How SEPA OCT Inst is transforming cross-border payments
The G20 roadmap seeks to enhance cross-border payments by tackling challenges around cost, speed, access, and transparency, prompting various industry initiatives. One such initiative is FMI interconnectivity, covered in the blog “Developments in cross-border payments and the evolving landscape”. In response to these efforts, the European Payments Council (EPC) introduced the SEPA One-Leg-Out Instant Credit Transfer (OCT Inst) scheme, which serves as a building block for FMI interlinkages.
The SEPA OCT Inst scheme is designed for international instant credit transfers, enabling account-to-account transactions in any currency, as long as one leg is denominated in EUR (Euro leg). It builds upon the existing SEPA Instant Credit Transfer (SCT Inst) scheme, utilising familiar standards like ISO 20022 messaging, 24/7/365 availability, and a transaction limit of 100,000 EUR. Additionally, the scheme incorporates concepts and processes from SWIFT’s Cross Border Payments and Reporting Plus (CBPR+) and Cross-Border Instant Payments Plus (IP+) guidelines, enhancing Straight-Through Processing (STP) rates for greater transparency and faster processing times.
Key differences between OCT Inst and SEPA Inst:
- SEPA Inst launched in 2017 and became mandatory under IPR regulation in February 2024, while OCT Inst is an optional scheme
- SEPA Inst requires both the sender and receiver to be within the SEPA zone, whereas OCT Inst only requires one leg to be in the SEPA zone
- SEPA Inst’s rulebook applies to both parties, while OCT Inst’s rulebook primarily applies to the Euro leg
The OCT Inst scheme rulebook was first published in March 2023, with a planned go-live date in 2025.
Currently, domestic real-time payment systems do not support cross-border transactions. As a result, a significant portion of international payments rely on RTGS infrastructures like TARGET2, which not only raises costs but also increases processing times due to limited operating hours and working days.
Fintech and remittance companies have identified the increasing demand for cross-border payments and the significant opportunities in this area. In response, they are providing innovative solutions that lower costs and accelerate transactions for both individual customers and businesses. Key players in the remittance industry include Wise (formerly TransferWise), Remitly, Visa B2B Connect, and Ripple.
The SEPA OCT Inst scheme could enhance the cost-effectiveness, transparency, and speed of cross-border payments, including remittances. In 2021, remittances from Germany totalled $17 billion, from France $16 billion, and from the Netherlands $15 billion, with an average cost of 11.39% (superscript) amount sent.
While remittances are a key use case for outbound SEPA OCT Inst, a large number of foreign students living in Europe also rely on financial support from family members abroad. With OCT Inst payments, the standardisation of processing, clearing, and settlement could significantly reduce costs and fees, while greater transparency could lower FX conversion fees. The scheme, ensures payment execution within the Euro leg takes less than 10 seconds.
PSPs have made substantial efforts and investments in adopting SEPA Inst, leveraging existing capabilities to unlock new revenue opportunities and enhance customer offerings, thereby maximising their return on investment. Although OCT Inst is optional from a regulatory standpoint, the cross-border payments market is highly competitive. PSPs that adopt OCT Inst can gain a competitive edge, potentially increasing revenues and expanding their market share.
From an end-to-end payment flow perspective, this introduces added complexity, as an incoming payment through one scheme may trigger another payment via SWIFT CBPR+, or vice versa, depending on whether you are entering or exiting the SEPA zone.
To tackle this, PSPs need to decouple payment channels from their processing engines and delegate routing decisions to optimise the use of the most efficient payment schemes. Implementing an order management layer forms the foundation for smart payment routing based on dynamic rules and customer profiles, while also enabling additional value-added services such as payment netting and aggregation.
Icon has helped many banks implement this approach from idea to delivery. We can assist banks in developing a pragmatic business case for Order Management, taking into consideration cost, revenue and risk.
