How Instant Payment is Quietly Changing the Game for European Corporates
Having launched almost six years ago, the SEPA Instant Credit Transfer (SCT Inst) is starting to hit its stride with an increased transaction limit helping to encourage usage. For corporates operating in the SEPA zone, the scheme is not without flaws, but initiatives from regulators and banks point to a more functional and secure future.
While the world’s first-ever instant payments scheme, Japan’s Zengin system, was launched some 50 years ago, the topic has only recently begun to capture the imagination of corporates in the past decade. Initiatives such as UK Faster Payments – which should soon see a benefit from the implementation of the country’s New Payments Architecture – Singapore’s FAST, RTP in the US, UPI in India, and Europe’s SEPA Instant Credit Transfer (SCT Inst) were just a few of 64 live real-time payments schemes globally in 2022*. SCT Inst is particularly notable because it enables instant payments across multiple national borders within the SEPA zone.
Stephanie Ekindjian, MD – Global Head of Cash Management Products and Solutions – Societe Generale, comments: “With the SCT Inst, all the characteristics are common among all euro area countries, except for the transaction limits. All transactions have to be processed in less than 10 seconds. The scheme is available 24 hours a day, seven days a week, every day of the year. All scheme participants have to be reachable by any of the banks from the SEPA zone, and the transaction cannot be cancelled once it’s been executed.”
Gaining corporate relevance
The difference in transaction limits is fascinating for corporates due to the enormous payment amounts that treasurers often deal with. When the European Payments Council started the SCT Inst scheme, the limit was just €15,000. That was not too relevant to corporates because, in its infancy, the SCT Inst scheme was driven by the retail industry. While that relatively low threshold was in place when the system began operating in 2017, today it stands at €100,000 in most countries.
In the first quarter of 2022, 11.48% of all SCT transactions were carried out through SCT Inst and adoption is increasing**. It is possible to gain insight into what may happen if the transaction limit was removed altogether, as that is precisely the situation in the Netherlands.
“With no cap, almost all the credit transfers in the Netherlands are instant payments,” remarks Stephanie Ekindjian. “However, only around one-third of corporate credit transfers are [made] through instant payments, because issues still limit corporate usage. For example, a treasurer can use only the unlimited value of instant credit transfers within that country. That’s not very convenient when you consider many corporates have suppliers outside their home country.”
The threshold issue is not the only obstacle to the greater adoption of instant payments in Europe. Reachability is another hurdle. While this is also slowly improving – around two-thirds of European payment service providers are now reachable through SCT Inst – there is still work to do.
From a corporate perspective, the critical issue is not just thinking about instant payments as a technical scheme. Instant payments offer treasurers a fresh perspective on the payment landscape, enabling them to re-examine their entire payment processes and use cases.
“Corporates can’t just decide one day to change from a classic SCT to SCT Inst, it has to be embedded in a strategy, with use cases that bring value to themselves or their customers,” comments Stéphanie Ekindjian. “It’s all about identifying those use cases.”
A corporate’s approach to instant payments is broadly governed by factors such as their industry and the types of clients and customers with which they interact. The retail sector, for example, is primed for corporate use cases of instant payments, particularly when issuing refunds to consumers. Societe Generale has worked in collaboration with Fintecture to enable Auchan (one of its retail clients) to propose instant payments on refunds, Stéphanie Ekindjian explains.
“If a shopper wants to return a purchase to the store, they’ll return to the point of sale with the products,” she says. “If they paid by card, they would usually have to wait 24 to 48 hours to be refunded to that card. Thanks to our partnership with Fintecture, the salesperson only has to enter the refund in their information system and, via an API, the refund is generated immediately through an instant payment. The consumer gets their money back instantly.”
The insurance industry offers another example of how corporates can use instant payments to gain a competitive advantage through providing additional service and greater satisfaction to their own customers, as Stéphanie Ekindjian outlines.
“If you offer insurance as part of your business, then instant payments are advantageous on the claims side,” she notes. “The person waiting for a transfer may need to have it immediately, not in 24 or 48 hours, so it is a good selling point for your policy.”
Obstacles and opportunities
While use cases are increasing, there are still barriers to the adoption of instant payments that corporates bump up against. The previously mentioned €100,000 limit in most SCT Inst countries is usually far too low for many treasury transfers, for example. And that’s not all.
“For big operations, such as closing an M&A deal, treasurers would like to have the possibility to transfer the cash instantly,” continues Stéphanie Ekindjian. “They will usually gather all the cash a few days before the operation and, rightly, try to maximise the value of this cash in their account. They won’t want to release the cash until the very last moment, on the day of the transaction. At the same time, they want to be sure that the cash will be credited to the correct person or business. This is not currently possible in most European countries.”
