FinTechTalk: Meeting the deadline for SEPA Instant Payments 

On 23 April 2024, FintechTalk host Charles Orton-Jones was joined by David Gyori, CEO, Banking Reports; and Nadish Lad, Head of Product, Volante.

SEPA instant payments
At the end of this year, banks in the European area will be required to process payments in 10 seconds, as well as to notify participants about the transaction within that timeframe. According to estimates, for 58% of the banks this timeline is not realistic. Although there seems to be a rush now, banks had seven years to comply voluntarily with these standards. This is a textbook case of the banking innovation paradox, i.e., the fact that banks have huge resources for innovation and they also have economies of scale,  but are, nevertheless, reluctant to innovate. 

What is going wrong with implementation?
The main reason for banks dragging their feet is legacy technology. It’s also often the problem for banks that can do instant payments that they are unable to scale it up. The root of the problem resides at core banking level, which is hard to operate and even harder to build an agile system on top of. Omnichannel customer journeys complicate things even further and instant payments throw fraud detection in high relief too. Instead of providing services on 60-70 different channels, banks should narrow them down to the 12-20, where they can genuinely excel. 

The details of sanctioning non-compliance are still unclear. The use of payments account in the terminology makes the language even more vague. What banks have to get right first is their data. Technology complexity has become so high that banks can no longer put off investing in both technology and talent and allow their cost-to-income ratio to drop as a result – which might be unpopular with their shareholders. However, shareholders must understand that if they want to unlock sustainable profitability for the 21st century, they must make some concessions now. Currently, there are so many regulations to comply with that for banks, building even a basic level of compliance means that they won’t have resources to generate any added value. 

Payments, however, are getting increasingly commoditized. Banks must invest a lot of money in technology and change to get compliant, which costs them money, while their margins are shrinking too. (compare this to what happened with telcos profit margin in calls.) What can be a game changer for banks is data. Banks must strive to get the clean and rich data that they can capture, analyse and commoditise, so they can make up for lost margins.  JP Morgan, for example, asks clients to opt in sharing their data with third parties, so they can monetise spending data by allowing payment advertisement appear in their banking app. 

The panellists’ advice

• Depending on the infrastructure of the bank, compliance can be achieved as soon as 3-5 months provided banks opt for an out-of-the box solution.
• To grapple with compliance, banks must become more selective in, for example, what channels they serve.
• There are two ways to create value from payment data – monetise it directly or build assets (e.g., lending) and liabilities (deposits, investments) on data that you capture and analyse to create net interest rate margin – the oldest and most traditional source of income for banks.