Quick-quick, slow: why banks are struggling with instant payments

Europe-wide rules on settling transactions within 10 seconds are due to come into force next year, but a significant number of institutions don’t seem to be ready for them

We live in an instant world. Send a WhatsApp message and it arrives immediately. Ping and email and bang - it's there. But what's about payments?

The UK’s Faster Payments Service offers impressive speed. A transfer of funds from Monzo to Revolut typ- icallytakeslessthanasecond.But other transactions can take several hours. It can even take days in some parts of the EU, where older banks are still wedded to batch payments, processed in bulk, usually at night.

This is all set to change with the imposition of the Single Euro Pay- ments Area (Sepa) rules on instant payments. From 9 January 2025, payment service providers must be able to receive “instant” payments That means no more than 10 seconds, with a further 10 seconds to notify participants. And from 9 October 2025, providers must be able to send instant payments. It’s a huge shake-up.

The Sepa spans 36 European nations, including Norway, Iceland and the UK, so it’s considerably larg- er than the EU. It’s an integration initiative that commands the sup- port of the whole European banking and payment industry, the European Commission and the euro currency’s Eurosystem. When its new rules take effect, Europeans should be able to make payments without delay, all around the continent.

But are the banks ready? A poll of 200 payment professionals in France, Germany, Italy, Spain and the UK by RedCompass Labs in January found that 32.5% weren’t confident that their firms would be readytoreceiveinstantpayments by the start of next year. Only 7.5% were “very confident” of meeting the deadline. UK-based respond- ents were the least optimistic that their companies would be ready, with 20% saying that they were “very unconfident”.

Payment providers have had years to prepare. Surely they should be equipped to meet this basic thresh- old in time? What’s going wrong?

Several deep-rooted infrastruc- ture problems are causing mayhem, says Nick Botha, global payment lead at AutoRek, a provider of soft- ware and data services to the sector.

“Banks work on operational flows designed around settlement cut-off times, which are incompatible with the instantaneous nature of Sepa instant payments,” he explains. “Processes such as risk manage- ment, reconciliation, reporting, regulatory compliance and data management are all tailored to fit a model based on market closures at set times each day. In a 24/7 settlement regime, these processes become inadequate.”

Upgrading to instant payments is not a simple case of installing a new software module, then. A bank may need to upgrade or even replace its entire tech stack.

Botha points out that, when pay- ments become instant, “fraud is more difficult to detect and non- real-time reconciliations become completely unfit for purpose. Moreover, liquidity and settlement operations including reporting can no longer be organised as an end- of-day process; regulatory and central counterparty risk becomes much more pronounced; and data management processes turns into operationalbottlenecks.”

In short, Sepa is a spotlight illu- minating the banking sector’s technological shortcomings.

At the core level, several banks may still be running legacy software that can’t easily be improved. (In banking parlance, the core is akin to the operating system.) The industry is still riddled with cores that were designed in the 20th century.

Some banks have migrated. Lloyds, for instance, upgraded from a legacy core to a cloud-native plat- form made by Thought Machine. This cutting-edge infrastructure has made instant payments simple for the bank. But several other institutions remain hamstrung by obsolete cores.

“Banks tend to be reluctant to update their core systems, as it’s costly and time-consuming,” says Michael Greenwood, research analyst at Juniper Research. “Updates can mean downtime, preventing a bank from offering its services while the migration takes place. This could be avoided by using a staggered migration strategy, but that would increase the overall time taken.”

Migrating to a new core will take 18 months at best, but three years is more likely. Big banks run spaghet- ti systems – tangled networks of cores and applications that are almost impossible to port to a new platform. One UK high-street bank runs on more than 50 cores, with about 7,000 applications, for instance. For such institutions, migration may be the toughest task in banking.

“Banks that haven’t begun transi- tioning to a new core will struggle to complete the process and integrate instant payments in time,” Green- wood says. “This means that adopt- ing solutions that can integrate instant payments into legacy sys- tems is their only real option for making the deadline. But doing this will push the issue of legacy infrastructure further down the road.”

Given that the details of both par- ties must be verified and anti-fraud analytics completed in a fraction of a second, each instant payment is a logistical miracle.

Willem Wellinghoff, chief com- pliance officer at online payment provider Ecommpay, believes that many organisations still lack the firepower to deliver anti-mon- ey-laundering (AML) checks and fraud detection at the speed required by instant payments.

“There is already a significant focus on managing AML risks in banks, while automation and the use of AI is a priority in many institutions,” he says. “But this work is still evolving rapidly, with early-stage adoption, so there’s still a reliance on rule-modelling overlaying human intervention. Operating instant transfers will therefore put significant pressure on compliance functions to manage a fine balance while ensuring the outcomes of the Sepa scheme. We’ve seen a significant amount of authorised push-payment fraud [where bank customers are duped into transferring funds to scammers] – and instant payments might increase this.”

Busy shopping periods will put banks’ AML systems and processes to the test. While they may perform adequately in normal times, Black Friday, say, could prove problemat- ic. As transactions spike, they may hit full capacity, slowing down transactions. One bottleneck, such as a third-party provider lacking bandwidth, could affect a whole payment ecosystem.

International variations only add to the complexity of the harmonisa- tion challenge. The goal of Sepa is to coordinate payment systems across Europe, but regulatory con- cepts vary from country to country. France, Italy, Spain, the Netherlands and the Nordics all run their own payee verification schemes, for example. A single protocol is being developed, but it’s not yet uniform.

Progress is being made. For instance, 80% of financial institutions in Europe have a Sepa instant credit transfer facility in at least one segment of their business. Nonetheless, achieving universal compliance by the start of next year is a tall order.

Some industry insiders, including Wellinghoff, believe that the Sepa deadline should be pushed back.

“Innovation and compliance come at a significant cost and, unfortu- nately, banks don’t move at pace,” he says. “It would therefore be a good proposal to extend the dead- line by another 12 months.”

But this looks unlikely. Rules are rules – and Europe’s financial insti- tutions have had plenty of time to prepare for them.

Consumers want instant payments. Companies do too.

Any bank that can’t meet the Sepa deadline, for whatever reason, is sending a clear warning to the market: avoid us and deal with someone more competent.

Sources : RedCompass Labs _ Raconteur