Nearly half of European banks expect to lose millions in interest due to new liquidity demands under the SEPA Instant Payments regulation, yet they believe the advantages will surpass the costs.
As the industry races to meet the October compliance deadline for mandatory instant euro payments across the EU, RedCompass Labs surveyed 300 senior payments professionals at European banks.
One significant challenge for banks is liquidity. SEPA Instant requires 24/7/365 processing, but the European Central Bank’s Target2 system, used for wholesale payments and liquidity management, operates only on weekdays between 07:00 and 18:00 CET. Consequently, banks must pre-fund accounts in the Target Instant Payment Settlement (TIPS) system to maintain liquidity during evenings, weekends, and holidays.
This situation can be expensive for banks, as idle funds held in central bank accounts limit capital available for lending or investment. Additionally, borrowing from central banks incurs costs, and transferring money from interest-bearing accounts into TIPS diminishes potential earnings.
The planned removal of the €100,000 transaction limit will complicate matters further. Higher transaction limits make it challenging for banks to predict their liquidity needs; nearly all surveyed banks (93%) expressed concern, with almost half (48%) indicating they are “very concerned.”
To address these challenges, nearly half of respondents are increasing their liquidity buffers, while a similar number are enhancing their fraud and sanctions screening tools to manage higher volumes during off-hours. Two in five banks are modifying their risk management frameworks, and a similar percentage are establishing bilateral agreements to set transaction limits with other banks.
Sanctions screening presents another significant hurdle. Over half of the banks reported an increase in payment rejections related to sanctions compliance under SEPA Instant. The requirements to clear payments within 10 seconds have led to a 30-50% increase in rejections. To adapt, two-thirds of banks plan to leverage AI to decrease false positives in sanctions screening, and a similar number are investing in tools to enhance transaction monitoring speed and accuracy.
Despite the challenges, over eight in ten banks believe the benefits of SEPA Instant outweigh the costs. While nearly half of the respondents struggled to meet the initial January deadlines, 85% feel the October deadline is realistic.