Instant payments are poised to become the foundation of consumer and business transactions—including card, mobile and online payments—across the European Union and the United Kingdom. But there are important steps needed to achieve successful implementation.
The European Commission is a key driver of instant payments solutions that help streamline payment service provider (PSP) operations including strategies that integrate technologies focused on furthering digitization and increasing payments efficiency.
The Commission has recognized crypto’s natural place in this instant payments landscape, initiating a proposal for a sandbox environment for crypto-enabled payments within the EU. Regulators plan to leverage this sandbox to study the impact on market integrity and financial stability and to apply those learnings to future legislation. In addition, the region is taking tangible steps toward greater interoperability through the combination of institutional support for crypto solutions and by providing clear and consistent regulatory guidance and standards.
In the UK, the Bank of England is renewing its Real Time Gross Settlement Service to deliver a range of new features and capabilities for payments and settlements between financial institutions. The UK’s New Payments Architecture (NPA) for retail payments is also being developed to enable access to a single clearing and settlement mechanism, using ISO 20022 messaging to enable more participants to utilize the UK payments infrastructure and continue to be interoperable with payment services across the globe.
Let’s look more closely at the current state of European payments, dive into trends that are helping smooth the path to adoption, explore the steps it will take to get there and consider opportunities in the near-term future.
Eagerness to Streamline Instant Payments in Europe
The European Central Bank (ECB) has long desired to make instant payments available to all EU PSPs. Several EU countries have prioritized state-level solutions for instant payments due to concerns around operational issues when scaling up to cross-border payments. This piggybacks on 2016’s Payment Services Directive 2 (PSD2) which aims to “increase competition in an already competitive payments industry, bring into scope new types of payment services, enhance customer protection and security and extend the Directive’s reach.” This legislation directly led to the UK’s Competition and Market Authority (CMA) to call for an “open-banking standard” for the country’s largest banks to share customer and transaction data with third parties.
The European Payments Council has also made progress through the SEPA Instant Credit Transfer system—an update to the original SEPA (Single Euro Payments Area) program, designed to reduce friction with data and cost issues in Euro payments—which requires payments to clear in 10 seconds or less between the 26 countries involved. Not all PSPs in the region are part of the SEPA network, meaning it is not an inclusive solution for all payment providers in the region. While SEPA Instant Credit Transfer delivers on providing instant payments for participating PSPs, it still requires the netting of transactions and the establishment of final positions for settlement by clearing companies or even prefunding in certain cases.
In the UK, the Faster Payments System enables payments to move quickly and securely to and between UK bank accounts—24 hours a day. In 2021 alone, FPS processed 3.4 billion payments—an increase of 20% from 2020—with a value of £2.6 trillion—an increase of 24% from 2020. The system is also growing rapidly in terms of participating financial institutions—40 banks, PSPs and fintechs have joined FPS to date.
Expanding crypto-forward solutions—like Ripple’s crypto payments solution which frees up working capital by reducing the need for pre-funding and removes the need for complex clearing mechanisms in the background—can open new doors to make instant payments available to more PSPs. Embracing this crypto for banks strategy would further enable instant payments across Europe regardless of currency symmetry or capital resources.
Key Supporting Trends
Two parallel movements support the accelerated mainstream adoption of instant payment methods across Europe. First, both the B2B and B2C payments landscape is rapidly modernizing. There is increased expectation from both consumers and businesses that international payment rails function as seamlessly as domestic rails. Blockchain technology’s proliferation in the region has resulted in a widespread expectation of cheaper digital payments, which may also help to bolster the perception and adoption of other digital and crypto-backed tools that streamline payments.
The second movement is the rise of interest in central bank digital currencies (CBDCs), not only across Europe but worldwide—over 90% of central banks globally are researching or piloting CBDCs. This technology offers myriad benefits, including streamlining payments for domestic fiscal policy. The Bank of England, Sweden’s Riksbank and the European Central Bank are all exploring CBDCs, with a focus on data privacy and financial inclusion. Sweden—a highly digitized economy already—has seen a massive decline of cash use in recent years. As a result of proactive research, Sweden has emerged at the global forefront of the CBDC movement.
Other parts of the world are exploring digital currency solutions including the Republic of Palau, Bhutan, Mexico, and China. The introduction of CBDCs throughout such diverse economies will have far-reaching economic impacts, such as greater financial inclusion, increased innovation opportunities and improved efficiency.
So while Europe is already making headway with new payment rails to bolster the region’s economies, their technological lead and digital-first approach stand to put them at an even greater competitive advantage.
Obstacles to Overcome
Despite the progress made on the path to an instant payments system, there are roadblocks to navigate in order to reach full adoption of instant payment methods in Europe. Although technology is key to achieving instant payments, clear regulation is necessary to ensure instant payments have legal backing and public support across the region. Regulators worldwide are pushing for instant payments and open banking adoption, but to arrive at the future of cross-border payments, further alignment is vital.
Efforts like that of the Digital Pound Foundation and Digital Euro Association—which aim to integrate digitization into the economy—must be championed and broadened to garner success for modern payment methods in Europe. Not only for instant fiat payments, but for other emerging, digital asset solutions like crypto-enabled payments and CBDCs.
Opportunities Abound for the EU and UK
Instant payments will take center stage across Europe this year, and the widening array of technology and institution-driven options will alter the space for businesses and their end users. With CBDCs and crypto predicted to have the biggest impact on the global payments landscape over the next two decades, positive sentiment and action toward further adoption are likely to trend exponentially.
Emerging tools from non-bank providers may also play a larger role in daily financial activities. For example, a digital wallet for online purchases or greater access to liquidity with crypto-enabled solutions that can reduce friction in the enterprise payments ecosystem.
In certain countries, regulation around open banking and instant payments looks promising and has continued to ramp up. For instance, the UK has been proactive in introducing open banking regulation to financial products like mortgages and investments, as well as broadening the capabilities of APIs to better streamline the flow of money and build up payments infrastructure.
Instant payment technologies coupled with clear regulation can help streamline and digitize the financial industry across the region, increasing competition and innovation in the space to position Europe as a leader in the global economy.
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