Financial Markets & Investor Protection
Instant Payments: Luxembourg prepares for the 2025 deadline
Published on 22 October 2024
The financial landscape in Luxembourg is on the brink of a significant transformation as the country prepares for mandatory instant payments regulation, which is set to take effect in 2025. This shift, driven by the rise of digital banking and the increasing demand for faster and more efficient transactions, is part of a broader European Union initiative aimed at establishing instant payments as the standard for all Payment Services Providers (PSPs) offering SEPA (Single Euro Payments Area) credit transfers. By embracing instant payments, the EU seeks to enhance the competitiveness of the European economy and reshape the way payments are processed across the region.
Summary
Key challenges in implementing 24/7 Instant Payments
The move towards 24/7 instant payments presents several technical and operational challenges, particularly in transitioning legacy systems and processes designed for traditional banking hours. One of the primary issues faced by banks is their reliance on batch processing systems, which operate on predefined schedules and are typically geared towards business hours. As a result, transfers initiated outside of these hours often have to wait in a queue for the next processing cycle, which limits the availability of instant payments on weekends and bank holidays.
Another obstacle is the operation of interbank settlement systems like Target 2, which currently function only during business hours. To address this, the Eurosystem introduced TIPS (TARGET Instant Payment Settlement) in 2018, designed to extend Target 2’s capabilities and ensure real-time settlement in central bank money with a pan-European reach. This innovation is critical for enabling 24/7 operations, but it requires significant technical upgrades and adaptations by banks.
Liquidity management and regulatory compliance
Managing liquidity on a 24/7 basis introduces a new layer of complexity for banks. Traditionally, financial institutions reconcile their accounts at the end of each business day, which provides an opportunity to monitor and balance liquidity. Extending this process to cover weekends and holidays demands more sophisticated liquidity monitoring tools and additional resources. Furthermore, managing foreign exchange conversions in real time poses another challenge in ensuring flawless instant credit transfers for customers.
On the compliance front, the shift to instant payments brings heightened regulatory scrutiny. Anti-money laundering (AML) and counter-terrorism financing (CTF) regulations require banks to monitor transactions for any suspicious activity and verify that funds are not transferred to sanctioned individuals or entities. Traditionally, following automated compliance checks, there is a human involvement to treat suspicious cases. However, with instant payments, any flagged transactions must be rejected outright, requiring banks to invest in more advanced fraud detection and real-time compliance systems. The integration of AI such as machine learning technologies is expected to play a significant role in addressing these challenges.
Adapting to new regulatory requirements
The forthcoming regulation introduces several key changes aimed at facilitating the implementation of instant payments. From January 9, 2025, when PSPs will have to process instant incoming payments, they will also be required to screen their own customers’ databases against EU sanctions lists at least daily. This measure is intended to streamline the sanctions screening process and reduce delays in processing instant payments. However, it does not absolve banks of their obligations to perform additional checks on individual transactions.
Another significant requirement is the mandatory verification of payee information, set to begin on October 9, 2025, when the outgoing payments will have to be processed instantly as well. This process involves matching the beneficiary’s name and account number with the information available at the receiving bank, and providing the results to the payer. While this measure is crucial for combating fraud, it necessitates the development of standardised systems and interoperability between member states and banks.
The Role of ABBL in facilitating the transition
In Luxembourg, the ABBL is playing a central role in supporting its members through this transition. The association has established an Instant Payments Task Force within its Payment Cluster to assist approximately 50 member companies in meeting the regulatory deadlines and addressing remaining inconsistencies and challenges. The task force organises conferences and workshops, bringing together experts from the CSSF, BCL, ECB, banks, and service providers to foster collaboration and knowledge sharing.
ABBL’s role extends beyond facilitating technical and operational readiness. It is also engaged in advocacy efforts, working closely with the Ministry of Finance, the European Banking Federation (EBF), and other stakeholders to shape policy in favour of efficient instant payment frameworks. Recently, the task force participated in an EBA consultation concerning Implementing Technical Standards (ITS) for the uniform reporting of charges and rejected transactions. Additionally, ABBL, in its capacity as the National Adherence Support Organisation (NASO) for SEPA in Luxembourg, assists PSPs with the documentation and filing process for adherence to SEPA Schemes.
Addressing the final hurdles: cybersecurity and digital literacy
As banks prepare for 24/7 operations, cybersecurity remains a critical concern. The continuous availability of banking systems exposes them to potential cyberattacks at any time, necessitating enhanced security measures and constant monitoring. The cost of upgrading systems to meet these requirements, while ensuring regulatory compliance, could be a barrier for smaller financial institutions.
In addition to technical and operational support, ABBL is committed to promoting digital literacy and skills development among its members and their customers. The association runs training programs and workshops on key topics such as cybersecurity, data protection, and digital customer experience, with the goal of creating a resilient and digitally savvy financial services sector in Luxembourg.
A milestone for Luxembourg’s financial sector
The shift to 24/7 instant payments represents a significant milestone in Luxembourg’s financial sector. While the country’s adoption of instant payments may be slower compared to larger EU economies, mainly due to its concentration on private banking and wealth management services, Luxembourg’s banking infrastructure is gradually adapting to meet the new requirements. By continuing to invest in modernising their systems, upgrading fraud prevention measures, and ensuring optimal liquidity management, Luxembourg’s banks will be well-positioned to offer faster and more efficient payment services to their customers by 2025.
The ABBL’s proactive efforts to support its members and engage with regulators underscore its commitment to making Luxembourg’s financial services sector more competitive and resilient. With the upcoming regulatory changes, both customers and businesses in Luxembourg stand to benefit from a more seamless and efficient payments landscape.
Galina Miroshnichenko
Adviser – Payments & Digital, ABBL
Published on 22 October 2024