First conceived in the early 2000s to support broader financial integration within the European Union, the Single Euro Payments Area (SEPA) is a monumental initiative aimed at creating a unified and competitive market for euro payments and facilitating seamless cross-border transactions.

Prior to SEPA’s official launch in 2008, businesses operating in multiple jurisdictions grappled with a patchwork of payment systems and regulations. This fragmentation not only increased the cost and complexity of processing cross-border payments, but also stifled economic growth and innovation.

In light of this, the European Payments Council (EPC) partnered with the European Central Bank (ECB) and the European Commission to standardize payment processes across the eurozone, creating a unified market in which cross-border transactions are as seamless and efficient as domestic ones.

The goal of SEPA is ambitious, yet simple — it:

• Introduces common standards and practices to ensure that payments within the eurozone can be processed seamlessly, regardless of their origin or destination
  
• Reduces the cost and complexity of cross-border payments in the interest of driving greater efficiency, economic growth and integration
  
• Enhances transparency in cross-border payment processing by making fees and transaction times clear and predictable for all parties involved
  
• Fosters a competitive market, encouraging the development of innovative payment services and solutions
  

To date, 36 countries and territories participate in SEPA, including European Union member states, European Free Trade Association member states and multiple microstates.

As part of this initiative, the EPC introduced SEPA Credit Transfer (SCT), a payment scheme that enables individuals and businesses to transfer funds between bank accounts within the SEPA area in the span of a single business day. In 2014, the EPC added two additional payment schemes to the SEPA family: SEPA Direct Debit Core and SEPA Direct Debit Business-to-Business (B2B).

Imagining a real-time economic landscape

While the launch of SEPA and its various payment schemes were major milestones in the push for a unified, dynamic European financial landscape, the EPC’s vision didn’t end there. To meet growing demand for immediacy in cross-border transactions, the EPC launched SEPA instant payments — more commonly known as SEPA Instant Credit Transfer (SCT Inst) — in 2017.

SCT Inst improves upon the existing SCT framework, supporting the real-time transfer of up to €100,000 per transaction and providing recipients with immediate access to funds. Both SCT and SCT Inst payments are irrevocable and final, but while SCT remains subject to typical banking hours and cut-off times, SCT Inst is available 24 hours a day, 365 days a year.

Let’s take a closer look at how SEPA instant payments are processed:

1. Initiation
   An individual or a business (the payer) initiates a transaction by entering the recipient’s details, the amount they wish to transfer and any necessary reference information into their bank’s digital platform. The payer then verifies their identity using some form of authentication — such as two-factor, multi-factor or biometric authentication — to authorize the payment.
   
2. Payment Request
   The payer’s bank, known as the originating bank, receives the payment request. The originating bank verifies that the payer has sufficient funds in their account to complete the transaction and reserves the requested amount. The originating bank then generates a payment order containing the recipient’s International Bank Account Number (IBAN), the Bank Identifier Code (BIC), the amount to be transferred and other relevant details.
   
3. Payment Processing
   The originating payment sends the payment order to the appropriate Clearing and Settlement Mechanism (CSM), such as the ECB’s TARGET Instant Payment Settlement (TIPS) or EBA Clearing’s RT1 system. Upon receiving the order, the CSM processes the transaction instantly, debiting the designated amount from the originating bank’s account and crediting it to the receiving bank’s account. The CSM then notifies both the originating and receiving banks of the successful settlement.
   
4. Payment Receipt
   Upon receiving the funds and confirmation from the CSM, the receiving bank immediately credits the recipient’s account, making funds available for immediate use and issues a notification to the recipient.

Understanding the benefits and challenges of SEPA instant payments

Since its debut in 2017, SEPA Instant Credit Transfer has opened doors for financial institutions and payment service providers (PSPs), enabling them to deliver on the promise of real-time, cross-border payments throughout the eurozone. SCT Inst presents an array of strategic benefits that can significantly enhance banks’ and PSPs’ operational capabilities, position them at the forefront of innovation and enable them to deliver unparalleled speed and efficiency in payment processing.

• Exceptional Experiences: In an era where immediacy is expected, SCT Inst enables banks and PSPs to support instant fund transfers, ensuring that payments are processed in real-time, around the clock so that customers have immediate access to available funds.
  
• Operational Efficiency: SCT Inst uses advanced automation to streamline payment processes, reducing the need for manual intervention and the risk of human error, accelerating transaction times, optimizing resource allocation and enabling institutions to focus on strategic initiatives rather than routine tasks.
  
• Liquidity Management: The real-time nature of SEPA instant payments provides banks and PSPs with up-to-the-minute visibility into cash positions, allowing for more accurate and efficient liquidity planning. This capability is particularly valuable for treasury operations, where timely insights into cash flow are crucial for decision-making and financial stability.
  