One challenge that treasurers face, which could be overcome thanks to instant payments, is around payroll, particularly when paying interim workers. When treasury wants to run payroll, they may handle one or more of these salaries that are not simply a fixed amount every month. Without wanting to hold up all salary payments, there is little time to adjust and ensure that the correct amount is paid to the interim employee. With instant payments, this can all be calculated at the very last moment, resulting in the exact amount being paid on time.
“We have quite a few companies working with us that pay salaries in the interim sector,” reflects Stéphanie Ekindjian. “What’s interesting in this case is that they don’t process a single SCT Inst, but rather they process mass payments.”
Banks also face operational, technical, and organisational challenges around instant payments, as it represents a major project with a significant impact on the IT side for banks and corporates alike. On the bank side, this requires a significant interbank investment to collaborate with the European market authorities and contribute to the homogenisation of standards. This will ultimately represent an opportunity for corporations to benefit from a harmonised European format, which began in 2017 with the SCT Inst scheme.
“For banks, it is essential to enrich the offering, to propose new functionalities,” comments Stéphanie Ekindjian. “A payment simply being instant is not sufficient. We must propose additional services and features to our clients that enrich the offer. It is vital to propose this across all channels, whether host-to-host, API or e-banking.”
Mass payments are indeed one area where banks can add an important feature. By default, banks unitarily book the entries for mass payments in client accounts, which can sometimes be an issue. “If the treasury was to process all the company salaries instantly, it is possible that the CEO or CFO would not like their salaries listed individually,” Stéphanie Ekindjian points out. “We are gradually deploying global booking functionality, so there will be global accounting of the remittance rather than every single entry listed there.”
Another area where banks could add value is when an instant payment is rejected. For example, this could happen for compliance or operational reasons or if the beneficiary bank is not reachable. “We are currently deploying new optional functionality to ‘downgrade’ an instant payment if it is rejected, so finding a way to move it from an SCT Inst to a classic SCT,” reveals Stéphanie Ekindjian. “This allows the bank to call the client and ask them to check whether the transaction is appropriate. It still can be processed if it is not a real fraud. This option brings value.”
As well as finding ways to enrich instant payment offerings, banks also have an eye on the future by enabling transactions that can be input with a later execution date. While this might sound contradictory to the concept of instant payments, it could offer more sophisticated companies another way to optimise their liquidity.
“A very structured company, perhaps with a POBO/COBO setup, might be interested in precisely seeding all their payments if they can accurately predict their future incoming cash flow,” suggests Stéphanie Ekindjian. “If a treasurer knows that they will receive a specific amount of cash on a certain date, they can optimise their liquidity, be renumerated for their cash, and then set their payments to go out instantly on the set date.”
A little pain for the gain
When the beneficiary’s bank accepts an instant payment, it is generally considered irrevocable. This irrevocability, coupled with a 24/7 availability and the real-time nature of the transaction, makes instant payments a prime target for cyber fraudsters. Instant payments use the same variety of infrastructure and controls as standard payments, but adaptations had to be made to escalate controls as soon as possible. Technology plays a key role here.
“We use machine learning to rate transactions and help us determine whether they are correct or suspicious,” says Stéphanie Ekindjian.
These controls are carried out throughout the customer journey. For example, if the transaction is triggered using web banking, ML is used from the connection, the entry of the order and then the validation to determine at each step whether the transaction follows the customer’s usual habits and behaviour. Stephanie Ekindjian provides an example of how this can be applied.
“If the company usually works in a particular set of countries and we suddenly see a new account in an unusual country, or we see that the payment was entered at 2am on the customer’s normal business day, we will report that this is unusual compared to the customer’s usual habits,” she reveals. “In this case, we can reject the transaction if it is done on a host-to-host connection. If this is a web banking service, we may remove the customer’s ability to use SCT Inst. The transition of the transaction into the normal SEPA credit transfer channel gives more time to check the validity while retaining the possibility to release the payment.”
Whether the payment is an international transfer, SCT, or SCT Inst, the most used attack methods remain based on identity theft. Two prevalent methods today are the fake supplier and fake president (CEO or CFO) frauds. Human error is a factor in more than 90% of cases. For example, suppose the corporate receives an email from a supplier asking to pay an invoice on a different account. In that case, the error is to carry out this operation without prior verification of the request's origin and the validity of the account and the requested transaction.
If this transaction is carried out by instant payment, it is impossible to react after the validation of the transaction. Therefore, putting in place a solution for verifying beneficiary accounts and legal payees is strongly recommended. In addition, the best payments security relies on co-operation between corporates and their banking partners. Fraudsters often use digital channels to try to compromise a company or engage in social engineering to harvest passwords, or scare an employee into thinking it is their CEO or CFO calling in to validate a transaction, for example.
