The most underestimated mandatory task for 2023 is the implementation of the inconspicuous EU Directive 2020/284 "as regards introducing certain requirements for payment service providers". The directive on the prevention of fiscal fraud in cross-border e-commerce for goods and services requires payment service providers to report certain payment data. The details are quite complex: an additional, rather intricate reporting system with its own interfaces to the Federal Central Tax Office has to be set up. Data not previously available must be collected and reported: for example, the identifier of the payment recipient's location, such as the IBAN. If available, the address data and tax numbers of the payment recipient must be transmitted. The reporting obligation applies from 1 January 2024. The number of banks that have set up such projects is very limited to date. Considering that financial authorities are not exactly known for their sense of humour, this seems rather bold.
SWIFT requires structured data
Not quite as urgent, but similarly complex, is the SWIFT requirement to process only structured address data of customers in payments from November 2025. The regulation affects banks as well as end customers. It implements requirements of the leading industrialised countries to combat embargo violations, terrorist financing and money laundering. It is recommended to switch to using only the structured data as early as 2023. This will likely affect several million data records in Germany alone which are not available in this form. Banks should therefore already develop communication plans and technical implementation scenarios in the coming year – with AI support where applicable.
It is a sad but industry-accepted truth that 50 per cent of payments operating costs are for regulatory compliance and another 25 per cent for process and technical infrastructure maintenance and adaptations. It is therefore not surprising that financial institutions often lose sight of earnings potential and opportunities.
Request to Pay provides opportunities
For example, an offer that combines the still young standard Request to Pay with concrete use cases such as electronic invoices has enormous potential for banks. If banks were to offer their corporate customers the processing and handling of electronic invoices and the corresponding payment requests, they could reduce their costs – including the reconciliation of incoming payments – by around ten euros per invoice. In this context, banks could generate lucrative transaction fees, while at the same time further strengthening the business account as core of the customer relationship and, on top of that, make a significant contribution to sustainability.
The decisive success factor for corresponding services is cross-bank accessibility. It is therefore all the more gratifying that such infrastructures are already emerging in the market. It is expected that from 2026 onwards, only electronic invoices will be permitted throughout Europe anyway.
TARGET2 consolidation: "all hands on deck"
So much for the underestimated topics. Not underestimated are the preparations for the TARGET2 consolidation, which has been postponed to 20 March 2023, and the start of the SWIFT migration to the ISO 20022 format. This date should remain fixed, because another postponement of the TARGET2 consolidation would probably have the nasty consequence that TARGET2 and the SWIFT migration would diverge.
Mass payments will also be characterised by the implementation of new regulations in 2023, such as the EU regulation on the mandatory introduction of SEPA instant payments and the introduction of the latest ISO standard for all SEPA payment schemes. The latter will not only have an impact on the payment file and payments systems themselves, but will also affect peripheral systems like, for example, master data systems.
Fraud prevention for real-time credit transfers
The EU Commission's proposal for the mandatory introduction of SEPA real-time credit transfers presented at the end of October 2022 is currently the subject of in-depth discussions and lobbying. Among other things, there is intensive discussion on whether payment service providers must offer their customers a matching of account number and name. The background to the proposal is the finality of SEPA real-time credit transfers in seconds. This makes them vulnerable to fraud and is to be counteracted by the possibility of checking whether the IBAN in question really belongs to the payment recipient before the payment is sent out. Successfully combating fraud attempts is becoming a key factor in the success of instant payments.
The widespread establishment of real-time credit transfers does not only affect payment service providers who have not yet offered the instrument, but also the active players. The reason: since real-time credit transfers must not be more expensive than conventional transactions in the future, market participants expect their share of all transfers to rise from 10 to at least 30 to 40 per cent. This trend is promoted by the rising interest rate level, which rewards the holding of credit balances again. But if the number of transactions grows by at least a factor of three, all the payment service providers whose real-time infrastructure has so far been based on makeshift solutions will run into difficulties. A corresponding check is therefore urgently required.
In retail payments, the pan-European initiative EPI – with a meanwhile limited scope of services as an account-based P2P and e-commerce procedure – faces important fundamental decisions at the turn of the year 2022/23. This concerns, for example, the questions of whether the cooperative finance group will rejoin the EPI and whether and how the initiative as a whole will move forward.
New use cases for retail payments
The key service providers in the retail payments sector will continue to work on improving their capabilities in 2023. The issuers will, for example, further develop the girocard for e-commerce. Many payment service providers are working on supporting various omnichannel concepts, not least as a result of the Corona pandemic. The focus here is not only on the now generally known use cases such as click & collect, but also on
- The use of online payment methods at the point of sale, such as buy now, pay later,
- The support of franchising and cooperation models, for example cross-channel and cross-company returns, and
- The evaluation of customer behaviour across the various touchpoints.
In October 2023, the ECB's analysis phase on the digital euro will end and the Governing Council will likely decide to start the realisation phase. Since the digital euro is currently being designed as a retail euro, various banks in Europe are already working in parallel on the introduction of so-called tokenised commercial bank money in 2023.
How can the financial institutions – in view of the shortage of skilled workers as well – cope with the enormous number of tasks? It will only work if the willingness to cooperate across banks increases, standard solutions become more widespread and outsourcing is also considered. There should also be a growing willingness to renew the foundations, if necessary, instead of continuing to build on existing legacy systems while ignoring the "technical debt".
Those are a lot of projects to cover already – and we have not even talked about the impact of the coming DORA regulation, accessibility regulations and the PSD3 looming on the horizon.
Author: Hubertus von Poser, Head of Consulting Payments, PPI AG
