A new orbit for account-to-account transfers and digital wallets
Updated: Nov 15
European regulations will stimulate instant payments and innovation in digital businesses
Merdihan Ismailov is the Chief Digital and Information Officer of IRIS Solutions, one of the first licensed PSD2 service providers and pioneers in open banking in Bulgaria. Mero is actively involved in the development of PSD3 and the new EU open finance framework. We reached out to him to comment on the key news from last week, regarding the financial sector and the digitization of our lives.
Mr. Ismailov, last week we saw some key decisions that will shape the future of digital services in the European Union. How do you see the news about the agreement reached on the final versions of the proposals for regulations for instant payments and digital identification?
These are signs that significant changes are imminent in the ways bank transfers and the sharing of personal data are conducted in the online environment. Instant payments are already part of daily life, but currently, they constitute only 15-20% of the total number of fund transfers in almost all European countries, with Hungary being a notable exception. In Hungary, the regulator and government decided that all transfers in the country should be instant.
I believe that the decision for regulation at the European level will encourage wider adoption.
When will the new regulation for instant payments become a reality?
Within 6 to 12 months of the new regulation coming into force, all transfers in euros must be executed as instant payments. Countries not using the euro as their national currency will have a transition period of up to 36 months.
What changes will the regulation bring about?
The transfer of funds between two payment institutions will be reduced to a matter of seconds. This will significantly boost the development of account-to-account transfers, especially those related to payments between merchants and customers, transfers between individuals, and cross-border transfers within the EU.
Who will benefit the most from the introduction of the new rules?
The benefits of the regulation extend to all participants in payments. One positive aspect is that it limits the fees for these transactions, ensuring they cannot be more expensive than standard credit transfers performed by payment institutions.
We also anticipate additional momentum in payment services due to the long-awaited change, allowing payment institutions and electronic money institutions direct access to payment systems and the ability to execute instant payments. I believe this will foster diverse innovations and competitive pricing offers.
But where are the risks?
The speed of transaction execution also brings the risk of attracting individuals attempting to exploit this advantage for unauthorized purposes. Therefore, the regulation includes the introduction of additional checks by the sending institution to match the recipient's name and account number in the receiving institution. This is expected to limit cases of account number substitution, especially in business transfers.
How will the new regulation impact service providers like PSD2, such as IRIS Solutions?
The eagerly anticipated regulation for instant payments has been welcomed by open banking service providers. We expect the combination of open banking with instant payments to revolutionize account-to-account transfers, creating real competition against card payments.
Until now, these types of payments suffered from the negatives of standard transfers—slow authorization and a complicated process. However, with the new regulation, funds will be with the merchant within seconds, regardless of the time of day, allowing them to fulfill services/orders without worrying about when they will receive the funds.
It's particularly pleasing that some of the changes for instant payments are also described in the new Payment Services Directive (PSD3/PSR1), indicating continuity and completeness of the regulatory framework in the payments sector.
The second historic news from last week is the agreement on the parameters of the EU Digital Identity Wallet. What does this agreement mean?
The decision for a pan-European online identification is good news for all digital businesses, especially those registering clients from all EU member states.
One of the challenges of the current directive (eIDAS) was how to combine different approaches in member states into a common solution. With this new addition, that equation will be solved.
What does this news mean for European citizens?
The primary function of the EU Digital Identity Wallet is to identify European citizens through their national identity document in a digital environment. But beyond that, the wallet is expected to provide additional services such as storing and sharing documents (e.g., driver's licenses, diplomas, licenses, certificates, medical records), sharing data with the government and secure private institutions, and payment and other services.
Which businesses will benefit the most from this innovation?
We expect one of the business areas to benefit most from this innovation is the financial sector, where KYC and AML regulations are extremely strict and limit digital processes. The main application will be in customer onboarding processes, account opening, and service provision. But we also believe that new solutions for in-depth identity verification will be developed for payments and other financial transactions, potentially involving the use of the EU digital currency.
The IRIS Solutions team will continue to closely monitor the path of both regulations and their integration into our daily lives. We welcome your comments and suggestions.