Instant payments refer to transactions made from one account to another, available 24/7 and completed within seconds. From 2024 onwards, the European Commission aims to make such transactions mandatory for all payment service providers in the EU offering transfers in Euros. To achieve this, the Commission has established deadlines and conditions, the scope of which also includes sanctions lists screening.
Banks have to Act: The EU is Redefining How Instant Payments are Handled
- The difference between instant payments and standard credit transfers
- Instant payments: En route to the “New normal”
- The implications for sanctions screening
- How banks are preparing for the instant payment obligation
- Instant payments in Switzerland: how and when?
- The top six questions about instant payment and sanctions screening
The Difference Between Instant Payments and Standard Credit Transfers
Instant payments, also known as SEPA instant credit transfers (SCT Inst), are Euro transfers within the 34 countries of the Single Euro Payments Area. These transactions enable the transfer of funds within seconds – anytime, around the clock and 365 days a year. While instant payments are processed within ten seconds, standard transfers can take one or more days to complete. Currently, the transfer amount for instant payments is capped at 100,000 Euros.
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Instant Payments En Route to the “New Normal”
To meet the needs of bank customers who have to make funds immediately available to recipients, many banks offer instant payments, but only some of them extend the scope to include incoming payments too. But although instant payment transactions typically incur higher fees than standard transfers, things look set to change. On October 26, 2022, the European Commission unveiled a draft regulation to modify the Single Euro Payments Area (SEPA).
The Implications for Instant Payment Sanctions Screening
One contentious point that came up in the debate is the proposal to compel payment service providers to check their customers against the EU sanctions lists at least once daily. This would preclude the need to individually scrutinise all transactions. Although sanctions lists screening for instant payments would be simpler, it would mean not all risk factors are covered.
For financial institutions operating in multiple countries or regions, a risk-based approach makes most sense. They would then decide which payments to examine depending on the regulatory context and their risk appetite. Relevant factors here include the type of payment (domestic vs. international), unusual patterns (e.g. pass-through transactions), transaction value and the payment’s origin/destination (e.g. country/region, recipient type).
Screening via sanctions lists has to be conducted before the payment is executed. But since sanctions lists screening comprises just one part of the payment process, only a limited timeframe – between 500 milliseconds and one second – is available. A window this tight requires efficient IT infrastructure and bringing all available technical solutions into play, such as interface adjustments, storage of hits and clarifications, cache optimisation and workflow and GUI adaptations.
How are Banks Preparing for the Instant Payment Obligation?
Instant payments generally align well with banks’ digitisation strategies. That said, the risks are higher and IT systems must facilitate decision-making within fractions of a second, for which thorough preparation is a must.
Banks having rolled out instant payment projects to a greater extent report needing a lead time of around half a year for analyses, bringing various areas on board and clarifying IT infrastructure.
Questions like these are quite likely to come up along the way:
- How should the payment and compliance systems change to ensure 24/7 year-round availability?
- How can false positives be reduced?
- What are the best interfaces for addressing peripheral systems?
- How will requirements engineering be handled,
in-house or with a service provider?
- What is the core business? Are there opportunities to complement the business model?
- What do customers expect?
- What is the risk of customer satisfaction deteriorating?
- Beyond instant payments, can any other services be improved?
The Goal: Opening up Availability of Euro Instant Payments EU-wide
Execution of a real-time transfer requires payment service providers (PSPs) adhering to the same rules, practices, and standards (“Scheme”) to be present on both sides of the transaction. In 2017, the European Payment Council introduced the Single Credit Transfer (SCTInst) Scheme for Euro instant payments within SEPA. Broad participation by PSPs in this scheme is an essential prerequisite for the wide availability of Euro instant payments throughout the EU.
Instant Payments in Switzerland: How and When?
Market participants in Switzerland will have to wait a bit longer. The Swiss Interbank Clearing (SIC) payment system, operated by SIX on behalf of the Swiss National Bank, connects bank accounts. Technically, SIC is capable of processing real-time payments. However, to make Instant Payments work across the entire payment chain, adjustments are needed in both the operation and organisation of interfaces between banks and SIX. With the launch of the fifth generation of SIC at the end of 2023, SIX will lay the foundation for instant payments, similar to the European SEPA Instant Credit Transfer standard. By August 2024, the largest Swiss banks must be able to process instant payments, and the rest should follow by 2026.
The Six Key Questions to Ask on Instant Payment and Sanctions Screening:
How is system availability defined?
A 24/7 round-the-clock service year-round, with zero downtime
What is the maximum tolerable response time?
A maximum of 10 seconds, which is extendable to 20 seconds in exceptional circumstances
What does this mean in the context of sanctions screening?
Ideally, the system must have completed the sanctions list check within 500 milliseconds with the maximum time allowed one second.
Which data does the sanctions screening check for instant payments?
The sanctions screening checks transaction data, such as IBAN, purpose of use, blocked banks or countries.
What is the difference between screening of standard bank transfers?
The instant payment screening function compares remittance data with sanctions and blacklists and as soon as a “hit” is found, the payment is rejected. Manual clarification, as with a standard bank transfer, is not possible. To keep customer satisfaction high, it becomes even more crucial to reduce false positives via screening of instant payments than with SEPA credit transfers.
What role must an IT system fill in instant payment screening?
Instant payment screening and the need to perform the checking mentioned within 500 milliseconds and no more than a second has a massive impact on the IT infrastructure and requires interface adjustments. The storage of hits and clarifications must also be adapted to the strict time regime and the cache, workflow and GUI all have to be further optimized.
Going forward, experts envision a world where real-time transfers cease to exist, giving way entirely to instant payments. This transformation, however, is still under discussion, and the necessary legal changes have yet to be implemented. Regardless, banks have already recognised the growing trend toward instant payments and have begun adapting out of self-interest, providing these services for both incoming and outgoing transactions, with the momentum behind this shift apparently unstoppable. Banks are also preparing for a more comprehensive sanctions screening process at the same time. This includes not only traditional sanctions list screenings but also assessments of other risk factors under a risk-based approach. Thorough preparations like this will help position banks to navigate the era of instant payments effectively once it arrives.
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