Regulation drives instant payments:

The use of instant payments is growing rapidly - in Europe and worldwide. In the US, the RTP (Real-Time Payment) network recorded an impressive 76 million transactions worth USD 42 billion in the first quarter of 2024. This alone would not be explosive, but the network has shown continuous growth with an average quarterly growth rate of 15% since 2019.¹

With a revised EU regulation on instant payments² there is now even more movement on the topic in the SEPA area. In Europe, the share of SEPA Instant Credit Transfers (SCT Inst) in all SEPA credit transfers reached 17.8% in the first quarter of 2024, which shows the increasing acceptance and use of this payment method³. Significant growth is also recognisable here..

The new EU regulation will accelerate the introduction of this technology. This development brings with it both immense opportunities and challenges, particularly in the areas of compliance and security. In this article, we look at the most important aspects of instant payments and their impact on corporate treasury. You can also find details on the EU regulation and its implementation from the perspective of banks in the KPMG Klardenker article: "Instant Payments: How banks are implementing the new obligations correctly" from 12 February 20244.⁴

The most important new features of the EU regulation are summarised below:

1. Obligation to provide instant payments:
   Payment service providers must offer their customers real-time transfers 365 days a year, around the clock. The regulation comes into force on the twentieth day after its publication. Within nine months of entry into force, payment service providers must be able to receive instant payments (by 09.01.2025), send instant payments (by 09.10.2025), receive EUR IPs outside the euro area (09.01.2027) and send EUR IPs outside the euro area (09.07.2027).
2. Costs and availability:Instant Payments
   must not be more expensive than conventional SEPA and SWIFT transactions. In the medium term, payment institutions should also be able to receive and send instant payments in euros outside the eurozone.
3. Security and compliance requirements:
   Payment service providers must ensure that their systems meet the highest security standards. A daily check is required to determine whether customers are on sanctions lists. If there are any matches, the assets of the customers concerned must be frozen immediately.
4. Amount limits:
   The amount limits set are essential for the strategic direction of SEPA Instant Payments. Initially, SEPA Instant Payments were only offered up to an amount limit of EUR 10,000, specifically focussing on end customer payments (retail). Currently, real-time transfers of up to EUR 100,000 are already possible. In the future, the limit could be lifted completely, which ultimately makes SEPA Instant Payments so interesting for corporate customers and treasury departments. Please note that this information is up to date until June 2024. It is always advisable to check the latest developments as regulations may change.
5. Further rules:
   In order to increase the acceptance of SEPA Instant Payments and put them on an equal footing with conventional SEPA payments, the legislator has laid down additional rules:

• Banks must check the SEPA Instant Payment data for plausibility (in particular, the IBAN must be checked against the recipient's name, the "IBAN name check").
• Settlement of bulk payments (bulk files) must be possible.
• Cross-border payments within the EU must be made possible.
• Settlement must take place within 10 seconds.

This regulation ensures that instant payments are offered throughout Europe at low cost, which promotes the integration and utilisation of this technology.

We are regularly confronted with the question of whether SEPA Instant Payments are relevant for treasury departments at all. In fact, we assume that instant payments will fundamentally change corporate treasury in the medium term. The following use cases illustrate the implications:

1. End customer payments
   With the introduction of SEPA Instant Payments and the obligation for short-term settlement within 10 seconds, the EU initially created a new payment method. This can be used in over-the-counter and online retail - for example for quick refunds to customers or even as an alternative to established end customer payment methods such as Giropay or card payments. The approach is not new, as other existing initiatives are also pushing for the creation of a competitive offering for card payments - for example with WERO (as the successor to GiroPay and managed by the European Payments Initiative, EPI) or with digital central bank money (managed by the European Union). In terms of customer expectations, companies in the B2B sector should assess the relevance of SEPA Instant Payments as a new payment method for their own customer group.
2. Optimisation of short-term cash management
   A particularly relevant use case for instant payments in corporate treasury is the optimisation of short-term liquidity management. The immediate availability of funds and precise real-time monitoring of payment flows enable companies to significantly simplify and improve their short-term liquidity management. The time-consuming and often inaccurate procedures of traditional cash forecasting could become largely superfluous where real-time information on account balances and real-time payments is possible. With Instant Payments, treasurers have the opportunity to adjust their planning precisely during the day, as they have a clear overview of the current financial status at all times and can set up payments without lead time in future. This not only reduces the administrative burden, but also minimises the risk of liquidity bottlenecks and optimises the use of available funds. In other wordsif I can see my account balances in real time and make transfers in real time, my planning will not only be more precise, but also independent of short-term forecasting. Gone are the days when interest losses are caused by inaccurate overdrafts and forecasts.
3. Expansion of the disposition
   A possible expansion of SEPA Instant Payments to include "treasury payments" will increase the pressure for automation in treasury. The ability to send and receive payments with high amounts (> EUR 100,000) around the clock will create the need to extend scheduling outside normal business hours. In other words, SEPA Instant Payments in unlimited amounts will render the usual "bank opening hours" and the limitations imposed by the cut-off times of the settlement systems obsolete, which will raise the question of sensible business hours for a treasury department. Since it is unrealistic to staff the treasury department around the clock, the only long-term option is to further automate the processes for trading and cash management (for example by storing rules or using robotic process automation).
4. Increased transparency and security in international transactions
   Companies that operate globally are often faced with the challenge of processing cross-border payments securely and transparently. Instant payments can offer a solution here by increasing the traceability and security of transactions. For example, a multinational company that regularly imports goods from different countries could benefit from the instant confirmation and clear traceability of each transaction.
   An example would be a company that imports goods from Asia and sells them in Europe. With instant payments, payments can be tracked in real time, minimising the risk of fraud and errors. This not only increases security, but also the efficiency of financial processes and provides a better basis for financial planning and Risk management.

