INSTANT PAYMENTS

Michael Salmony 0:02

Welcome to the Payments Trilogue, where three seasoned professionals discuss payments and more, for Europe and beyond.

Michael Salmony 0:12

Welcome everybody to another episode of the Trilogue where I am joined by Ralf and Gijs, who are looking at new developments in Europe around payments and finance from their various perspectives. We already looked at some broader topics like regulation, but now we're starting to drill down into more specific topics. And the first one we want to look at is on instant payments.

Now, instant payments, of course, is something that is again conquering the world. The Japanese started, I think, about 30 years ago having an instant payment scheme, but now it is increasingly becoming the dominant method because nobody understands why sending an email should be quicker than sending a payment. And more and more countries are developing instant payments. And in Europe, there were various local initiatives like in the Netherlands or with some mobile apps.

And then the regulator decided maybe we need a pan -European instant scheme, which is now undergoing some pressure to make it actually really happen. Maybe you can just share with us, Gijs, a little bit what the trajectory has been from your point of view to get us to instant payments, because the Dutch have been leading in that area. Yeah, thank you, Michael.

project, it was a nation, a national project started in 2015, exactly for the same reasons, as you said, we could no longer explain to consumers and to politicians why a simple credit transfer would take needed to take more time than than a simple SMS message, text message or a an email. One and the second is why you could not do 24x7 x365 because it's not

only the execution time of the single transfer, but also it's in the 24 hours economy, it's no longer explainable that you cannot do payments over the weekend by explaining that European Central Bank's target system is closed over the weekend. Therefore, banks cannot settle money between them and therefore consumers cannot make payments or at least the monies will not move in the weekend. that's

Michael Salmony 2:35

That's what we were a little bit ahead of the pack in my country, I being unable to explain. Well, we could explain, but the arguments were no longer accepted in this day and age of internet and text and email. So we had a project and while we were underway into '15/'16, the discussion also started at the EU level, especially in the European Payments Council on the SEPA credit transfer inst.

rulebook. So that was a little bit in parallel. And we finished our project in early 2019. And ever since we said instant is for all intents and purposes, the new normal in my country. And I think that that's a mantra that has been taken over for the rest of Europe. Instant should be the new normal. But as we will probably discuss, some believed a little bit otherwise, and at least the market

was not fully convinced that it should be the new normal for different reasons. So maybe I should stop there. We'll drill into that in a moment. I can just hear Ralf, why instant is so important for you and your side of the industry? Actually, when it was back, I think

2016, I was representing the e -money institutions at the time at the Euro Retail Payments Board, the ERPB and where the ERPB brought this up as a, or put that high on top of the agenda, realizing that there is too much risk of fragmentation across Europe in different countries having their initiatives. so it was, the EPC was actually pushed, I think, quite hard.

to get something going very quickly. mean, that luckily or good that we already had a SEPA credit transfer rulebook there. And so it could be an extension of that. And I think it was done in record time. So I think the establishment of SCT Inst as a scheme, as a rulebook was, yeah, was one of the big success of the EPC. at the time, I must say, I didn't realize how important it would be. It would become.

Michael Salmony 4:56

from a fintechs perspective because at that time we just had PSD2 agreed and our interpretation of PSD2 would have continued to allow us the practice of well looking at account data in order to establish the certainty of a payment.

Little did we know at the time that a few years later, the EBA will come out with an opinion that, sorry, no, you can't do that anymore now. And so now you have to rely on a positive confirmation message by the ASPSP, the bank, that the payment has been executed, not just initiated, because then you would know whether it will be executed or not. You need to know about the execution, not just the initiation. but that wasn't clear.

because we thought we could continue our practices from before. But then, well, I must say I found it a bit funny at the time that we had basically a take -up of more than thousand banks within the first year, but it was because whatever 600 German Sparkassen and 400 or 500 German Volksbanken picked it up. So we had quickly

Within the first year or so, we had about half of the European banks that participated in SEPA credit transfer, which I think was a bit more than 3000 already participating, but then it stopped and no further growth. And that was then when PSD2 was implemented, we realized that, okay, well, now we are not able to establish our payment certainty anymore.

Now we need to find something else. And we touched already on our last episode there about the difference between making the payment instant or getting a payment confirmation instant where the letter is really what is especially from a retail payments perspective is really important. So, but not having the payment execution being certified, we now, well, we needed to have a, well,

Michael Salmony 7:11

The best proxy for that is to have the whole payment executed in real time. So to put it simply, just initiating a payment doesn't always make sure that it really goes through. And whereas with instant, you are quite sure that it's been initiated and it's really, really happened. And that's why that makes life a lot easier. I mean, maybe you can help me here. This is something I've never really understood. When the single currency was introduced, the euro,

the SCT was defined so that we could also move the single currency electronically around. But then it took a while to actually mandate that because it wasn't adopted fully. And then it took a while to develop SCT inst. And then it took another while to regulate that to make it compulsory. So we had four various stages. Why wasn't it right from the beginning, SCT inst mandatory?

