In our previous SEPA insight, we outlined how financial institutions could implement SEPA instant credit transfers (SCT Inst.). Now that the 9 January deadline for banks to receive instant credit transfers has passed, many banks are struggling to fully optimise the transition to an instant settlement model. We have identified several challenges in implementing instant settlement mandates and in this follow-up article, we explore the challenges of operationalising instant settlement mandates, propose mitigation strategies, and explore potential opportunities that SEPA Instant offers to stakeholders. In the digital payment landscape, speed and safety remain crucial yet often conflicting elements of customer experience, and many payment systems are still struggling to balance these effectively.
Understanding the importance of transaction settlement in credit transfers
Transaction settlement is a pivotal element of the payment lifecycle. Without dependable settlement mechanisms, the integrity and efficiency of credit transfers would be jeopardised, eroding trust in financial transactions. In particular, instant settlement forms the foundation of the SCT Inst. scheme, ensuring that funds are swiftly and securely transferred to foster confidence and streamline operations in the evolving payments landscape.
The Instant Payments Regulation (EU) 2024/886 mandates SEPA Instant Credit Transfers (SCT Inst.) by European banks, promising rapid settlement by 2025. However, achieving this involves addressing challenges in security and liquidity management. This article examines the operational shifts from STEP2 and TARGET2 to RT1 (Real-Time 1) and TIPS (Target Instant Payment Settlement), with strategies for effective instant settlement in credit transfers.
Understanding SEPA credit transfer settlement models
In operational terms, credit transfer settlements can be executed through either an automated clearing house (ACH) or a real-time gross settlement (RTGS) system. ACH transactions are generally processed in batches at scheduled intervals, usually requiring one to three business days for completion. Conversely, RTGS transactions are processed and settled on an individual basis in real-time, ensuring immediate and irrevocable fund transfers. The table below highlights the key characteristics of these two settlement models:
Parameters |
RTGS |
ACH |
Settlement time |
Real-time, immediate settlement |
Batch processing, one to three business days |
Transaction size |
High-value transactions |
Low-value, high-volume transactions |
Speed |
Ideal for urgent, large-sum transfers |
Not ideal for urgent payments |
Cost |
Higher fees |
Lower fees |
Availability |
Operates continuously |
Specific cut-off times for processing |
Collateral requirements |
Requires immediate liquidity or collateral to ensure real-time settlement of transactions |
Generally, does not require collateral, as transactions are netted and settled in batches |
Liquidity management |
Participants need to manage their liquidity carefully to avoid settlement failures |
Reduces immediate liquidity needs compared to RTGS |
Risk management |
Central banks often provide intraday credit or liquidity facilities |
Risk management measures such as credit limits, monitoring of positions and settlement guarantees |
Across Europe, SEPA credit transfers are processed through two primary platforms: the European Central Bank's (ECB) STEP2 and the European Banking Authority's (EBA) TARGET2.
- STEP2: Operated by EBA Clearing, STEP2 is a pan-European ACH that handles SEPA credit transfers and SEPA direct debits. It facilitates the batch processing of transactions, typically completed within one to three business days.
- TARGET2: Managed by the European Central Bank (ECB), TARGET2 is the Eurosystem’s RTGS system. It processes large-value euro payments, offering immediate finality and settlement in central bank money.
Traditionally, SEPA credit transfer settlements have followed a batch-processing model, which prioritises security over speed. This approach ensures the safety of the payer/sender and their bank while helping ecosystem participants minimise liquidity requirements for securing inter-bank settlement obligations.
SEPA instant credit transfer: transaction settlement dynamics
To establish a successful instant settlement system, technical interoperability among participating institutions is crucial, but equally important is the cultivation of robust inter-institutional trust. This trust is often underpinned by security collateral held by each participant on behalf of others, ensuring that institutions can credit a beneficiary's account based on instructions from fellow participants.