These are just a few examples of applications that illustrate how instant payments can not only improve efficiency and security in various business processes, but also change relationships with partners and suppliers. The integration of this technology can therefore create considerable added value for Corporate Treasury.

The implementation of instant payments requires careful planning and coordination. Specifically, treasurers must work closely with IT departments and external providers to ensure that the technical requirements are met. This includes several specific areas:

Technical integration: Instant payments must be seamlessly integrated into existing ERP and financial systems. This often requires adjustments to the existing software (e.g. payment runs) or the adaptation of interfaces (e.g. creation of new payment formats to the banks), and the IT department plays a central role in ensuring the technical requirements and compatibility with various banks and payment service providers.

Scalability and performance: Instant payments require an infrastructure that can cope with high transaction volumes and the speed of payments. IT departments must ensure that the systems are scalable and remain stable and performant even under high utilisation. This may require the implementation of cloud solutions or other scalable technologies.

Security and compliance requirements: IT experts must ensure that all transactions are encrypted and protected against cyber attacks. This includes implementing multi-factor authentication, conducting regular penetration tests and continuously monitoring systems for security vulnerabilities. While these security measures are also important in traditional payment systems, the speed and volume of instant payments requires an even more robust security infrastructure. For example, treasurers must ensure that their payment processes continue to meet transaction monitoring requirements. Monitoring systems must recognise and report suspicious activity immediately. Payment monitoring systems must therefore be able to keep pace with the speed of real-time payments to ensure compliance and transaction security.

Cooperation with external providers: External providers of payment solutions can provide specific technologies and expertise that are necessary for the implementation of instant payments. This may include technologies for fraud prevention technologies or compliance tools. Working closely with these providers helps to ensure that all components work together smoothly and fulfil the requirements of the new EU regulation.

Utilisation of technology: Comprehensive staff training is essential to ensure a smooth transition. IT departments need to ensure that treasury teams and other relevant departments are familiar with the new systems and processes and know how to utilise them effectively. Companies need to develop strategies to effectively use and analyse the additional data generated by real-time payments.

Strategic orientation: In any case, existing providers should also be critically scrutinised for their innovative strength. Does the in-house payment service provider deal with SEPA Instant Payments and WERO and (when) will it be in a position to offer the new payment methods? Is my TMS provider in a position to keep up with new innovations on the part of the banks, to automate processes and at what quality and speed?

So there is indeed a lot to do.

The introduction of instant payments offers numerous advantages. Companies can improve their liquidity as payments are processed almost in real time. It doesn't take a clairvoyant to predict that instant payments will be the new norm in the not too distant future. This reduces the need for large liquidity buffers and enables more efficient utilisation of capital as well as faster receipt of foreign currency. In addition, real-time payments help to reduce the risk of non-payment, as instant confirmation of payment receipt improves financial planning and Risk management. However, real-time payments also place some new demands on daily financial planning and require companies to offer their customers new payment methods.

Of course, there are also challenges associated with the introduction of instant payments. The need to adapt existing IT infrastructures to cope with the high transaction volumes and speed of payments requires significant investment. Companies must ensure that their systems are robust and secure in order to manage risks appropriately.

Source: KPMG Corporate Treasury News, Issue 145, July 2024
Authors:
Börries Többens, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Alexander Horn, Senior Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG

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¹ Vgl. www.theclearinghouse.org/payment-systems/Articles/2024/04/RTP_Network_Breaks_Instant_Payments_Records_04-04-2024
² Vgl. Regulation (EU) 2024/886; https://eur-lex.europa.eu/eli/reg/2024/886/oj
³ Vgl. What are instant payments? (europa.eu)
⁴ Vgl. Instant Payments: So setzen Banken die neuen Pflichten richtig um (kpmg.de)