Why did we have to go through those four stages? That's the way things go, Michael. There was no demand. There was no market demand in 2002 because that's what you were talking. Nobody was thinking about instant payments. There were no fintechs. There was no access to the account. And as time progresses, we have innovation, competition, new business models, new players, et cetera, et cetera. And to top it off, so it started.

I said with the banks no longer being able to explain why you couldn't make payments instantly 24 x7 x365 because people tend to forget that's the most important thing 24 x7 x365 within 10 seconds my country five seconds and then you have payment certainty so you would know in Ralf's case within five seconds you will know if the payment was executed and credited to the the the payees account.

instead of maybe later in the day or next day as PSD2 still said T plus one. But only I think and so that after the first push as Ralf said many large banks said this is what we need to do. It's a strategic opportunity. We all understand this will become inevitable and all the mainstream banks probably did it. So

Michael Salmony 9:31

And then the problem is that ~ and Ralf said that in some countries, if you just take the number of licensed credit institutions, you have very small Sparkassen in Germany, you have thousands of small banks, but together they only have a small portion of, let's say, the payment account. So we leave in the statistics produced by the European Payments Council, we also said, because in my country, it's the other way around, the four large banks have more than, let's say, 95 percent of the market.

but there's only four of them, whereas there are 50 banks. So we look bad in terms of numbers of banks, but in terms of the volume, we were doing a okay. But the metrics of the reporting were number of credit institutions, which has a distorted picture if you look, but what does that mean in terms of payment accounts covered? And when I think then finally when, but also probably inspired by the arguments of Ralf,

and his constituency that they wanted a payment guarantee, payment certainty in whatever shape or form, the European Commission also discovered the geopolitical value, the possible geopolitical value of instant payments. So if you combine open banking access to the payment account on the PSD2 with instant payments, hey, and with a QR code or whatever technology, you might create a nice alternative European

payment solution as an alternative to the more international card schemes based card payment solutions also in the e -commerce but also at the point of sale. So that really geared up the political interest and the push of the European Commission guys, instant has to become the new normal as it has to become, let's say the basic infrastructure to build this new

European alternative on and that's where we had to be topped off, cut off the long tail with a regulation. That's how things go. Okay. I mean, you've given a robust defense there, Gijs I would still maintain even when the euro came in, one could have seen that instant was inevitable and was going to happen and one could have done it straight away. But Ralf, maybe you can tell us a little bit more about what these new solutions might be. Why is your

Michael Salmony 11:53

FinTech industry, what sort of new solutions can one build on top of it? Why is this such, Gijs already mentioned QR codes and wallets and things. What can we expect there? Yeah, so for me, the main driver there a few years ago, in terms of pushing now for mandating it was because of the side effect on payment certainty. So that really was the

And I think that it will bring a good push towards non -bank financial services because that certainty you can't, need, you just need to have it. it is something that will make many fintech services much more robust. But there is also, of course, the additional or

new use cases, additional use cases, which will only be enabled by having money moving instantly and over the weekend and all of that so that you can use it then between making payments on the spot and having the certainty also point to point, person to person I mean. So if I buy whatever, something where my credit card wouldn't

suffice then I could just use me using an instant payment from a phone to another phone. Buying a used car is the main is the typical example there. yeah and similar cases or also moving yeah money more quickly instead of you know having for the thousands app that allows you to split the bill you just quickly move the money from

there and then without having a whatever split billing app required. I think it is one of those cases where we will only over time discover how much, how much we will have evolved, how much new news cases we will have, we will get. And it's, I guess, difficult to predict, but I'm pretty sure we'll look back at this in five years time and say, well, how could we ever live without it?

Michael Salmony 14:12

Ever without. No, I'm totally with you there. I always thought the main application area is actually B2B. You know, as a consumer, I'm not so super interested whether my payment arrives when I send five euros to Ralf, whether it arrives within 10 seconds or tomorrow. But in the B2B, there are loads of scenarios with liquidity management and paying for insurances and letting freighters leave harbors, where instant payment is super important.