• Cross-border Standardization: As part of SEPA’s aim to support seamless payment processing throughout the eurozone, all SCT and SCT Inst transactions utilize the ISO 20022 messaging format. This standardization simplifies integration with various banking systems and payment platforms, enhancing interoperability and reducing operational complexity. By facilitating easy and efficient cross-border payments, SEPA instant payments enables financial institutions to expand their reach and offer their customers the convenience of real-time payments, regardless of geographical boundaries.

But transitioning to SCT Inst also comes with its own set of technological, operational and strategic challenges. To overcome these challenges — and to take full advantage of SEPA instant payments — financial institutions and PSPs must first understand them:

• Technological Overhaul: Many institutions continue to rely on legacy systems that were not designed to support instant payments and that lack the real-time processing capabilities needed for SCT Inst, necessitating a complete infrastructure upgrade rather than mere enhancements.
  
  Banks and PSPs can overcome this hurdle by investing in modern, scalable payment platforms — ideally, cloud-based solutions and payments as a service (PaaS) models that can facilitate faster implementation timelines and transition costs from capital expenditures to operational expenses. These modern solutions not only meet the technical requirements of SCT Inst, but also offer flexibility and scalability for future growth.
  
• Fraud Detection: With the rapid pace of instant payments innovation comes an increased risk of fraud. Financial institutions need advanced fraud detection mechanisms capable of operating at the speed of SCT Inst transactions. Traditional fraud prevention methods may be insufficient, as instant payments require real-time analysis and response. Implementing sophisticated fraud detection systems that leverage artificial intelligence and machine learning can help identify and mitigate fraudulent activity in real time.
  
• Operational & Strategic Adaptations: The shift to SCT Inst not only poses technological challenges, but strategic ones. Financial institutions and PSPs must balance their need for compliance and security with the operational demands of real-time payments, such as maintaining liquidity, ensuring seamless settlement and reconciliation processes and managing potential service disruptions.
  
  Adopting a phased approach to implementation enables organizations to address operational issues incrementally by first focusing on building out the necessary infrastructure and then gradually rolling out SCT Inst services. When paired with continuous training and development programs for staff, institutions can ensure that their teams are well-equipped to handle the new system’s demands.

Preparing for the future of cross-border payments

Europe stands on the precipice of yet another major economic transformation as the European Union prepares to implement a new regulatory mandate aimed at standardizing instant payments across the eurozone. This forthcoming regulation, poised for implementation by 2025 within the euro currency and by 2027 for those outside it, aims to accelerate the adoption of instant payments and establish a unified, efficient financial ecosystem.

The mandate’s requirements are clear and ambitious: All transactions must be processed and funds made available to recipients within 10 seconds or less, and instant payment services must be available at all hours of the day and all days of the year. This immediate access to funds redefines the very essence of what “instant” means in financial transactions, setting a new standard for speed and efficiency. The regulation also emphasizes the need for upfront payee verification to enhance payment security and reduce fraud risk. Moreover, the mandate calls for synchronized pricing between SCT and SCT Inst, promoting fair pricing and broader accessibility.

These requirements are more than just technical specifications — they’re a catalyst for growth and innovation. By mandating the widespread adoption of SCT Inst, the regulation aims to foster a more integrated, efficient and secure financial system. Any financial institution or PSP that embraces this shift will not only meet regulatory demands, but also position themselves as leaders in the rapidly evolving financial market.

Make the transition to SEPA instant payments with Volante

Transitioning to SEPA instant payments comes with a unique set of challenges and opportunities and requires the support of a trusted partner with proven experience — a partner such as Volante.

Our recent experience with a Tier 1 global bank demonstrates our ability to deliver efficient and effective solutions for institutions looking to make the switch to SEPA payments. The bank in question wanted to adopt SEPA for their European region and determined that a payments as a service (PaaS) model was the optimal approach. This decision was facilitated by Volante’s ability to provide seamless connectivity to the SEPA scheme, making the business case straightforward.

Volante’s role in this engagement involved configuring interfaces with the bank’s existing platforms and hosting the solution on their service. Our pre-configured, ready-made VolPay solution easily integrated with the bank’s systems, ensuring all necessary certifications were met. The bank is now in production and able to process SEPA payments.

This is just one success story of many for Volante and VolPay. Designed to deliver end-to-end payments processing for financial institutions and payment service providers, this cloud-native platform provides comprehensive support for various instant payment schemes, including SCT Inst. With VolPay, institutions can build new, real-time customer experiences, reduce the cost of their payments infrastructure, accelerate straight-through processing and much more.

To learn more about VolPay or any of Volante’s payment solutions, contact us today.

SEPA Instant Payments: Are Banks Ready?

Discover the full impact of the impending SEPA instant payments mandate — and the challenges and opportunities it creates for banks — in this on-demand webinar hosted by Finextra.