Balancing Regulation with Innovation: Paving a Way Forward

Financial institutions are confronted with pressing deadlines for compliance. Banks have a mere nine months to enable the receipt of instant payments and eighteen months to facilitate the sending of instant payments across all channels while implementing verification of payee mechanisms. Research indicates that six out of ten banks consider these timelines unrealistic, given the extensive operational changes required. 

Banks can be categorised based on their current engagement with instant payments. Institutions already offering instant payment services are not fully prepared despite existing capabilities. Implementing verification of payee across all channels—including mobile applications, online banking platforms, self-service kiosks, and call centres—poses a significant challenge. Furthermore, banks are no longer permitted to impose additional fees for instant payments compared to standard SEPA payments. This removal of fees is anticipated to increase adoption among corporate clients, leading to a substantial rise in transaction volumes. Current systems, capable of handling tens or hundreds of transactions per second, may prove inadequate when instant payments become the norm. 

Banks that have yet to offer instant payments face greater challenges in meeting compliance requirements. For some institutions, particularly private banks and asset managers, payments may not constitute their core business. These banks traditionally operate on a business day schedule, closing systems overnight. Core banking systems perform end-of-day processing and are not designed for 24/7 real-time payments. There is an urgent need for these institutions to become permanently accessible to support instant payments. 

The challenge of balancing regulatory compliance with the need for innovation is pronounced. Banks are allocating a significant portion of their resources—often 80 to 90 per cent—to regulatory matters and maintaining existing infrastructure. This focus on compliance can divert attention and resources away from innovation. In a recent panel discussion, regulatory issues were identified as the primary factor impeding innovation within banks. 

Innovation is essential not merely to gain a competitive edge but to keep pace with industry advancements. The solution to this challenge is twofold. Firstly, banks should consider building and scaling new solutions using cloud technologies. Cloud platforms offer the flexibility to implement innovations as they emerge, ensuring that banks can adapt to ongoing changes without overhauling their entire infrastructure. Secondly, collaborating with specialised partners who excel in specific areas can provide access to cutting-edge solutions tailored to institutional needs without the burden of in-house development. 

The implementation of the SEPA Instant Credit Transfer mandate has revealed significant disparities in how prepared banks are for instant payments. Some institutions are well ahead in their preparations, while others have made little progress. This situation is surprising given the proximity of the mandate's deadlines. 

A critical challenge is the outdated infrastructure that hinders the adoption of instant payments. Banks may find it difficult to identify suitable partners compatible with legacy systems, creating a cycle where progress is stalled due to both internal and external factors. Upgrading infrastructure is a critical operational challenge. Banks are beginning to leverage cloud technologies for instant payment processing, which offer scalability and flexibility. However, a comprehensive core banking transformation or replacement is not feasible within the nine-month timeframe. Therefore, banks must think tactically about immediate options to meet deadlines. 

Tactical planning involves prioritising critical updates and incremental improvements to meet immediate compliance needs. Implementing stand-in processing or shadow balances can serve as interim solutions to enable 24/7 operations. Engaging with specialised providers who offer standardised solutions can help institutions avoid the time-consuming process of developing heavily customised systems. Maintaining payment engines and core banking systems as standard as possible helps lower total operating costs and facilitates faster compliance. 

The digitalisation of payments, while beneficial for speed and efficiency, inherently increases the risk of financial crime and fraud. Real-time transactions and higher volumes provide more opportunities for fraudulent activities, posing significant challenges for financial institutions. 

Addressing security concerns is paramount. Banks need to adopt multiple sources of data and layer solutions across all stages of the payment process—inbound screening, outbound screening, and processing—to create a robust defence against fraud. It is challenging for individual banks to gather all necessary tools and data independently. Therefore, adopting a comprehensive perspective, possibly through partnerships with specialised providers, can enhance the ability to detect patterns and prevent fraudulent activities proactively. 

Building consumer confidence is also essential. Banks must prioritise security measures that reassure consumers and encourage the adoption of instant payments over legacy systems. Transparent communication about fraud prevention strategies and a demonstrable commitment to safeguarding customer funds are crucial in this endeavour.

The transition to instant payments will have a significant impact on both financial institutions and their customers. Customers, especially corporate clients, are enthusiastic about the adoption of instant payments. New use cases are emerging, such as e-commerce and point-of-sale transactions, which are currently dominated by card payments that are relatively more expensive. Instant payments offer a cost-effective alternative, potentially reducing transaction fees and increasing efficiency. Corporations stand to gain an extra day of working capital without incurring additional costs, enhancing liquidity and financial management. 

Financial institutions must also consider the broader implications of instant payments on their business models. The increased speed and convenience of payments could lead to changes in customer behaviour and expectations. Banks that adapt effectively can leverage instant payments to enhance customer satisfaction and loyalty. Conversely, those that fail to meet expectations risk losing market share to more agile competitors. 

Continuous monitoring of developments and best practices will be essential. Financial institutions should anticipate further regulatory changes and technological advancements that will shape the payments landscape. Embracing innovation is not solely about compliance but also about positioning for future competitiveness.