Real-time payments are already live in some domestic markets, and from November 2017 will be available across Europe. This cross-border payments facility comes as a challenge for card schemes, as it represents the creation of a pan-European alternative to cards.
Instant payments in the European market have long-term potential, and card schemes will want to secure their positions to guard against the risks posed by this service to their core business. Instant payments represent the next stage of SEPA (Single Euro Payments Area) development and are a focal point for European payments harmonization. The infrastructure will become the platform for the SEPA Instant Credit Transfer (SCT Inst) scheme, which will allow consumers to make transfers to other participating banks 27/7/365, with a maximum limit of €15,000.
At the same time, PSD2 (due to be implemented from January 2018) will provide new entrants and non-payments participants with access to SCT Inst, potentially leading to the creation of new payments products and services that could threaten card schemes. Joining the new scheme is not compulsory for European banks, and only 39 financial institutions have started investing in the infrastructure. While other key operators are waiting to gauge take-up, those that are currently investing will have a competitive advantage from November 2017.
Although instant payments are already available in a few European countries (Denmark, Norway, Poland, Sweden, and UK), this has been limited to domestic transfers. In the UK, Faster Payments has proven popular among consumers, processing 135.7 million payments in June 2017 (up 15% compared to June 2016). Over £1.2tn ($1.57tn) was transferred via Faster Payments in total in 2016. The UK’s success demonstrates the opportunity this service provides – across the European market there are 500 million potential customers and companies that could drive trillions of transactions.
Instant payments infrastructure has provided a solid foundation on which to build powerful payment services. Blik has proved to be a successful example in Poland, with 3.5 million users and 2 million transactions per month in just two years. In the Netherlands, iDeal is operating as an e-commerce payment system that is based on online banking and is currently the most popular payment method among Dutch online consumers. Despite fierce competition, its market share has reached 56% (by transaction value) since launching in 2005.
Given that SCT Inst will create a potentially pan-European, fast bank-to-bank payment network, it has the capacity to disrupt the role of payment cards in both domestic and cross-border payments. The scheme represents a new set of “rails” on which payments can be made, facilitating the development of innovative products that can compete with cards both online and in-store. Provided that such services are cheaper to use and accept than cards, card schemes may find themselves cut out of the European payments value chain.
Pan-European instant payments pose a long-term, potentially existential threat to card schemes, but they are making moves to remain relevant. Mastercard’s recent acquisition of Vocalink (a provider of fast payment services) puts Mastercard in a stronger position by giving it access to this emerging value chain.
By Madalina Aghinita, Consumer Payments Analyst