How Soon is Now? What Instant Payment Really Means

Instant payments (IP) is a general term used to qualify initiatives set up around the world capable of delivering a payment in real-time or near real-time. These schemes are ‘open for business’ 24/7/365. Requiring interbank clearing, they provide rapid confirmation of the availability of transferred funds to the beneficiary. No transaction processed through a scheme can be cancelled once executed, enabling those funds to be used immediately.
In the SEPA zone, the scheme is referred to SCT Instant or SCT Inst. It was launched in 2017. The oldest scheme dates back to 1973 in Japan. Today, there are currently around 70 national faster payments schemes. The generic term ‘faster payments’ is often used because not all schemes are instant, with times ranging from a few seconds to a few hours. Most impose transfer limits, although thresholds are generally evolving upwards, as systems become established and user-need increases. SCT Inst is limited to €100,000. In the Netherlands, there is no limit, although banks impose one, for reasons that will be discussed later. 

Why IP?

There are likely to be different drivers for IP around the world. In Europe, it was proposed as a firmly European alternative to the established US-based card market, notes Ekindjian Delliste. “Cards are well developed and offer benefits for individual users,” she says. “But users are subject to a monthly total limit that can be inconvenient. And cards can be expensive for businesses because fees are levied. These can be negotiated, but that then depends on the negotiator’s skill. So when it comes to something that does not offer much of a competitive advantage, businesses are willing to use an alternative.” 

Of course, IP also trumps cards in that it enables rapid payments between individuals too, so it seems more convenient from several angles. So why has it taken so long to build momentum? 

It has taken 15 years between the UK’s Faster Payments in 2008, Europe’s SEPA Inst in 2017, and the 2023 launch of the US FedNow model, comments Penichou. One reason for the apparent dragging of heels is, he states, “that the regulator didn’t pay enough attention to it, and regulation tends to accelerate effort”. But he also acknowledges that the market itself must shoulder some responsibility. With corporates focused on batch payments, the banking community has not stepped up to provide the technical ecosystem necessary to fully leverage IP.

For that ecosystem to develop, Penichou says five key players must coalesce around the topic: corporates, central banks, banks, vendors, and the regulators. The step up in Europe of the latter is underway with the entry into force of Regulation (EU) 2024/886set for early 2025. Covering SCT Inst, the new rule ensures that all PSPs in the EU are able to send and receive instant credit transfers in euros. “We truly believe that IP across Europe will then take off,” he comments.   
But for corporates, how compelling is the need for IP? The main adoption case today is made in the B2C space, notes Penichou. With a generation of digitally native consumers now conditioned to assume near-instant results, companies are having to meet expectations, with payment services included.
Presenting a case study at EuroFinance 2023, Societe Generale revealed how a French supermarket client is leveraging instant reimbursements on customer returns, enabling those customers to instantly ‘re-spend’ that money. 

Liquidity question

This is good for B2C transactions but B2B has other considerations, not least those transaction limits. The limit-free transfers in the Netherlands, referenced above, are theoretical only. Without limits, banks could face ‘out-of-hours’ liquidity issues were IP transfers to exceed their reserves, explains Penichou. 

Banks place excess cash with the central bank overnight and at weekends, for which they are remunerated. SCT and SCT Inst schemes also require banks to place reserves with the relevant central bank to cover expected outgoings. Without the necessary ecosystem to provide visibility over instant out-of-hours cash outgoings – or even transfers to accounts in the Middle East where Sunday is a working day – that mechanism could be severely compromised.

A business may have a fully-loaded tanker waiting to cast off from a port in Oman on Sunday. It may need to send a large sum (potentially more than $100m) to release the ship, otherwise it could be subject to additional port fees of thousands of dollars. This could cause the initiating bank a liquidity headache, which is why in limit-free countries, such as the Netherlands, bank-imposed limits remain. And, adds Penichou, even as the new EU regulation arrives in 2025, “they will remain, and will do so until such time as the ecosystem is built that can manage this liquidity challenge”. 

