In May 2021, the European Central Bank (ECB) took aim at major EU banks for the prices being set for Instant Payments systems. Speaking at an event in Helsinki, Finland, Fabio Panetta, Member of the Executive Board of the ECB, said:
“The next step is for payment service providers to offer instant payments at attractive and transparent conditions. This means that prices should be neither excessive nor hidden to consumers.
“While the cost for service providers of using TIPS is 0.20 eurocent (€0.002) per instant payment transaction, instant payments are sometimes offered to consumers for €1 per transaction. This must change.”
Indeed, Panetta is right. In the long run, at least. Instant Payments must become a free service. This is as important for banks and financial institutions as it is for customers.
The problem is, Instant Payments aren’t free for the payment providers. There are costs when it comes to additional infrastructure, servicing and platform management. In this sense, it’s very difficult for bank and financial institutions to achieve a positive business case while also remaining relevant.
The question is, how can banks and financial services companies offer free Instant Payments services, without being confronted with a huge loss? The answer could be payments in a mutualized set-up.
How Instant Payments have changed finance
Nowadays, with the rise of digital banking, consumers expect convenience, which means easier and faster banking services. Instant Payments are just that – electronic retail payments processed in real-time, 24/7, throughout the year. Funds are made available immediately to the beneficiary by the consumer’s payment service provider (PSP) for transactional use.
Additionally, end users (mainly retail customers) consider payments as a commodity service. Nobody changes banking provider because one bank processes a payment faster than another.
Back in 2014, the Euro Retail Payments Board (ERPB) proposed a pan-European Instant Payments system for use within the Eurozone. The ERPB invited the European Payments Council (EPC) to develop a payments scheme based on the pre-existing SEPA Credit Transfer (SCT). The scheme became known as the SEPA Instant Credit Transfer (SCT Inst).
The SCT Inst system was launched in November 2017 and is monitored by the Eurosystem SEPA Inst monitor. 60% of European PSPs have already joined the scheme, and a survey by the EPC on SCT Inst use in France, the Netherlands and Belgium has shown a stark increase since 2018.
By the end of Q4 2022, it is expected that SCT Inst will account for at least 20% of total credit transfers in Europe. The current situation is that banks and financial institutions now need to support and maintain two similar products (SCT and SCT Inst) with very little gains for this additional service.
But what is really driving the rapid rise of Instant Payments? Digital ubiquity means that speed, cost and customer experience have become crucial metrics to consider when developing payment systems. Older systems based on credit or debit cards can be more costly and time consuming, and Instant Payments systems can also offer added value services, while keeping in line with regulatory pushes coming from the EU.
Indeed, over the last two to three years, Instant Payments have become a stalwart of the payments industry, and although currently voluntary for banks, SCT Inst could be made mandatory in 2025.
The real cost of Instant Payments
There’s no doubt that banks need to be able to offer a resilient, scalable and elastic Instant Payments infrastructure in order to cater to growing volume. The problem is that offering Instant Payments isn’t free for banks and financial institutions.
According to our pricing model, the cost per transaction on-premise drops significantly after a system’s initial set up, and over a period of five years averages out at €0.068 per transaction for on-premise and €0.039 per transaction for SaaS. After five years, we see that 43% of costs are spent on infrastructure for on-premise systems, as opposed to 46% for SaaS, with 23% on operations for on premise and 41% for SaaS.
So, we know that the cost of Instant Payments reduces significantly once a bank has a mature and established infrastructure. But what about the financial gains from Instant Payments? Well, we are still waiting on the new European legislation regarding SEPA SCT Inst payments, and banks are free to charge what they want for the moment. For example, Société Générale currently charges €0.80 per Instant Payment transaction (retail), and BNP Paribas charges €1.
For the most part, however (depending on geographical location), banks offer Instant Payments for free in order to remain competitive. In Belgium, for instance, most retail banks offer SCT Inst at no additional cost, and it is the default transfer when using a mobile app to make a payment. Beuc published a more detailed look and different Instant Payment fees in the European banking sector that highlights this very fact.
Customers around the globe generally expect free-of-charge Instant Payments as part of their bank’s basic offer.
Payments in a mutualized set up mean shared costs for banks
For banks, there is a solution to the additional and high costs of running an effective Instant Payments system: Payments in a mutualized set up. This solution involves sharing the infrastructure, servicing and platform costs of running Instant Payments with a number of other organizations.
By doing so, banks can save up to 40%. This is notably achieved through the mutualization of exchanges at the software (IPCE) level and also at the CSM connectivity level.
Furthermore, by stepping into a mutualized approach, banks can actually achieve more resilience by paying less for different CSM connections and let the competition play between the CSMs. When a single bank implements the solution alone, they need to have double connectivity to CSMs in order to ensure that if a line fails, the other is still working. In a mutualized approach, banks can avoid this problem.
In Belgium, for example, five banks are mutualizing the solution and have four connectivity lines to CSMs. They are, therefore, achieving better resilience with four lines, but paying for less than one line per bank.
This approach allows banks to really enjoy the best of both worlds – lower costs and higher resilience. In order to achieve this, they need a strong provider to equip them with the solution and to offer them the service with strong SLA commitments.
This is where companies like Sopra Banking Software come in. Installing an Instant Payments solution can affect many parts of a bank’s or financial services company’s IT infrastructure, and it all requires time and investment, so choosing the right investment and the right partner is key to success.