European Union payments regulations: new rules, new challenges

Like its predecessor, PSD2, the new directive mandates banks to expose their payment systems to third-party providers, allowing for real-time transactions and improved consumer experience. To do this, Luxembourg’s financial institutions are investing in digital solutions such as APIs and mobile payment applications, as well as collaborating with fintech businesses to create new payment services. This approach is anticipated to promote competition, spur innovation and eventually benefit customers.

However, according to a group of executives from the country’s top major financial institutions who met at a breakfast meeting in the country’s Le Royal Hotel, the biggest issue is being prepared when the changes happen. Said one attendee: “It cannot be done within the time frame imposed by the EU, but we, the banks and financial institutions, must find a way to do it.”

Several participants argued during the morning debate that the exponential expansion of data in instant payments necessitates a hybrid strategy that leverages both human and technological assets, and required the development and application of several solutions that involved the use of artificial intelligence, cloud computing, quantum computing and edge/fog computing.

According to one of the experts at the roundtable, using automation and machine learning algorithms allows financial institutions to process and analyse large amounts of data quickly and accurately, freeing up human experts to focus on high-value tasks such as risk assessment, fraud detection and customer service. This fusion of human expertise and technological capabilities has the potential to enable real-time decision-making and improve operational efficiency and the overall customer experience in the instant payments landscape, all while freeing up resources and meeting the requirements of the new EU PSD3 regulations.

Risks of instant payments

The primary risks and expenses connected with immediate payment services in EU banks “include the need for significant investment in infrastructure and technology, potential increased operational costs due to the need for 24/7 customer support, and the risk of fraud and money laundering,” said one attendee.

Furthermore, there may be expenses involved with meeting regulatory obligations, such as adopting strong security measures and reporting systems. There is a “risk of reputational damage if instant payment services are not executed promptly and correctly,” stressed one executive director, which could result in a loss of customer trust and loyalty, particularly among retail banks that began the process several years ago.

Some approaches to mitigating risk in rapid payment systems include incorporating strong security features such as encryption, secure authentication and fraud detection technologies to prevent illegal transactions. These approaches can include:

• Enhancing client verification by confirming identities and ensuring that they have the requisite finances and authority to conduct transactions
• Setting transaction limitations to avoid excessive spending
• Monitoring transactions in real time by continually scanning for suspicious activity and intervening quickly to avoid fraud
• Collaborating with other banks and financial institutions to share information and best practices for fraud prevention and detection
• Creating rigorous compliance processes to ensure that instant payment systems meet regulatory standards such as anti-money laundering and know-your-customer rules
• Minimising arguments and complaints by communicating clearly and transparently
• Implementing contingency plans by creating backup plans in the event of system breakdowns or technological challenges in order to maintain company continuity

In general, the experts present at the meeting agreed that by implementing these measures, banks can reduce the risk associated with instant payment services and provide a secure and reliable experience for their customers.

Some of the specialists at the table emphasised the importance of simplifying payment stages for quick payment solutions to succeed in real-world banking circumstances. “The majority of the necessary technology already exists, but the complexity of payment processes is a significant barrier to overcome.” added a senior executive. To guarantee smooth integration and uptake, parties such as banks, fintech businesses and regulatory agencies would most likely need to collaborate and reach an agreement to simplify the payment procedures.

Clear challenges ahead

Modernising rapid payment systems in the EU financial system will be a considerable task for banks of all sizes and there was a clear consensus in the room that immediate action was required.

Despite some hesitation, session delegates were excited about the new legislation. However, they struggled to understand the financial benefits, notably the elimination of transaction fees. They want to know how banks and institutions will benefit from these changes, and how they can take advantage of the possibilities given by the new legislation to stay profitable.

“That’s a valid point because the fees charged by financial institutions frequently don’t fully cover the costs associated with transaction processing,” said one delegate, including technology and labour charges. This has resulted in a “situation where banks may be absorbing these costs, which could potentially impact their profitability and make it challenging for them to adapt to the new regulations,” added another.

Whilst the path ahead is not fully mapped and there are clear obstacles to overcome, the general outlook amongst those present was one of optimism.

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