The Single Euro Payments Area (SEPA) has been enhanced to enable instant payments across Europe: 24 hours a day, every day. Jointly led by the European Payments Council (EPC), the European Central Bank (ECB), and the European Union (EU), this mandate is
writing a significant chapter in banking history by opening instant payments up across all countries using the Euro.

This European-wide instant payments rollout is revolutionising how consumers and corporates move and access funds, no longer being constrained to the previous €100k cap.

The transformation is being channelled through two key infrastructures: TIPS, operated by the Eurosystem, and RT1, a private-sector alternative administered by EBA Clearing. Both are compliant with the SEPA Instant Credit Transfer (SCT Inst) scheme and are
acceptable under the regulation.

The impact will be huge

According to the ACI’s Prime Time for Real-Time report, by 2028, up to 13% of all payments in Europe are likely to be instant – that’s €36.8 billion. This could easily be an underestimate, given the speed and convenience that instant payments promise to
businesses and consumers. Instant payments will transform how people do business, manage their cashflow and trade across borders.

So naturally, Payment Service Providers (PSPs) have been working around the clock to upgrade their customer-facing portals and broader infrastructure. Challenges with instant payments, like anti money laundering processing, promise to be outweighed by the
benefits that the world’s largest cross-border payments system will bring.

In short, the consensus is that instant payments are a great way to stimulate business and the economy across Europe. But PSPs are feeling the pressure to overcome the hump of their legacy system upgrades and switch to these high-speed, instant settlement,
Pan-European solutions.

The stakes are high, and the complexity and volume of transactions are potentially staggering.

It’ll also be intense from a regulatory perspective. So being prepared for this seismic shift is paramount, for regulatory risk and compliance purposes, but more so for the impact of moving liquidity management into real time.

But what about treasurers?

24/7 real-time payments have the potential to wreak havoc with teams managing intraday liquidity and regulatory compliance.

PSPs are now changing their outlook on liquidity, moving away from the well-established ‘end-of-day’ model. Now, payments don’t take weekends or public holidays off. So, providers need to ensure that the areas where they hold their liquidity are available
to tap into at any time. It’s not always an issue of whether there are enough Euros to meet the demand of payments, but more a case of how readily available they are. Treasurers need to change their liquidity model.

The ECB’s T2 payments system closes on evenings, weekends and holidays, so with an instant payments boom, PSPs will have to carefully manage the funding of their instant payments accounts from their T2 accounts to meet the expected demand.

In more mature instant payments markets, such as Australia, these transactions are already taking a significant proportion of PSPs’ liquidity flows. Since its real-time settlement system, the New Payments Platform, was introduced in 2018, year-on-year growth
in transactions has been up to 30%.

Similar growth in adoption, in both transaction volume and value, is inevitable in Europe with the introduction of SEPA. The impact? Liquidity will be hard to predict and fund appropriately, thus significantly heightening liquidity risk.

Liquidity breaches can land a PSP fines up to 20% of their annual turnover.

Considering the instant payments rise, treasurers need to power their liquidity models with reliable, data-driven forecasting. If they get their liquidity wrong, it’ll have serious implications. Imagine returning on Monday to find you couldn’t fulfil your
payments over the weekend? Someone at the Central Bank may have had their sleep disturbed to initiate an emergency funding exercise to cover your payment obligations.

Aside from the reputational damage, the consequences include big fines. For example, in the UK, one of the most mature instant payments regions in the world, the most systemic liquidity breaches can land a PSP fines up to 20% of their annual turnover.

Forecasting the demand for payments is also a mountain to climb. Things can go into the red very quickly when dozens of countries with thousands of participating PSPs are in the mix. Funding concerns and associated regulatory demands will heighten as instant
payments gain momentum. For treasurers, ‘educated guesses’ no longer meet the mark.

Is liquidity management walking off a cliff-edge?

Not exactly. Instant payments are a significant shift in banking, and we’ve covered many of the risks they pose to PSPs. But there are ways to combat these risks. You’ll have to read part two to delve into that.

Before that, here’s a summary of the key challenges that SEPA instant payments present to treasury and payments teams:

• Putting stress on incumbent liquidity management models.
• Challenging prudent and adequate funding from T2 accounts.
• Measuring and forecasting instant payment flows.

Dive into the dynamics of funding instant payment accounts and explore ways PSPs’ treasurers can become instant payment-ready in part two, coming soon