Instant Payment – A new way of processing payments ??

The first obligation introduced by the Instant Payment regulation (Regulation EU 2024/886), as stated in Article 5a paragraph 1, calls on banks to offer an Instant Payment service to their customers. For the majority of small and medium banks in Europe, this is a huge challenge!

Why is Instant Payment processing so different from other types of payments known for decades by banks?

Whether we are talking about High-Value Payments (eg: Target RTGS) or Low-Value Payments (eg: STEP2 SCT), whether banks pay through a Payment System (aka CSM - Clearing and Settlement Mechanisms) or within Correspondent Banking, the workflow and processing of such payments within a bank are quite similar:

• Validations are performed on payment information: confirmation of fund’s availability on the debited account, execution of anti-fraud controls, verification compliance to applicable AML rules, etc.
• The payment instruction is settled in the books of the bank.
• The payment instruction is then sent to the next agent - bank or Payment System - in the end-to-end payment chain, where these steps are repeated.

In a nutshell, the payment instruction flows from agent to agent until reaching the Beneficiary’s bank.

This mechanism has demonstrated limitations and inefficiencies, among others:

• No real time constraints for the funds to reach the creditor account at the beneficiary’s bank. The duration of an end-to-end transaction is mainly driven by the number of agents involved in the payment chain and by the processing time taken by each of those agents.
• Controls related to the beneficiary and beneficiary’s account –? does the account exist? Is it not closed or blocked? - are only performed at the time the payment reaches the last agent, i.e. the beneficiary’s bank. If such controls are unsuccessful, the funds are returned back through all the previous agents, each one performing a reversal of the initial settlement.
• No processing during non-working days or outside office hours

Innovation was needed! ?

Instant Payments (or RTP – Real-Time Payments) have been introduced, with a quite different workflow and processing:

• Validations performed on payment information do not leave any room for manual investigation by a bank employee given the 10 seconds time span. An Instant Payment is either accepted or rejected!
• No settlement is initially performed in the books of the bank! A simple funds reservation on the debited account is requested for the agents located on the Debtor leg of the Payment System. The funds reservation guarantees the end-to-end payment certainty if the instruction settles. In case of rejection, funds are immediately made available again!
• The payment instruction is sent from agent to agent or Payment System (eg: TIPS, RT1,..) until reaching the Beneficiary’s bank.
• The Beneficiary’s bank performs controls on the beneficiary and beneficiary’s account and informs the sender of the payment acceptance or rejection. This status report is sent back from agent to agent until reaching the Payment System.
• As long as the Payment System receives an acceptance status report within the time frame, it settles the transaction between the two banks (Debtor side and Beneficiary side) participating directly in the Payment System. The acceptance status report is sent by the Payment System to the debtor leg and propagated until reaching the Debtor’s bank. Similarly, the acceptance is sent to the creditor leg and propagated until reaching the Beneficiary’s bank.
• Each bank settles the payment instruction in its own books, following the acceptance status report issued by the Payment System!

In summary, the payment instruction settles first in the Payment System and the settlement is then propagated from agent to agent until reaching the Debtor’s bank and the Beneficiary’s bank, in less than 10 seconds! This is a fundamental change in the way of processing a payment.

You still feel uncomfortable with this new way of processing an Instant Payment?

At escent, we have experts on the topic that could help you in your analysis phase and implementation process.

We are here to connect with you. Reach out to us at: [email protected] ??

Our next article will focus on describing the entire scope of the Instant Payment regulation. Stay with us!

Credits to: Jean-Fran?ois Puffet

Website: www.escent.eu

Instagram: 'escent - Business and Functional Analysis Experts ?? (@escent.consulting) ? Instagram photos and videos

#businessanalysis #payment #europeanbankingsystems #belgium #luxembourg