Not only is ensuring sufficient liquidity for large instant out-of-hours transfers a persistent banking obstacle, but so too are compliance check turnarounds on IP transfers. Compliance has to be executed in a timely manner but positives do arise, and a stop is placed on those payments to enable further checks. These can take longer than expected IP timescales, notes Penichou. “It potentially renders each exception nothing more than a standard transfer.”
Progress towards ecosystem revision is at an early stage because IP is, in general, viewed as a low-value solution. Corporates typically transact much larger amounts; current limits may be sufficient for certain supplier invoices, for example but, says Ekindjian Delliste, more compelling use cases must be presented to raise IP’s profile in the corporate setting, enabling changes to gather pace.

New drivers

Here, IP’s capacity to drive operational efficiencies may be persuasive. This could see an insurance company using it when settling an urgent client claim or in collecting premiums. A business employing staff on variable hours or short-term contracts could use IP to enable wages to be calculated to a point much later than normal payroll cut-offs. “While values for these use cases are still low, they do offer a good opportunity for businesses to become familiar to the scheme,” suggests Ekindjian Delliste.

However, before this can happen, she accepts that some corporates may also see a technical challenge around system and process implementation. Issuing IP may require adaptation of payment and work flows within an ERP or TMS. That system must be able to instruct the bank when a payment is SCT Inst and not classic SCT, for example. 

There is one additional matter to address, and that is the facilitation of cross-border payments. Today, IP systems mostly operate within their own borders. Limited cross-border capability, provided by a few bi-lateral IP agreements (see below), raises the issue not only of system interoperability but also of legal compliance within each jurisdiction. 

The forthcoming Regulation (EU) 2024/886 aims to address some of these issues within the EU. The European Payments Council’s OCT Inst also targets cross-currency payments. This ‘one-leg-out’ system will support the processing of incoming and outgoing international instant account-to-account based credit transfers, covering the euro-denominated leg of a transaction. Currently OCT Inst is minimally live, with six banks in Spain offering cross-border transfers. “Transactions are very limited,” concedes Ekindjian Delliste. “But it demonstrates the will of Europe to have a broader experience of IP. And I think it’s a first step to show that the needs of corporates are understood.”

The banking ecosystem’s current struggle to manage materially significant out-of-hours payments remains the fly in the ointment. However, certain “breakthrough initiatives” have at least made some headway in the payments space, Penichou notes. “When it comes to large transactions, our clients can today rely on Swift GPI to track the entire global journey of their funds, with around 50% of all payments using this system reaching the beneficiary’s account within one hour.” It’s faster payments in all but name. 

This leaves each business with its own IP case to construct. And, of course, software providers should ensure their corporate clients’ systems are equipped to handle IP. Key here is the provision of APIs. Web APIs have been available since 2000 but in another example of how regulatory intervention can boost uptake, when PSD2 and the notion of open banking arrived in 2016 their adoption started to gain momentum in the financial world. Now this must go further because, as Penichou comments, “what’s the point of having instant receivables, which can arrive at any time, if the recipient cannot access those funds in a timely manner?” 

Changing models

While system providers are indeed embedding APIs into their platforms to facilitate IP processing, Ekindjian Delliste raises the distinction between the needs of the accounting function and those of treasury. Accounting departments, she argues, will always need end-of-day cut-offs for financial documentation and reporting, to build end-of-month, quarter and year closures. 

“What we really have to address with IP are the needs of treasurers who require a real-time view over cash coming in and going out. Banks are already providing intraday reporting, but usually those reports are pushed to the client, at a frequency determined by the bank, and depending on the capacity of the client’s system to consume that data. It is not real-time.”

