Payment systems and the regulations that shape them are constantly evolving, creating significant opportunities and new challenges for fintechs and bank teams.

2024 promises to be an especially packed year in that regard!

In December 2023, we had the honour to host a webinar on the major changes expected to SEPA in 2024 and beyond, with outstanding guests covering everything payment institutions (PIs), electronic money institutions (EMIs) and banks should know about PSD3, instant payments, IBAN verification, new safeguarding requirements and more.

This blog is a summary of the information shared by our speakers:

The first change coming to SEPA in 2024 will be the European Commission initiative on instant payments.

Before we cover the expected timing of its entry into force, let’s explore what it includes.

What’s in the European Commission’s instant payments proposal?

The first main element is reach. Eventually, all banks, payment institutions and electronic money institutions in the European Union will need to allow their customers to send and receive SEPA instant credit transfers (SCT Inst).

Today, a majority of bank accounts are already reachable via instant payments because most major banks are connected to instant payment systems. But a lot of smaller entities are not.

The second element is pricing: the pricing asked to send an instant payment can not be higher than the pricing asked to send a regular payment. It is a key measure to increase the adoption of instant payments.

The third element is the introduction of mandatory IBAN name checks before initiating any instant payment. But we will come back on it later, as IBAN name checks will eventually apply to any SEPA payment.

The fourth element is the evolution of sanction screening rules. Today, all participants in instant payments are required to screen each and every transaction against a list of sanctioned entities and individuals. If the name of the sender or recipient of an instant payment matches the name of the listed person or entity, it generates a “hit,” and the payment is blocked until further verification.

But doing so in a 10-second time is very complex, so this rule led to a lot of false positives themselves, leading to a lot of failed instant payments because said payments were not executed within the defined 10-second time for instant payments.

The new rules for sanction screening will require PIs, EMIs and banks to screen their client databases every day instead of for every payment, which should give them more time to solve false positives and decrease the failure rate for instant payments.

What are the impacts of the new instant payment proposals on PIs, EMIs, banks and payment systems?

Today, some banks are directly connected to SEPA payment systems as direct participants, while all PIs and EMIs SEPA participants and the majority of banks are indirect participants.

For clearing and settlement management systems (CSMs), the payment systems at the core of SEPA, such as EBA clearing, this regulation will have two main effects:

The next big changes coming to payments in Europe are introduced by two texts introduced in 2023: the third Payment Services Directive (PSD3) and the Payment Services Regulation (PSR)

The European Commission has presented them as a package with the ambition of making the European payment market more innovative, competitive and safe.

In short, PSD3 focuses on the regulatory and licence aspects of payments while the PSR goes closer to the use cases and gives further details into what the different actors need to do in the provision of payment services in Europe.

Elements of these texts will have major impacts on PIs, EMIs and banks in the next few years, and we explore in the next sections the main changes they bring outside of open banking and access to financial data.

In Europe, Pis and EMIs are required to safeguard customer funds. Most of them use the segregated account method, where customers’ funds are held in dedicated accounts at a bank when not used for payments.

New requirements will mandate PIs and EMIs to safeguard customer funds at two different banks when using the segregated account method. Central banks will be allowed to open safeguarding accounts for PIs and EMIs, but they won’t be required to.

There are still a lot of unknowns about this new requirement, including how funds will have to be split between the two banks and what regulations will apply if the two banks aren’t in the same country.

Precisions are expected to be added to the texts within 2024, and the implementation of this requirement isn’t expected to happen before mid-2025 or early 2026.

While the instant payments legislation introduced the concept of IBAN verification for instant payments, PSD3 extends it to all payments. The goal of IBAN verification is to reduce payment fraud.

IBAN verification is the process by which a payer can confirm the name of a payee before sending a payment to a specific IBAN.

Concretely, when initiating a payment, a payer will have to enter an IBAN and the name of the beneficiary corresponding to this IBAN. The sending bank, PI or EMI will have to return one of the four following answers to the payer:

The payer will be able to decide whether to send the payment or not based on this information.

The latest versions of the instant payments proposal introduce an important element when it comes to the timing of IBAN verification implementation: IBAN verification will actually apply to both instant (SEPA instant credit transfers) and regular (SEPA credit transfers) payments at the same time.

It gives PIs, EMIs and banks until December 2025 to implement IBAN verification.

The third major novelty introduced by PSD3 and the PSR is the possibility for PIs and EMIs to get direct access to payment systems, meaning they will be legally authorised to become direct SEPA participants and connect directly with SEPA CSMs.

The main benefits for PIs and EMIs to become direct participants would be to cut intermediaries in the payment chain, making them independent from their sponsor banks' cut-off times and potential technical issues, and cutting costs.

However, the texts they are today still contain a lot of unknowns.

First, to be a “full” direct participant in payment systems, you need to settle your payments, and this is done via settlement accounts at the European Central Bank. Today, there is no clarity on whether PIs and EMIs will be able to open such accounts. If they don’t, they’ll still need to work with commercial banks to settle their payments, significantly reducing the benefits of becoming direct participants.

It is important to note that the upcoming legislation on instant payments already includes the possibility for PIs and EMIs to become direct participants in instant payment systems, but it doesn’t go further than that and doesn’t cover settlement arrangements.

In addition, they will still need to safeguard their customer funds and, therefore, work with commercial banks or, hypothetically, central banks.

Finally, being a direct participant involves additional requirements, liabilities, and operational complexity compared to being an indirect participant, so PIs and EMIs choosing to become direct participants will most likely be the largest ones.

Similar to the new safeguarding requirements, we are in the early days of the legislative process and are waiting for more precision on this element of the regulation.

While we are still waiting for additional precisions on many of the changes mentioned above, there is no doubt that they will require significant adaptations from banks, PIs and EMIs currently participating in SEPA. And they will add complexity for new participants.

Mambu Payments is a payment technology provider. We provide the infrastructure for fintechs to connect to partner banks, access schemes, and automate payment operations.

We already connect and support the payment operations of many SEPA participants, including Swile, Spendesk and Alma. We are committed to supporting our customers in these evolutions and integrating these changes into our platform so our customers don’t have to commit their resources to it.

Will PIs and EMIs have direct access to all SEPA payment schemes?

Yes, PIs and EMIs will have direct access to all SEPA payment schemes: SEPA credit transfer, SEPA instant credit transfer, SEPA direct debit core and SEPA direct B2B.

PIs and EMIs will most likely have direct access to instant payments first.

Will there be a new scheme for IBAN verification / IBAN name check?

Yes, the European Payment Council (EPC) is currently writing an IBAN verification scheme. A public consultation is expected to take place by March 2024.

How will IBAN verification technically work?

The technical requirements and workflows for IBAN verification will be defined in the EPC rulebook. Then, existing providers of similar services and players like EBA CLEARING will most likely adapt their solutions to fit the EPC rulebook requirements and offer their services to PIs, EMIs and banks.

Will IBAN verification / IBAN name check be mandatory on all payments?

Yes, IBAN verification will be mandatory for all push payments: SEPA instant credit transfers and SEPA credit transfers.

Will the new safeguarding requirements apply only to SEPA participants?

No, the new safeguarding requirements that mandate PIs and EMIs using the segregated account safeguarding method with at least two banks will apply to all PIs and EMIs, whether direct, indirect or non-SEPA participants.

With the obligation to support instant payments, will regular SEPA credit transfers be decommissioned?

No. There are many use cases where regular SEPA credit transfers will be the best payment method, especially for technical reasons.

Companies sending hundreds of thousands or millions of payments at a time will still rely on SEPA credit transfers that can easily be processed by batch rather than individual instant payments.