In practice, for instant settlement to operate smoothly, Bank A and Bank B need not only technical communication via API calls but also a strong mutual trust. This trust allows Bank A to instruct Bank B to credit a customer account instantly, akin to a cash advance or credit facility. The expectation is that Bank A will either reimburse Bank B in an agreed settlement cycle or Bank B will offset the advance using Bank A’s security collateral.
Such trust and collaboration are essential for ensuring a seamless and swift instant settlement process, akin to how ATM networks function. In this model, Bank B customers can instantly access cash from Bank A’s ATMs, with both banks settling the transactions under established procedures administered by card schemes. This rapid settlement model is vital for enhancing customer satisfaction and trust, offering immediate access to funds and reinforcing the value proposition of instant credit transfers.
Transitioning to RT1 and TIPS
Across the Eurozone, 24 out of the 40 SEPA member countries have implemented SCT Inst. The compliance deadline is divided into two phases—one for receiving payments and another for originating them. This staged approach allows stakeholders to focus on specific areas, implementing changes gradually. However, it also creates a temporary mismatch. By 9 January 2025, banks must be ready to receive and process instant credit transfers, but they are not required to initiate or send these transfers until 9 October 2025. Neobanks, such as Revolut and N26, have pre-emptively completed the payment origination implementation, unlike many traditional banks that are not yet equipped to initiate instant transfers.
Transitioning to an instant settlement system demands more than just technical updates to the SEPA platforms used by financial institutions. It also impacts non-technical aspects of settlement operations, including collateral requirements, liquidity and risk management. The migration from STEP2 and TARGET2 to RT1 and TIPS signifies a major shift in the settlement infrastructure for instant credit transfers. This transition requires comprehensive preparation to ensure seamless integration and operational efficiency across the banking ecosystem.
Operational changes and implications
The transition to instant payment systems like RT1 and TIPS represents a pivotal shift for SEPA instant credit transfers. Managed by EBA Clearing, RT1 enables 24/7 real-time processing of transactions, enhancing the speed and efficiency of fund transfers. This shift requires moving the settlement process from TARGET2 to TIPS, the ECB's infrastructure for instant settlement in central bank money. This change is crucial for optimising liquidity management and ensuring smooth interoperability among financial participants, bolstering the overall effectiveness of instant payments in Europe.
Comparative analysis: TIPS and RT1
Feature |
TIPS |
RT1 |
Operator |
ECB |
EBA Clearing |
Launch date |
November 2018 |
November 2017 |
Settlement type |
RTGS |
Deferred net settlement (DNS) with real-time capabilities |
Currency |
Primarily euro, with support for other currencies in the future |
Primarily euro |
Settlement accounts |
Central bank money held at the ECB |
Commercial bank money with accounts held at EBA Clearing (settlement through TARGET2) |
Availability |
24/7/365 |
24/7/365 |
Speed of processing |
Instant (within ten seconds) |
Instant (within ten seconds) |
Liquidity management |
Direct liquidity in central bank accounts |
Liquidity management through pre-funded accounts at EBA Clearing |
Participation |
Direct and indirect participants (through other banks) |
Direct and indirect participants |
Interoperability |
Yes, with other instant payment systems |
Yes, with other instant payment systems |
Scalability |
High, supported by ECB's infrastructure (used mostly by financial institutions) |
High, used by over 2,400 payment service providers across SEPA |
Reachability |
European-wide with growing global reach |
Extensive across SEPA with a large participant base |
Cost |
Generally lower, with flat fees set by ECB |
Varies, with fees based on volume and usage |
Designing an effective liquidity management framework
- Real-time monitoring: Deploy advanced monitoring tools to continuously track liquidity positions, ensuring funds are readily available for instant settlements.
- Liquidity buffers: Establish sufficient liquidity reserves to manage unexpected transaction surges and prevent settlement disruptions.
- Risk mitigation: Formulate contingency plans and conduct stress tests to identify potential risks, implementing strategies such as credit facilities or collateral arrangements to mitigate them effectively.