The development of real-time treasury data is based on the integration of APIs within those treasury systems. By doing so, it enables a TMS, for example, to call an API-enabled banking platform to request real-time information on account balances and transactions. Instead of having the bank controlling the data flow, APIs enable clients to be fully in control.
The reason APIs should have treasury appeal is easy to understand. “Most treasurers still struggle to have accurate cash flow forecasting beyond three months, and for many, the period of accuracy is even shorter than that,” notes Penichou. But with deep concerns about fraud, especially as new technologies such as Generative AI become more commonplace, he says companies tend towards caution when it comes to deploying more complex solutions. 
But with IP enabling payments and receipts in real-time, and real-time data on these flows provided direct to a treasury system via APIs, daily or even hourly forecast updates are possible. And for Ekindjian Delliste, the combination of IP and APIs opens up new options such as payment warehousing. 

A company sends a payment file covering multiple invoices to its bank on Tuesday, but requests that these are not processed until the final due date, the following Sunday. This enables it to take advantage of its own liquidity right up to that point, settling those invoices immediately on their due date. This is a compelling opportunity for a large corporate. It is able to prepare the file earlier in the week but hold on to its cash until the last moment. 
However, says Ekindjian Delliste, warns that forecasting of inbound flows up to that point must be accurate, or it risks the IP transactions being rejected. Vastly improved forecasting accuracy is made possible, she says, not only by the hour-by-hour (and even minute-by-minute) reporting afforded by APIs, but also through the use of tools such as AI to analyse data flows and customer behaviours.  

“While IP might not yet be seen by all as beneficial, over time its advantages will be better understood by corporates,” stresses Penichou. “And with the new regulation coming next year [Regulation (EU) 2024/886], banks may no longer wish to maintain classic SCT and SCT Inst in parallel. It may take several years, but the switch to SCT Inst will happen. With banks developing new features for corporate clients driving the adoption of APIs, and all the vendors embedding this into their systems, IP will become the new standard.”
Should that be the case, the traditional treasury impetus towards centralisation and pooling will surely change too. “In 10 to 15 years, cash pooling will mean nothing to the new generation of treasurers because everything will be naturally consolidated,” predicts Penichou. 

In theory, if leveraging virtual accounts and IP, a business could have all of its liquidity concentrated in one account, notwithstanding restrictions imposed on pooling structures by some jurisdictions. “That will optimise the way treasurers concentrate their liquidity tomorrow,” he comments. “However, banks still need to provide clients with options. Some have multiple legal entities with regional treasury centres, some are implementing payment factories, others just want to keep their various activities separate.”
Ekindjian Delliste agrees. “Virtual accounts enable a client to build a more rationalised account structure, offering natural cash pooling within one bank, but it’s within one bank only, and our clients often work with several banks,” she explains. “Cash pools will be available for several years to come, so it’s more useful for us, in terms of optionality, to work on a combination of virtual accounts, IP, and cash pools.” 

A future together

For IP to deliver on its early promise, the conversation between the five key stakeholders – corporates, banks, central banks, vendors, and regulators – must gather momentum. “We must work together to explore and develop new services that are real-time by design, because building this ecosystem is a complicated and costly task,” notes Ekindjian Delliste.

This effort is underway. The Immediate Cross-Border Payments (IXB) initiative brings together The Clearing House, EBA Clearing and Swift with the aim of connecting RT1 with RTP to facilitate and support euro and USD IP. Societe Generale was one of the first members involved in this initiative. A similar project is already live in Asia with the PromptPay-PayNow connection in Thailand and Singapore, and similarly the UPI-PayNow linkage between India and Singapore.

“These initiatives demonstrate that we understand the need for clients to have cross-border IP,” says Ekindjian Delliste. “But we accept that there are complicated issues still to resolve, not just in terms of regulatory compliance, but also for aspects such as FX, and of course the liquidity challenge for banks. Everybody’s willing to advance, but it’s going to take time because new set-ups around IP-driven cash concentration and overnight liquidity, for example, require the whole ecosystem to evolve. This is why stakeholder engagement now is so important.”
 

This article is part of the whitepaper "Shaping the Future of Treasury", published by Treasury Management International (TMI) - September 2024. Click here to download the whitepaper.