“Prevention with our clients, to remind them of their essential role [in fraud prevention] and to emphasise how important it is that when they use online banking, they have an administrator who is careful when entering or validating payments,” explains Ekindjian. “When they use bank-to-bank channels, they need to notify the bank if someone leaves the company, so we can update the list of people authorised to process any transactions. This co-operation is essential.”
Ensuring that payment processes are locked down and only verified treasury and finance team members can authorise payments is essential. While some of the authentication steps might occasionally frustrate corporates, Ekindjian notes that they are for the greater good.
“We’ve had two-factor authentication since PSD2, which is a very efficient way to secure all the clients and different factions,” she says. “This can make the client journey a bit more painful – corporates have to input the transaction, log in with their password and then use their mobile or SWIFT 3SKey to secure it. But this is efficient. It is a little pain for great overall success.”
A cross-border future?
While domestic instant payments schemes continue to thrive, the cross-border element is lacking, which is where most corporate treasurers will be interested. While it is possible to consider that SCT Inst processes instant cross-border transactions between countries in the SEPA zone, they don’t connect to another payments system outside of that region. However, specific pilot projects hint at the future of cross-border payments. One exciting example is IXB, an immediate cross-border payments initiative launched by a committee comprising The Clearing House, EBA Clearing and SWIFT.
“IXB aims to connect the European and US real-time payment scheme infrastructures – RT1 and RTP – to enable cheaper, faster and more transparent cross-border payments on the euro-dollar currency corridor,” explains Stéphanie Ekindjian. “For the moment, it is more focused on personal payments, but it also aims to address corporate needs. Societe Generale and other major players in the banking industry are part of the sounding board working on this initiative.”
An initiative from the European Central Bank aims to promote multi-currency instant payments. In that context, TIPS (TARGET Instant Payment Settlement) is working on a solution to enable such payments between Nordic countries.
As well as the challenge of connecting all the infrastructure, these cross-border payments pilots also raise specific questions pertinent to corporates and banks. “Cross-border payments are usually multi-currency, so who’s going to get the benefits of the FX linked to the payments?” mulls Stéphanie Ekindjian. “We will likely see the European regulators want to give a bigger role to the euro at an international level, so they could push for solutions to promote that. Instant payments are the first bridge to build new interoperability. When we get the digital euro, that may also help address this cross-border issue.”
Another initiative poised for greater impact is the SEPA Request-to-Pay (SRTP) function, which was launched in 2021. This combines requests and the SCT Inst or SCT scheme to generate payment as soon as the payer approves the request, or later if needed. SRTP may thrive as an alternative to card payments because it avoids the interchange fees that merchants have to pay the card companies. And that’s not all.
“SRTP could also be seen as an alternative to direct debits, which have the major inconvenience that the payer can contest the transactions for up to 13 months,” points out Stéphanie Ekindjian. “Here, the irrevocability of the instant payment preceded by the RTP brick is something interesting for corporates to improve treasury predictability.”
Another glimpse at the possible future for instant payments is offered by examining the statistics for online purchases and the payment instruments used in Europe. In most countries, cards are the preferred payment method, usually between 40 to 60% of transactions, while the use of credit transfers is far lower, at around 10%. But as we know, one SCT Inst country has an entirely different payments landscape to its European counterparts – the Netherlands.
“In the Netherlands, cards represent only 10% of online purchases, while 65% use credit transfers,” reveals Stéphanie Ekindjian. “This is a great way to imagine how the European payments landscape could evolve. It gives an idea of the rebalancing that could take place.”
For treasurers, instant payments are not just a new technical scheme to read about in an academic paper. Instead, they offer corporates an opportunity to rethink how they run their operations. “Instant payments represent an opportunity for corporates to develop their business,” concludes Stéphanie Ekindjian. “It doesn’t matter if they start with a small use case, they should be pragmatic and search for the value. If they find some value, they will become accustomed to the scheme and have a differentiator. Then, when the scheme is deployed more broadly, they will be ready to grow this value even further.”
*FIS, The Global Payments Report 2023
“ From a corporate perspective, the critical issue is not just thinking about instant payments as a technical scheme. Instant payments offer treasurers a fresh perspective on the payment landscape, enabling them to re-examine their entire payment processes and use cases. Corporates can’t just decide one day to change from a classic SCT to SCT Inst, it has to be embedded in a strategy, with use cases that bring value to themselves or their customers. It’s all about identifying those use cases.”
Stéphanie EKINDJIAN DELLISTE
Global Head of Payments & Cash management solutions