments, there’s certainly cases where I have to pay a claim. If I’m a business, I want to transfer something to another person. When I’m at a you know, we go out to eat, someone pays the bill. You transfer money over. There’s, there’s, there’s business use cases that where speed is very important. Speed is one key driver. It’s not the only driver, security, richness of data. Those things really matter on the business side. Speed matters more on the consumer side, I would, I would suggest, what are some of the use cases that you see that you find most important here?

Kate Pohl  19:46

Okay, fair enough. We have to. The first thing we have to do is we have to say whether we’re talking consumer or wholesale, so retail or wholesale, or consumer or corporate, because it’s a huge difference. And if we talk about both. If we say consumer, I think their speed is absolutely key. You know, is some of the examples you just gave, you know, paying the bill, splitting the bill, you know, if you were sending money to someone, speed is key when I’m trying to balance an account out, because I need to put money in it to buy something. I really wanted to be there right away. I don’t want to have to worry if it’s a day or a day and a half or when the money is going to come. I think when you look at the wholesale market, it’s very much. On one hand, it’s it, well, it’s also B to C, it’s risk. Risk is the key driver. So in other words, when I say risk, I mean if you are paying for something the company may not want to give it to you unless they’re sure it’s good money. You know, we’ve had credit cards up until now. That took care of that. You know, our four corner model and all of that. But all of a sudden, we have the chance of doing account to account instantly. And therefore, if you’re standing at a supermarket counter, or you’re, you know you’re buying gas, or even if you’re, you want to take the car home immediately, if you can pay instantly, then the merchant knows that you’ve got a good payment if they have the money in their account instantly. So in 10 seconds, that’s, that’s pretty cool. So then the other thing is, like, for example, the insurance industry has been, I think, very big on this. So you’ve, you know, you have the paying of claims, you know, think of disaster. Think of specific issues where it’s really important to get a fast a fast return, a fast pay, where, you know, it’s been used, where it started, perhaps too is with, you know, Port charges or fuel charges for the airplane, when they need to buy fuel, and it has to go quickly, and it has to be paid for before they let the the plane leave. But as I said, you know, when you come to Treasury, you’ve got a great percentage of payments that are that are well known in advance that that don’t need the, you know, the instantness however we’re moving, and that’s that’s really up your alley. We’re moving, you know, to the whole idea of, how do I have a better treasury management? How do I have a better liquidity management? How do I, you know, run a an almost real time treasury and get best use of my money? Well, of course, if you can move things around instantly, you can rebalance so much better. However, just because you can do it or your bank can do it, what about everybody else that’s playing this game? Sending it doesn’t mean it’s received. If you’re sending it halfway across the world. Is that still instant? Oops, I think banks are working very hard on use cases. Of course, there are others, but I see really, really big is B to C. So the retail risk side, any, anytime you have a risk, instant is a is a really good way to handle it. Consumers want convenience and quickness. That’s sort of where things are going for now, I would say.

Craig Jeffery  23:01

Like you said, speed on the consumer side is a is a bigger play for more, more use cases. On the corporate side, there’s, there’s certainly quite a few use cases where speed is one dimension is really important. Other dimensions, security, efficiency, for posting, communicating flows like you don’t necessarily want to move and say, we’re going to pay you now, as opposed to paying you in 45 days or whatever the terms are. But if you communicate, here’s a payment, it’s got more information now the other party knows exactly what’s coming and when it’s coming. That makes the process efficient. Even though the payment may not move instantly. Payments are not moving slower. They’re moving faster. Not every use case is instant, but there’s more cases where better payments, of which, certainty, security, speed. Those are all elements that matter in different use cases.

Kate Pohl  23:55

One of them is sort of what you’re describing is the primary use case for salary payments. You know, what we’ve discussed, for example, is salary payments are planable. You know, we all know this is the salary run for the end of the month. However, you’ve got to fund those salary payments. It might be very interesting to be able to fund them just in time. In other words, if I know I’m going to pay on, I don’t know the 29th but I know I’m going to pay at three o’clock on the 29th that could be very powerful, because then I would fund, you know, at 10 to three. I’m being a little facetious, but you, I think you under you understand where that’s going. So, but people, people talk about that. That is a use case, and it’s one where, if they if they have their batch, and batch is part of instant, by the way, that is a really tricky part. We didn’t talk about that specifically, but maybe two points. So you know, you usually have salary and batch, of course. And the problem with that is. Is it each payment as it’s received. Even if you’ve got 10,000 payments, it’s not 10,000 in 10 seconds. It’s each one as it hits, being being actually transacted. The 10 seconds begins. But what happens if you have a batch with one red payment or two or three? What does that mean? How do you handle it? That’s something they’re still working on, but I still see the the salary payments, especially for savvy treasurers who are trying to optimize their cash and liquidity, that could be a definite use case.

Craig Jeffery  25:32

Thank you so much, Kate. Really appreciate your time on the Treasurer Update Podcast. Thank you.

Kate Pohl  25:37

Thank you so much, Craig.

Announcer  25:38

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