The European Council on 27 February 2024 that aims to ensure credit transfers can take place within 10 seconds. It includes requirements that aim to promote the adoption of instant credit transfers, reduce fraud through verification of the payee services and allow non-banking payment service providers to directly access payments systems, Allen & Overy senior associate Andrei Costica explained during an event on payments regulation organised by Luxhub and the law firm on 18 April.
Requirements for payment service providers
Thanks to the instant payments regulation, payment service providers (PSPs) who offer the sending and receiving of credit transfers “will have in the future the obligation to also offer instant credit transfers,” said Costica, and accounts that can receive standard credit transfers “will have to be reachable 24/7.”
“Essentially, instant credit transfers will be in effect 24/7, throughout the year.”
So how exactly do these work?
Once a payer initiates a credit transfer, “the PSP of the payer will have to immediately verify--after receipt of information--whether it has all the data and all the conditions are met for the processing of the transaction,” explained Costica.
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And once it does the verification and it can confirm the conditions, including availability of funds, for example, “it will send the payment transaction to the PSP of the payee. The PSP of the payee has 10 seconds, during which they have to credit--or not, in case the payment transaction does not go through--the account of its customer.” The payee’s PSP then needs to send confirmation of execution back to the payer’s PSP. In case of failure of execution, then it would need send a notification and the funds would be re-credited to the payer’s account.
No real-time sanctions screening
In the first draft of the regulation, there was the idea of having sanctions screening on a real-time basis. But “this would have been impossible, given the very short deadlines for the transfer, to be effective,” said Costica.
There are significant administrative fines that may be imposed on PSPs for failure to comply with these essential screening requirements
Instead, a compromise was reached: client databases would need to be screened daily (at least) against lists of entities subject to restrictive measures. “What’s important to note here is that there are significant administrative fines that may be imposed on PSPs for failure to comply with these essential screening requirements,” he added.
Verification of payee
That--in a nutshell--is how instant payments work behind the scenes. How will it actually work for the end users?
A key element of the instant payments regulation is the verification of the payee, said Luxhub CEO . Starting in October 2025, when a user initiates a bank transfer--whether that’s through their web banking, mobile app or at an ATM or physical branch counter--they’ll receive a confirmation that they’re sending money to the right beneficiary. In order to do so, the bank will have to check if there’s a “match,” a “close match” or “no match” between the international bank account number (Iban) and name entered by the user and that of the beneficiary. This verification check will need to take place before the credit transfer is authorised.
The payment services user always remains in full control of the execution of the payment
This, he noted, is not something that happens at the moment and is something of a false perception. “In some cases, there are some checks that are performed, but most of the time, the name and the Iban that you provide when you initiate a credit transfer are not checked. But in October 2025, this will become a reality and can be actually enforced by the regulation.”
That being said, “the payment services user always remains in full control of the execution of the payment,” said Meurisse. “If the bank says, for instance, that there is no match between the beneficiary name and the Iban account, the user can always override the decision. It’s just a hint.”
Requirements, opt-outs and liabilities
PSPs will be required to “reply” to verification requests to check names and Ibans on a 24/7 basis, said Meurisse, “and from a user experience point of view, this kind of service cannot take several seconds to respond. Otherwise, you will provide friction in the payment flows for your end users.”
In addition, “there was also a lot of discussion about the possibility to opt out from this service, which has been finally clarified in the regulation. Opt-out will not be possible for personal users; it will be possible for non-personal users,” he said. This refers to users that are not consumers and that “submit multiple payment orders as a package,” .
There’s also the question of liability in case the service doesn’t work. “The primary liability will always happen on the payer’s bank,” Meurisse noted, though “there is a possibility to shift the liability to the payee bank in the case, for instance, the payee bank is not providing the service yet or the payee bank has some issues with the service.” End users could also be liable in the event that they “override the decision that was provided by the bank” regarding a match (or lack of a match).
Connectivity and standardisation challenges
Two major challenges are connectivity and standardisation challenges, argued Meurisse.
“At Luxhub, we have the conviction that the most efficient way to tackle the connectivity issue is to rely on local infrastructure, because it will simplify the connectivity and lower the cost of implementation,” he said. “If you will have to connect to different hubs in Europe, you will end up potentially with some network fees in order to connect with different hubs; if you can do that at a country level, you’d have more power when negotiating fees with other countries.
It’s up to the market to define the standards, and “the good thing is that the market is also getting optimised for these two challenges.” Initiatives have emerged at the European level, such as one from the European Payments Council, which aims to “define the verification of payee scheme. The goal is really to enable the interoperability of the different players in the market,” and in fact, a public consultation on the topic is open until 19 May, he noted.
Timeline
The instant payments regulation itself entered into force in April 2024, and there’s a “staggered implementation,” said Costica. PSPs that receive instant credit transfers in euros will be subject to the regulation in January 2025, while PSPs that send instant transfers will fall under the requirements in October 2025. At that point, verification of the payee--for all PSPs, instant and non-instant credit transfers--will be obligatory.
And although autumn 2025 may seem far away, “you need to start now,” said Meurisse. “You cannot wait until October 2025.”
This is a new regulation that is going to “trigger some costs,” Costica warned, “especially for PSPs that do not now offer instant credit transfers. This is a point that has been raised by market participants and the [European] Commission is aware.” A review of the application of the regulation--looking at issues, effectiveness, efficiency and success, for instance--will take place in 2028.