The Single Euro Payments Area (SEPA) is an EU payment-integration initiative for simplifying euro bank transfers. The SEPA region comprises 38 European countries, including some countries that aren't part of the euro area or the European Union.
SEPA enables customers to make digital, cashless euro payments to any account located anywhere in the EU, using a single bank account and a single set of payment instruments. SEPA’s significance in global finance is substantial, as it has streamlined cross-border payments in Europe, aimed at reducing the cost and complexity of conducting transactions in euros.
SEPA's impact on cross-border transactions has also been significant. In standardizing payment processes and formats, it has encouraged greater economic integration across the region and worked towards enhancing the efficiency of the European financial market. According to the European Central Bank, this has led to increased trade and economic activity throughout the SEPA zone.
The evolution of SEPA and the introduction of faster payments is a significant milestone in the European payment landscape. The recent and upcoming regulatory changes will transform transaction processing to offer benefits to customers, such as improved speed, efficiency, and customer experience. However, these changes bring challenges to institutions in terms of fraud prevention, third-party risk management, and regulatory compliance, including compliance with sanctions.
A faster payment is an electronic transfer of funds that occurs almost instantaneously, allowing customers to have quicker and more convenient transactions when, for instance, sending money to someone or paying bills.
There is an ongoing demand for near-instantaneous transactions across an ever-more digital economy. And in Europe, faster payments have been driven by both regulatory initiatives and market demands. The significance of faster payments lies in their ability to meet consumer expectations for speed and convenience in all financial interactions.
Faster payment systems can offer improved transaction speeds, providing the ability for enhanced commercial growth and competitiveness. They also provide opportunities for cost-efficiency and streamlined operations, as they can reduce the need for manual processing, while minimizing errors.
Versions of digital payment systems have been in existence for many years, but faster payments continue to evolve. When comparing newer payment systems to others such as CHAPS (Sterling’s Clearing House Automated Payment System), there are some key differences.
While CHAPS offers same-day settlement for high-value transactions, faster payments provide near-instant transfers for smaller amounts, typically within seconds or minutes. Faster payments are often free or low-cost for consumers, whereas CHAPS transactions may incur higher fees.
However they are made, faster payments drive the need for financial institutions to conduct due diligence. And the introduction of EU rules for 24hr near instant payments is pushing the need for real-time digital screening or perpetual know your customer (pKYC) checks to the fore. If an institution is required to process instant payments – transmission from A to B in under 10 seconds – checking the transaction is legal and compliant also needs to be instant.
The requirement to check transactions aren't fraudulent or driven by a bad actor laundering money, or by a sanctioned individual is vitally important. "While digital KYC has been done quickly before, it’s going to need to be done at breakneck speed now and on a continual basis. Ongoing digital transformation and introduction of further AI-enabled solutions are going to be the keys to managing this.” said Chor Teh, Industry Practice Lead at Moody's.
The future of SEPA and faster payments is shaped by several regulatory milestones, including these three:
These changes could create risk and compliance challenges for financial institutions. Financial organizations need to ensure their payment infrastructures can process transactions within the stipulated time limits while also implementing robust, real-time fraud prevention measures. They must also integrate refined financial crime controls, such as know your customer (KYC) and sanctions screening, along with name matching technology.
Streamlining approaches to third-party risk management and introducing pKYC processes could help maximize efficiency, identify material changes to a customer's risk profile, and reduce non-compliance with sanctions and other anti-financial crime laws.
Regulatory compliance in the areas of faster payments is becoming increasingly complex. To manage compliance effectively, financial institutions are likely to be focused on upgrading their payment infrastructures to meet the new requirements. This might include investing in technology to build systems capable of instantly processing payments, as well as implementing real-time anti-financial crime and fraud prevention measures.
Emerging technologies – particularly AI and machine learning – can play an increasingly important role in helping organizations digitally transform their risk and compliance processes to conduct perpetual screening and risk monitoring across a customer base.
For business leaders, strategic considerations could include assessing current payment systems, planning for necessary upgrades and ensuring they have the right expertise and resources to navigate the regulatory changes. And, in many ways, these changes could be viewed as opportunities to enhance service offerings by improving operational efficiency while delivering better customer experiences.
For more information on how Moody's can help you with perpetual KYC (pKYC), as well as sanctions compliance, customer due diligence, and ongoing risk monitoring, please get in touch - we would love to hear from you.