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12 Apr 2023

Klarna Comment: How Instant Payments will spark competition in Europe

The Instant Payments Regulation is a great step forward for the European payments market. It will make things fairer for payment providers and encourage competition. This means customers will have more choice, smoother payment options, and lower costs for businesses. Klarna is excited to see what the future of payments holds and hopes that Instant Payments become the norm throughout Europe soon!

Have you ever found yourself needing to urgently pay an invoice, only to worry that the transfer won't arrive in the payee's account in time? Or have you ever ordered a birthday gift for a loved one and wanted to ensure it arrived on time? If so, Instant Payments could be the solution for you.

Instant Payments are a type of electronic payment that enables the almost real-time transfer of funds between financial institutions. They are the ultra-fast version of the standard SEPA transfers, completing transactions within seconds (SEPA stands for the Single Euro Payments Area and is the format for cross-border euro bank transfers).

But, the adoption of Instant Payments has been sluggish so far. Even though the infrastructure already exists since 2017, only 14% of credit transfers in the EU were instant in 2022. Even more, 1 in 3 Payment Service Providers (PSP) in the EU still does not offer Instant Payments at all and the costs for these super fast transfers vary greatly across Europe and providers. They often cost way more than traditional money transfers – up to EUR 30 per payment. That is a shame, as the additional economic output from Instant Payments is estimated at for instance USD 0.9 billion in France and USD 3.3 billion in Germany by 2026 (link). Luckily, the European Commission has issued plans to mandate banks to offer and receive Instant Payments 24/7 all year round. 

It’s time for regulation to speed up payments

In October 2022, the European Commission issued a proposal that will require banks across the EU to offer and receive instant euro payments 24/7 all year round. Currently, the European Parliament and the Council are working hard to push the Instant Payments Regulation over the finish line this year.

Do we really need this regulation? We say yes! Traditional banks have been too slow to roll out Instant Payments, while it offers many benefits. At Klarna, we think it's great for both consumers and businesses. Consumers get faster, more convenient payment options, while businesses reduce the risk of failed payments and improve cash flow. There's an even bigger opportunity: Instant Payments can accelerate new innovative payment methods by levelling the playing field between card-based and bank account-based payments, leading to more competition and better outcomes for society.

Let’s look at bank account-based payments. Account-based payments, also known as account-to-account payments, allow money to be transferred directly from the payer’s bank account to the payee's account without any intermediaries such as credit or debit cards. Instant Payments will make it easier to pay directly from your bank account at any point of interaction – whether shopping online or offline at your favorite retailer on the high street. Open banking solutions let consumers initiate the account-based payments smoothly and securely, e.g., by scanning a QR code via the Klarna App. Merchants get the funds instantly, with no card processing or scheme fees. This is great for consumers and merchants alike, but it also creates a more integrated and efficient European payments market and reduces dependency on non-European networks.

Why Instant Payments matter to Klarna

As both a licensed bank and a third-party payment service provider (TPP), we offer credit transfers as a bank and payment initiation services (PIS) as a PISP. Unfortunately, today payments that have been successfully initiated don't always get executed for various reasons (e.g. fraud or delayed accounting of withdrawals). These ‘failed’ payments cause significant costs, particularly for our merchants and their customers. Instant Payments can help to reduce these payment losses, particularly when a notification requirement is included so that the payer and any involved TPP will be informed whether a payment has been executed or rejected. 

At Klarna, we want to see Instant Payments become the norm for credit transfers – it's faster and smoother, and we believe consumers should have broad access to this form of payment. As a bank, Klarna currently gives its bank customers the ability to receive Instant Payments and plans to roll out the sending function free of charge this year. Instant Payments involve sending payments instantly and also receiving them instantly – only if both the payers and the payees' PSP operate instantly will the whole transaction be truly instant. That’s why a mandate for the whole industry is needed.

5 ideas to make the Instant Payments Regulation even better

The proposal for an Instant Payments Regulation is good, but we think it can be even better. In order for the Instant Payments Regulation to be great for consumers and businesses, EU policymakers should focus on the following areas:

  • Cap the pricing for Instant Payments. Fees for Instant Payments should be capped and kept the same as non-instant payment types, especially since some PSPs already offer free standard and instant SEPA credit transfers. This will make Instant Payments more attractive to consumers and businesses, as they won't be more expensive than other payment methods. Instant Payments should be the infrastructure on top of which banks and other payment service providers can develop further innovative services, such as enhanced security features or e-invoicing and bill processing. It's promising that many Member States and the Parliament's ECON committee draft report support the price cap on Instant Payments, as suggested by the Commission.
  • Stick with an ambitious timeline. Instant payments offer great opportunities for consumers, businesses and society. The sooner the regulation comes into force, the sooner Europe can benefit. The mandate for receiving and sending instantly should apply at the same time. We support a timeline of 6 months after the regulation is in force (hopefully in 2024!). It should also apply for EU countries that are not part of the Eurozone.
  • Add a notification requirement for payer and payer’s PISP. With Instant Payments, we also need instant certainty through instant notification. The Instant Payments proposal is missing an important element: a notification requirement to oblige sending payment service providers (PSPs) to inform the payer and potential payment initiating party (e.g. PISP) instantly and free of charge that the payment has been executed or rejected. Instant Payments are meant to ensure that payments are executed and credited immediately, but this aim will only be achieved if all parties involved are notified instantly. Currently, due to the lack of notification, consumers and businesses do not enjoy payment certainty when using payment initiation services.
  • Client-based EU sanctions screening could reduce burden. Sanction screenings are necessary to check if customers or organisations involved in a payment are not on any government's bad list. The proposed system of sanction screening for Instant Payments will be effective and potentially cheaper, as banks need only to check their clients against the EU sanction lists once a day instead of screening at every transaction. An additional improvement is that payment service providers (PSPs) would need to verify only their own clients. The current procedure is costly, as both payers and payees are screened twice – both are screened by the payee's PSP and the payer's PSP. This new client-based approach is more efficient and could be a blueprint for other areas, like regular SEPA payments.
  • IBAN-name checking only where suitable. The IBAN-name check should not apply where payee details are pre-populated via Open Banking solutions and where the PISP has performed know your customer (KYC) and due diligence checks in line with AML regulation on the payee. In these scenarios, when payment initiation services are used, it allows the payer ‘to place a payment order without being required to insert the payment account identifier’ (aka the IBAN). There is limited need to verify a match between the payee’s name and their IBAN, as the rapporteur Hoogeveen remarks in their draft report. In these cases, the PISP ensures that the payment goes to the right place.

It’s time for instant!

The Instant Payments Regulation will help to finally roll out Instant Payments in Europe. This will give innovation and competition a real boost, for example by making bank account-based payments in-store a genuine alternative to card-based payments. The Instant Payments Regulation needs to be ambitious and must not be watered-down during the legislative process in order to create strong incentives for universal Instant Payments in Europe. For Klarna, it is an important step towards achieving the goal of true open finance, where financial services are more accessible and convenient for everyone.

If you would like to learn more about Klarna’s perspectives on the Instant Payments Regulation contact global.pa@klarna.com