Gijs, would you agree that the B2B angle has been a bit under -examined? Yes, a couple of things. I hate it when Ralf says non -bank solutions. They are all regulated solutions. It's not a bank or non -bank thing, Ralf. It's a regulated service. Only regulated institutions, e -money institutions, payment institutions and credit institutions are allowed to provide.

has nothing to do with bank or non -bank because your constituent has to be licensed as well because it's the activity, not the entity. So please do not do that again, bank or non -bank, because that creates a false juxtaposition. So that's that. I totally agree. the whole point, and I wasn't trying to be defensive, but the whole point is banks as any enterprise normally do things because they see a business case.

The whole point, of course, there was no business case other than a regulatory business case because nobody, for instance, in the Dutch context, we already had eight settlement cycles intraday. So people were receiving the money already intraday. So the added value of now versus this afternoon, are you willing to pay for that extra service? come on, go away. Consumers said we have all our liquidity managed. will only look into my

account, the merchant said by the end of the day, and then I will do my liquidity wizardry and whatnot. So yes, but as Ralf said, it has to grow. mean, there was a vested decade long way of working with liquidity and getting your money and because it's a whole chain. Not only I received the money later, but also my creditor get their money later. And this has played out over time. And there was nothing

Michael Salmony 16:35

terribly wrong there, but it was a great replacement for checks and all sorts of stuff. But again, the big thing that everybody said, this is what I need. This is going to solve a great problem for me and I'm willing to pay for it. So please, banks provide me with it was just not there. And that's why it takes so much time and effort. And yes, we could have done it and we should have done it. But there was no business case. There was no pressure. There was no grand vision, shared vision of

the market and the regulator and the supervisor, guys, this is what we need to do for the good of Europe. Let's do it the time to act is now when we introduce the bloody Euro. Let's make it instant. That's hindsight. Okay. When I said banks versus non banks, you know, it's what counts is whether you are the party executing it that gives you

knowledge, insight and visibility of certainty or if you're not the party executing, if you're the party only initiating and then you're sitting in the dark and hoping for the best, that is not the right solution. So if you're not the executing party then you will see the big relevance of having account servicing payment service provider. exactly.

That's not the same as a bank. Yeah. So including EMIs and et cetera. And by the way, I think it's maybe from an EMI perspective there, well, many are like a prepaid card thing or maybe other three -corner models which have this advantage of having a, and basically an internal system that can work in real time without problem because it's an internal system. But instant payments,

Here our SCT inst will allow four corner models to become instant as well. I think that's significant. That's a super important point, right? I mean, also it's like topping up a prepaid card on your phone or something. These things need to happen instantly because I want to make the phone call right away. So there are real scenarios. Yeah, absolutely. But we've now moved on. We've actually have a new regulation now, which has made some changes to what's

Michael Salmony 18:53

What are the highlights for you both on this new view regime?

Well, Ralf, you want to kick that off? Yeah, okay. Well, first and foremost, so we are glad that it has been then mandated. we're still I was, yeah, impatient as I am, so waiting for it. Then we have still some wait for for it to become to get life really being well mandated, as you know, there's 9 to 18 months implementation time and

And by the way, just on that, there is the receiving, implementing the receiving of it, bank eh ASPSPs are allowed to take nine months to implement it and for sending it's 18, which is unfortunate.

Because from our perspective, the receiving side is not the problem. We could always pick a partner who is receiving instantly. But the sending part is the important one. The sender, the payer, is able to use it. so at least also for retail payments, in most of our use cases, it's the sending which is important. So here we have some time to wait.

In the proposal when it came out, first reading of it, I thought, okay, well, that's great. then, but then I realized that while there are a few things missing actually, and we do need to lobby for the co -legislators for amendments, which we then did. one of them was about having a... And well, what I was already referring to because what was missing was...

Michael Salmony 20:46

that this instant payment is not just sort of mandated to be done, but also mandated to be informed so that the parties involved must be informed that it has succeeded or failed. And that wasn't there. So we need to have that both the payer and the payee and any involved intermediary like a PISP would be informed instantly.

And that also without charging for that notification because otherwise the whole thing would have been lost from our perspective. That was the main reason we wanted it in the first place. And so that was an important addition which is thankfully has been added in. Another, I think a big concern on first sight, it sounded good to have a limitation on you know, on the fees.

that they should not be more than non -instant payments. it was, I guess, the same as whatever when it was 15 years ago, when the same happened with credit transfers, that they were not allowed to be cost more than domestic, as a previous other credit transfers. So that non -premium principle sounds good at first sight. But when we realized that, well, banks are

reading it in a way that, OK, well, then we may have to start charging for non -instant payments so that we don't have to bring the instant payments fee down the ~ That's where we got really very worried and tried to get, well, a more robust wording into that that would prevent that. well, other points, I think we have.

the, the, the, yeah, well, the, the, IBAN check and, or confirmation of payee or whatever you want to name it. making that a, mandating that we felt is maybe also not the right thing. We, because I think it's too technology prescriptive. So it, it you want to mandate a good outcome. So fraud shouldn't be higher than for non -instant, for example, but

Michael Salmony 23:02

singling out one fraud mitigation measure like IBAN name check is I think is counterproductive. It should be more open. it should allow more room for those involved here to find the best way of doing it.

