Around the world, banks find themselves under a veritable assault from different payment apps and fintech service providers and the demands they place on their processing capabilities. Consumers have more choice than ever to choose from a wide variety of apps including Venmo, PayPal, Apple Pay, Google Pay, and dozens more to manage their payments and banks need to provide support for these services or bear witness to a steady decline in their customer base.
But not only are customer demands changing, so too are regulators. In Europe, the ECB is demanding that banks provide instant payments both for the benefit of efficient commerce, and to ensure that banks aren’t sitting on pools of customer’s cash for multiple days. In this blog, we outline the changing payments landscape and explain why banks need to be developing better strategies for ensuring seamless and instant payments for their customers.
What is Single Euro Payments Area (SEPA)?
SEPA stands for Single Euro Payments Area and is a payment-integration initiative that the European Union (EU) is undertaking to simplify bank transfers. SEPA’s goal is to improve the efficiency of intra-Eurozone cross-border payments and allow citizens to use one bank account to manage payments no matter their location. In addition, SEPA seeks to reduce bank fees as a result of simplifying the payment infrastructure and standardizing processes across the EU.
Despite most of Europe being on the Euro, prior to SEPA there were still considerable delays and hurdles when making and receiving electronic payments across country borders. This was due to different technical standards, different payment instruments, and disparate processing infrastructures. Because of these discrepancies, bank fees continued to be higher on cross border transactions than on domestic ones. The initial wave of SEPA based payment services for credit transfers and direct debits resulted in:
- Faster payment completions across the Eurozone
- The availability of cross border direct debits
- The necessity for only one bank account for consumers straddling multiple Euro countries
- Simplified bill pay
- Common standards, improving cash flow, and a reduction in costs for businesses
- Simplification of government systems for invoicing, signatures, taxation, customs, and social security
However, it’s now time for the next revolution in SEPA payments, which is the move to pan-European instant payments.
What is Target Instant Payment Settlement (TIPS)?
TIPS stands for Target Instant Payment Settlement and is a new instant payments infrastructure service launched by the Eurosystem in 2018. It enables payment service providers to offer fund transfers to their customers in real-time no matter the time of day or day of the year or EU country of origin. TIPS was developed on the SEPA Instant Credit Transfer standard because EU regulators observed a number of distinct national systems being developed in silos and wanted to reduce fragmentation across the European retail payments market. Along with RT1 from the Euro Banking Association, these two SEPA Instant payments networks are set to revolutionize the speed of transaction completions across Europe enabling the further digitization of the payments market.
Why Consumers Are Demanding Instant Payments
The EU is several years ahead of the U.S. when it comes to developing a coordinated instant payments infrastructure. In 2019, the Fed announced its plans for a new service called FedNow which will compete with The Clearing House’s RTP service. The Clearing House, owned by a group of member banks including the largest institutions in the market, runs a number of payment rails in the US market. The RTP (Real-Time Payments) service was launched in 2017 and has seen a steady if not spectacular rise in participants in its first 3 years of existence. FedNow, the Fed’s new real-time payments system, is expected to gain strong traction in the market, especially among smaller banks. However, that system is only expected to launch in 2023 or 2024 at the earliest. Meanwhile, US consumers must often deal with complicated, multi-day delays on many transaction types precisely because of the lack of a coordinated infrastructure and the relatively smaller take-up by banks of support for instant payments services available in the market.
How Temenos Enables Instant Payments
Temenos Payments supports banks across all sectors with a cloud-native, cloud-agnostic platform. This allows our customers to take advantage of agile scalability and security while reducing operational costs. The solution has in-built facilities to help manage and monitor instant payment flows, ensuring high levels of automation on a platform built to support processing 24x7x365.
If you are struggling to build an instant payments system for your customers, contact us today to learn how we can help.