As Europe’s payment services industry continues its landmark transformation following the introduction of the Instant Payments Regulation in April this year, banks and payment service providers (PSPs) are facing mounting pressure to comply with various obligations under the new law.
The regulation represents a significant advancement in creating a more efficient and streamlined system for cross-border payments within the Single European Payment Area (SEPA), enabling euro credit transfers to be made in real-time and providing consumers and businesses with a more secure and cost-effective payment method.
Under the legislation, it will be mandatory for EU banks and financial institutions to provide instant euro payments within 10 seconds every day of the year while also capping the fees for instant payments so that they do not exceed those of traditional credit transfers.
However, the deadlines for banks and PSPs to comply with the legislation’s two phases are looming. The European Commission has mandated that January 9, 2025, is the deadline for the first phase, in which banks and PSPs must be able to receive instant payments.
The next deadline has been set for October 9, 2025. By then, banks and PSPs must allow customers to send instant payments using the same offer level in terms of channels, as well as comply with the legislation’s Verification of Payee (VoP) requirement.
These challenges cover several areas:
- Urbanization and technological choices in a context of sharply rising volumes.
- Short implementation times, as all banks’ channels with its customers and internal procedures are affected.
- Customer communication, particularly as the VoP obligation, must comply with the General Data Protection Regulation (GDPR).
- Investments and operational cost increases.
Even if we can benefit from the experience of the United Kingdom, which established a system for instant payments when it launched Faster Payments in 2008, followed by other countries such as India, Sweden, Australia, and Mexico, this is the first time that credit transfer flows have been positioned towards instant payments in such a proactive way, with the obligation of Verification of Payee.
According to the European Payments Council (EPC), in the second quarter of 2024, instant payments accounted for 19% of SEPA credit transfers – and we expect this proportion to continue rising.
What does the VoP entail?
Essentially, the VoP obligation requires payers to be notified of any discrepancies between the payment IBAN and the intended payee’s name when making an instant transfer.
This means that the bank or PSP of the payer (the requesting PSP) will instantly send to the PSP of the payee (the responding PSP) a request to verify their IBAN and name as given by the payer (the requester), the EPC says on its website. In addition, it could also verify an unambiguous identification code, such as a value-added tax number, Legal Entity Identifier, and social security code about the payee. The reason for this request is that the payer intends to initiate a SEPA Credit Transfer (SCT) or a SEPA Instant Credit Transfer (SCT Inst) transaction to the payee, the EPC adds.
The payer can then decide whether to proceed with the payment based on the result—which can be “match,” “close match,” “no match,” or “other”.
According to the European Central Bank, the VoP aims to improve payment security and reduce fraud related to instant payments and SCTs.
While the VoP sounds relatively straightforward, putting it into practice is far more complex.
What challenges do banks face?
Banks are concerned about increased operational costs due to continuous processing and alignment of fees between instant and batch payments.
Mandated instant payments across channels could also pressure profits by restricting differentiation and increasing fraud risk. Technology investments for compliance, ongoing fraud monitoring, and potential revenue reductions will also pose profitability challenges and require the building of new APIs to access the VoP scheme for data validation.
Exact name matching – for example, names that use special characters such as ä, ö, ü, or the issue of languages used in multilingual countries such as Belgium – are also a concern for banks and PSPs.
Banks must also ensure their VoP implementations comply with the General Data Protection Regulation (GDPR), as there are concerns about privacy implications when sharing payee information, especially regarding “close matches,” in which full names might be disclosed.
The EPC’s Verification of Payee Scheme Rulebook recommends that banks follow other SEPA schemes, which are based on basic Latin character set, saying: “They could prescribe the use of UTF-8 (which is the character set of the ISO20022 standards) on all the ‘name’ fields, avoiding conversion of special characters.”
However, it adds: “Scheme participants may bilaterally or multilaterally agree to use other datasets, provided this does not hinder PSPs, which only process according to the EPC recommendations.”
This will undoubtedly be the case for the banking communities rallying around the Routing and/or Verification Mechanism (RVM).
The lack of a unified central system for VoP in Europe is also a challenge for banks, leaving them with several options to consider, including:
- EBA Clearing FPAD: The European Banking Authority (EBA) Clearing has said that its Fraud Pattern and Anomaly Detection (FPAD) solution could be a possible central system and will be rolled out in December 2024. However, this approach includes various implementation options, which complicates the decision-making process for banks.
- Eurosystem: The Eurosystem is considering offering a value-added VoP service for instant payments. While this could provide a centralized solution, it is still in the consideration phase of development.
- National solutions: Several countries have implemented VoP systems, such as SurePay in the Netherlands. Banks must decide whether to connect to these existing national systems or wait for a pan-European solution.
What are the benefits of VoP?
VoP contributes to improving the SEPA payment ecosystem. As more banks adopt the technology, it will create a more secure and efficient payment network across Europe.
The legislation could also create opportunities for banks, such as product innovations and improved service offerings that enhance customer service and competitiveness.
It would also expand their reach in Europe and unlock new revenue streams through the settlement services provision. At the same time, faster transactions and improved safety would promote customer satisfaction and market penetration.
The legislation is also a boost for small and medium enterprises (SMEs) in the EU, with many expecting it to save them money, improve cash flow, and increase competitiveness, a June 2024 survey by the Society for Worldwide Interbank Financial Telecommunication (Swift) found.
More than six in 10 SMEs across France, Germany, Italy, and Spain expect the EU’s instant payments regulation to significantly impact their business, while 83% say upfront confirmation of beneficiary details is important to them as the regulation introduces SEPA-wide VoP.
“Many countries use VoP at a domestic level, but interoperability between these schemes is critical to its success on an international scale,” Swift says.
Some interoperability exists already between France, the Netherlands, and Italy. At a later stage, the VoP service, which is regulatory at the outset, could be used to meet other control needs, such as when signing a direct debit mandate.
How can banks and PSPs prepare for IPR and VoP?
Banks and PSPs should prioritize a gap assessment between existing procedures and upcoming requirements. This involves evaluating end-to-end architecture for real-time capabilities and adjusting batch-based processes to real-time processes.
It is also essential to review current sanction screening systems and consider how to enhance fraud detection by leveraging existing fraud transaction monitoring. And, to ensure future compliance with SEPA Credit Transfer schemes, banks and PSPs should regularly evaluate resilience and potential system updates, as well as reassess service offerings and product portfolios.
Overall, banks are progressing in their instant transfer capabilities despite the VoP scheme challenges. However, the regulation is expected to bring about opportunities for product innovation, improved service offerings, enhanced security, and a boost in customer satisfaction, ultimately benefiting both financial institutions and consumers.
However, it is essential that communication with the public, professionals, businesses, and all stakeholders align with the stakes involved in the rise of instant payments and the VoP service.
How SBS can help
SBS offers a SaaS solution that enables banks to manage instant payments without disrupting their core systems. It meets all regulatory requirements, including sanctions screening, IBAN name checks, and anti-fraud measures. With a fully modular approach and cloud-native architecture, banks can choose services based on their needs, benefiting from scalability and competitive pricing, while security is a priority at every level of the application. With SBS’s knowledge and expertise, banks can navigate their digital transformations to comply with the EU’s Instant Payments Regulation.
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