And also, I mean, from a PISP's perspective, we are usually the ones putting the data into the payload anyway. So we know that who is the recipient, who is the merchant. We know that it's right. So if we are then obliged to do some check there, which is redundant, it's unnecessary. And yeah, and finally, I think the...

settlement finality directive thing, which has been on our agenda for a long time, making sure that we as non -credit institutions can have access to payment systems, the ECB systems for example. I think that has been long overdue, has been discussed for several years already, and here was an opportunity to finally put it into law. thankfully this has been with some compromises, but more or less achieved.

Wow, Ralf, that's a very long and impressive list of things that come in in this new legislation, which make a lot of sense why you should want that. Gijs how do you feel about the new regime? Yeah, well, you heard Ralf, and where Ralf gets his way, that's probably most of the time not so good for the account servicing institutions. It's a bit unfair, to be honest, because Ralf has a very limited scope.

of course, when he's lobbying, it's only the PISP open banking case initiating payments. Whereas from the ASPSP point, let's say the bank's perspective, you have to really have an infrastructural approach. You have to make the payments instant for all customers irrespective of the business case. And Ralf only has a very specific business case and therefore lobbies for very specific amendments which suit his business needs. But those are only a very limited case.

Michael Salmony 25:12

not trivial, that's not what I'm saying, but it's only it's a pretty limited perspective, whereas the banks, of course, have to take the full spectrum of their responsibilities and what's there. So from a from a fundamental that that said from a fundamental perspective, of course, as a matter of principle, we are against any form of price regulation and there's no discrimination clause between SCT and SCT inst. There should be no and wait, wait a minute.

we don't trust the banks and they will try to circumvent by starting to charge as you had a regular good old slow credit transfer. And then they can charge the premium services, which is not premium to that. That's, I think.

sort of very, I'm not sure sure I have to say that there's a very negative connotation. And I don't think that would have happened even without Ralf bothering to get those texts into the legislation. that's a matter of trust. And if there's no trust, you get this. The. Well, it is what it is. the whole point is, Ralf wants to build a business on instant payments, but the ones that need to enable him to do that need to invest.

need to change their systems to make it all happen. So that's pretty easy to say. if Ralf could really help by investing in banks in projects to help them change their systems to instant it's easy. Ralf wants free beer, but the ones that have to provide the beer can't produce it for free. And that's the basic inequality in the whole argument. So it's a bit unfair to get Ralf get away with this because he's the one that's going to make money with

He's going to charge his customers a lot for initiating instant payments, forcing the banks to invest and to make it happen in the first place, not being able to charge him anything and he will sell it at a hefty price to the merchant or anyone else. So what about sharing value here? That's way beyond the horizon.

Michael Salmony 27:15

Sorry, Ralf, I hope I'm not insulting you. No, it's good to have some controversy here. I'll come back on that in a minute. what it is. This was inevitable. It's also good from a geopolitical perspective, as I explained. It should be the new normal. I think all in all, it's pretty balanced. are still some probably unintended consequences, especially one is pretty worrying from the ASPSP's perspective on that is if there is not

a successful message of crediting the payee's account, then the ASPSP needs to refund the payer. But there could be all sorts of things going, being technical glitches in the execution and in the process, which could lead to banks having to, first, the money did arrive at the payee, but later than 10 seconds,

and they would have already had to refund the payer and then they would lose the money twice. That's a big risk that is absolutely unintended. There's also a little thingy about currency conversion and in the same timelines, which is not possible, also not in the weekends. And also the reference to the conversion rates that the European Central Bank publishes, which they don't want us to the commission to mandate as currency conversion rates, mandatory currency conversion.

if only because it's just for informational purpose and they do not publish them over the weekend. So there are no rates in the weekend. It's some funny stuff there that is, well, it is not trivial and that these are things that are in the text and we won't get them out. So what to do? So there's a little open, a few open things that from the ASPSP's perspective, it won't bother Ralf in his use case, but from the bank's perspective, it's pretty worrying. And then of course the timelines.