- Regulatory compliance: Adhere to regulatory mandates, including maintaining minimum reserve holdings and meeting liquidity coverage ratios.
By comprehending the dynamics of instant settlement and efficiently managing liquidity, financial institutions can adeptly navigate the challenges of SEPA instant credit transfers, providing a seamless and efficient payment experience for their customers.
Key actions for businesses to enhance instant credit transfer security and efficiency
To effectively balance transaction settlement speed with robust safety and security measures, participants in instant credit transfers should consider the following actions:
- Implement beneficiary name verification: Incorporate a mandatory verification of payee (VoP) step in the transfer origination process. Available on both RT1 and TIPS platforms, this step requires the payer to input only the payee's account number. The system will then display the associated customer name(s) for confirmation before authorising the transfer. This process ensures that the payer verifies the payee's identity before finalising the transaction, enhancing security.
- Deploy advanced fraud detection systems: CBI reported that credit transfer frauds grew by 26% in 2023 and were higher for transactions where SCA was not applied. Hence, Financial Institutions must then pPrioritise the implementation of sophisticated fraud detection systems capable of real-time analysis. Financial institutions can utilise machine learning and AI technologies to identify suspicious activities and mitigate risks. These systems should be designed to analyse transaction patterns and immediately flag anomalies.
- Establish transaction limits and monitoring: Define transaction limits and set parameters for monitoring high-risk transactions. This approach helps prevent large-scale fraud by providing an additional layer of security.
For effective management of settlement liquidity and security collateral, financial institutions should:
- Develop a comprehensive liquidity management framework: Create a framework to manage inter-bank settlement obligations under the instant credit transfer mandate. This framework should account for current daily credit transfer volumes and values, as well as potential increases due to faster settlement cycles. It must ensure that security collateral is adequate to cover daily turnover without being excessive, avoiding the cost of idle funds that could otherwise be utilised productively.
- Implement robust reconciliation systems: Establish a reconciliation system capable of handling real-time processing to maintain accuracy and reduce errors. Regular audits and reviews of settlement accounts are essential for early detection of any anomalies, ensuring the integrity of financial operations.
SEPA instant is expected to create a level playing field for banks particularly for the pillar banks (as it could drag them up to the level of their fintech rivals) giving them the much needed opportunity to claw back customers from Revolut, N26 and other neobanks like them. However, to maximize the advantages of instant credit and create a competitive edge, these institutions must:
- Enhance customer experience: Focus on providing a seamless and user-friendly experience for consumers. This includes intuitive interfaces and reliable customer support.
- Develop a market segmentation strategy: Implement a robust market segmentation strategy to identify and target specific customer groups, such as MSMEs. This allows for tailored marketing and product offerings that meet the unique needs of each segment like offering instant credit solutions to SMEs to help them shorten settlement cycles (compared to the traditional D+1 settlement cycles of card payments). This can eliminate card costs, making it a more cost-effective option for SMEs. While this may cannibalize the Financial Institutions existing profit structure from card operations, a cheaper instant credit transfer proposition for SMEs will invariably lead to higher more sustainable deposit mobilization for the FI in the long run.
- Facilitate stakeholder education and sensitisation: Conduct comprehensive education and sensitisation programs for stakeholders, including SMEs, to raise awareness about the benefits and usage of instant credit solutions. This can help build trust and encourage adoption.
By adopting these key actions, businesses can effectively navigate the complexities of SEPA instant credit transfers, ensuring a secure, compelling and efficient payment experience.
We are here to help you
Our team of experts can support your instant credit transfer implementation under the SCT Inst. mandate covering both the receiving and sending propositions . We provide technical expertise to manage the transition to SEPA instant credit transfers, assess settlement infrastructures and guide platform selection based on cost, technology and timelines. We handle technical integrations with platforms like RT1 and TIPS into core banking operations, and design and implement liquidity management frameworks to meet continuous gross settlement requirements. Our services also include stakeholder training and developing go-to-market strategies to defend market share and identify growth opportunities.
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