Why making instant payments cheaper and easier is the key to pan-European adoption

7 July 2021

At a recent payments forum hosted by the Bank of Finland, ECB board member Fabio Panetta signalled commercial banks must make instant payments ‘cheap and easy to use’.

While on the operational side, the Eurosystem has ensured the pan-European reach of instant payments is affordable to all banks (€0.002 per transaction), banks are still passing on excessive costs to their customers. The European Central Bank has warned that the charges levied by banks for instant payments are proving a barrier to uptake and “must change”, and the European Commission is investigating these barriers further via two consultations on instant payments this Summer.

But the broader question is this. Why are these costs still being borne by customers? And why are customers still paying for payments?

The end of transaction-led revenue?

There has been an ongoing struggle on how to capitalise on the investment made in instant payments infrastructure. The historical way of making money from payments was on the transaction itself. However, the market is moving away from transaction-led revenue and towards data-led revenue or value-added services.

But many banks looking to shift are inhibited by the fact that the actual costs per payment are opaque, making it difficult for them to understand and measure costs at a granular level. This challenge is reflected by research conducted by Aite in 2019, which reported that just 18% of banks were in the process of shifting from a transactional revenue model to a data-driven revenue model.

The good news is that banks are increasingly thinking about the shift and planning their future strategy. For example, Icon’s payments maturity and total cost of ownership (TCO) modelling assets help banks assess and benchmark their relative maturity level from Payments-as-a-Legacy, Payments-as-a-Commodity through to Payments-as-a-Business and helps them move up the maturity model. As they progress, they are better positioned to understand their revenue and achieve the goal of payments becoming a profit centre. This allows them to digitalise around the customer rather than the product silos.

Finding the commercial sweet spot

We are seeing this battleground play out in local instant payments implementations and how they are marketed to customers.

Some banks, particularly in countries like the UK and Czech Republic, offer instant payments for free to the consumer. In most cases, the banks process payments under a certain threshold via real time payment rails by default; the consumer is not presented with any choice. This has led to a vast uptick in transaction volumes, reducing the cost of the overall offering and accelerating the adoption of real time payments.

However, many banks are still marketing instant payments to their customers as a ‘premium’ service, sometimes for as much as €1 per transaction. In markets such as Poland, where the KIR Elixir service has struggled to break through, transaction volumes are still relatively low for a scheme that is over a decade old. Treating instant payments this way is counter-intuitive and plays to the increasingly defunct transaction revenue model.

Banks need to be much more thoughtful and strategic about how to generate revenue. They must find the commercial sweet spot – but transaction revenue isn’t it. This strategy may hold water for corporate payments, but will no longer work in the anytime, anywhere digital retail world. The potential for banks to leverage real time data-driven revenue models that can monetise rich payments data through the delivery of new services and capabilities is vast. In research conducted by Celent in 2021, 38% of banks have made supporting data monetisation strategies an objective of their payment infrastructure investments. Delivering real time payments and related initiatives is a key objective for 48% of projects, along with initiatives to increase the speed and agility in bringing new solutions to market (45%). These offerings range from enhanced account and transaction information, auto saving, hyper-personalisation and on-the-spot loyalty. This revenue potential is far greater than a transaction fee, but more broadly customer retention and embedded finance will be greatly improved.

21st century technology for 21st century business

When transaction revenue was the go-to model for payments, banks were often beholden to expensive technology hubs for their processing. As technology has advanced, there is no reason to be paying excessively for these capabilities. Payments technology is increasingly cloud native and low cost, giving banks and PSPs the ability to better scale for their payments needs. And with integration timelines decreasing, it now takes months rather than years to onboard to new instant payments infrastructures.

Costs can be reduced further through the use of open-source components. A vast range of programmes exist whether for performance and portability, integration into existing systems or databases for ISO 20022 processing – meaning that proprietary code does not need to be written for each new service. Features such as automated testing and containerised deployment help break down the traditional silos between business, IT, and operations, ensuring all stakeholder requirements are addressed.

New generation payment platforms can help break the tie between traditional vendor reliance and pure in-house builds, accelerating the ability to transform and dramatically reduce cost. For some banks, leveraging SaaS/PaaS models for commodity elements of the payment value chain are worth reviewing. These opportunities must be grasped to help facilitate the delivery of services to clients that can be monetised on top of the instant rails.

By combining lower cost technology, with a clear payments strategy that focuses on data exploitation, value-added services and new revenue generating business models there should be no need for consumers to be paying €1 for an instant payments transaction.

At Icon Solutions we genuinely support the idea of a future where instant payment transactions are easily accessible to all.


Michel Vaja