Nine months for receiving and of course, Ralf is not interested in receiving but in sending and initiating. Hey, but it took us three years in the Netherlands to complete a nationwide project. This is a European project, but not with a European wide coordination or program management. It's many banks out there on their own having to do this. So it's still a heck of a job. well, Ralf is impatient. I know, but timelines are...

Michael Salmony 29:38

We're doing an information session, the 16th of this month, for our constituency, especially our smaller members that are not instant yet. And if you didn't have the consciousness to put something in your budget for 2024, ooh, there's an instant payments regulation that will mandate us to be compliant before the end of 2024.

which probably means we have to do something into 24, a project, and projects tend not to be free, so it might be wise to put something in a 24 budget, and I'm not sure everybody did that. Okay, yeah, you make a very interesting point, which I think has a wider consequence. It's not only Ralf, right? I mean, there are lots of others.

who are riding for free on the rails provided by banks. And not only thinking of PayPal and Google and whatever, right? This is a general phenomenon. I mean, in India where they created UPI, Google has got the biggest wallet going there because they're using this infrastructure which was provided, right? So this is something I think to watch out for, right? We may want more innovation and competition, but do we want the GAFAs for example?

all riding for free on our European infrastructure. What do you think, Ralf? Yeah, but that's exactly where I think the collaboration comes in again, because of course I'm very often if you pay peanuts, you get monkeys. If you pay nothing, you get even less. So it's not the free lunch I'm after. It is, and we've discussed it previously, it's that collaboration approach between banks. So finding win -wins on how

we can actually then turn the whole thing into something that's really working because basing something on purely on regulation will not get us into a space where we can really compete with the best of the best in the world. This is why we've done SPAA why we're doing SPAA and here that is about then sharing the fruit as well.

Michael Salmony 31:51

Well, and I guess also in that lobbying space, we could have had maybe more collaboration actually rather than rivalry. And maybe, I mean, we're calling this the trilogue because there is another, there is the other trilogue between the commission, the parliament and the council. And, but maybe what we need is a, what is it called? A quintylogue or whatever, where you have a common discussion there because

when we speak to co -legislators, then of course we provide them our arguments and it all looks very fintechy-spinned of course, and then if the banks do the same, it's from their perspective. And so the poor guys on the receiving end, which are typically not whatever, lifetime payment specialists, they may not...

even know really what is the most important part? Where do these interests really conflict? Where are they could maybe be the same or where do one not care about the other? And we could have both. So I think that would be really helpful. I guess, but that's what we're trying to do here. So we're trying to have a separate trilogue that shows that collaboration is undervalued. I more than 1000 % agree.

And I even thought, Ralf, that at some point in time in future with new rounds of legislation, we might indeed want a sort of informal market trilogue in parallel with the political trilogue. And of course, with all respect for each and every one's responsibilities and interests, it doesn't help if one succeeds in scoring a lobbying point that proves

to provide unintended consequences on the other side, just trying to understand what the impact of stuff is. There's no such thing, of course, as an ideal world, but it's certainly worthwhile, I think, in having such conversations in future and collaborating more. Where do we agree and where do we disagree?

Michael Salmony 34:11

And let's see where the common ground is. And I think also the whole, you mentioned SPAA, the SEPA Payment Account Access Scheme, which builds on top of PSD2, which is a market driven approach to try to produce better results, which is, let's say the outcome. as a first of its kind, could set the tone for such future arrangements.

I'm pretty optimistic about that. it's learning by doing and but also gaining trust and but also knowing what each other's interests and where the the where the divergences are and respecting that and and may the best men win. But for 80 percent, I would say we have common ground and there's maybe 10 percent on this and 10 percent on the other side. But it's.

it's absolutely worthwhile to at least agree on what that common ground is. And that would probably also alleviate the burden a lot for the regulator. If the multi -stakeholder environment says, guys, this 80 % good enough for everybody. You don't have to concentrate on that, but there are differences on the outliers. Well, that was a very statesman -like summary, Gijs, I think. Excellent, yeah.

So thanks very much. I think we've had quite a controversial debate this time. It's been more than other times, which is probably healthy. Maybe we're setting the foundation here for a market trilogue, which maybe we do indeed need in this multi -sided market that we all operate in. And nobody wins if only one side wins. We only win if we all work together. I think that's very clear.

There are still many things again where we could talk about on instant My favorite would have been to talk about fraud because the limit is now 100,000 per transaction. And this confirmation of payee is obviously not going to work at all against these modern fraud mechanisms. So there's still more to talk about. We'll do that in another episode. Now I just want to thank Ralf and Gijs for this very lively, very interactive, slightly combative discussion. And hope you all enjoyed listening to this too.

Michael Salmony 36:32

and look forward to seeing you again.