Ready, Set, Comply with IPR

The Instant Payments Blog Series

Part 1: Countdown to a New Era for Euro Payments

As the digital payment landscape evolves, the upcoming Instant Payment Regulation (IPR) represents a pivotal shift for payment service providers (PSPs) across Europe. Set to take effect on January 9, 2025, the IPR is not just another regulatory requirement; it’s a transformative framework that will redefine how payments are processed and monitored. 

Much like the existing SEPA Instant Credit Transfer scheme, the IPR aims to facilitate real-time payments while ensuring robust anti-money laundering (AML) practices. For PSPs located in the European Economic Area (EEA) — which includes the 27 EU member states, Iceland, Liechtenstein, and Norway — this regulation introduces new mandatory requirements. PSPs must implement enhanced customer due diligence measures and transaction monitoring systems to meet compliance obligations. These adaptations not only align with the regulation’s focus on the speed and efficiency required in the digital economy but also enhance competitive advantage in an increasingly crowded market. 

The implications on AML practices are significant. A well-implemented compliance framework will not only ensure adherence to regulations but also position companies as trustworthy entities in the eyes of consumers and regulators alike. This dual focus on compliance and customer trust can become a competitive advantage, setting forward-thinking PSPs apart in the marketplace. 

As the countdown to the IPR implementation begins, PSPs must recognize the urgency of preparing their systems and processes. The time to act is now — those who embrace this change will thrive. 

Decoding the IPR — What You Need to Know

The IPR is designed to create a seamless payment experience across Europe, promoting interoperability among payment service providers. Its main objectives include

1. Real-time payment capability: ensuring that payments can be processed instantly. 
2. Enhanced consumer protection: providing safeguards against fraud and financial crime. 
3. Regulatory compliance: Setting a standard that aligns with AML and Counter Financing of Terrorism (CFT) practices. 

PSPs must be aware of several main provisions, including: 

• Instant Payment Processing: all payment transactions must be executed in real-time.
• Comprehensive AML Measures: enhanced due diligence and transaction monitoring to identify suspicious activities.
• Interoperability Requirements: ensuring compatibility with other payment systems and compliance with existing regulations like PSD2 and AMLD.

To ensure compliance with the IPR regulation requirements and strengthen AML measures, financial institutions can implement the following comprehensive measures: 

1. Enhanced Due Diligence (EDD) Protocols for Instant Transfers
   • IPR requirement: European banks and payment service providers (PSPs) must offer instant euro transfers at the same cost as regular transfers.
   • Implementation: Develop robust EDD protocols specifically tailored for instant euro transfers. This should include additional identity verification steps, such as biometric verification or two-factor authentication, to confirm the identity of the sender and recipient.
   • Monitoring: Use advanced analytics to assess the risk profile of customers engaging in instant transfers. This will help identify high-risk transactions that warrant further investigation. 
   • Documentation: Maintain detailed records of all EDD conducted, ensuring they are easily accessible for audits and regulatory reviews. 
2. Integration of Verification of Payee (VoP) Services
   • IPR requirement: PSPs must offer a VoP service for euro credit transfers. This service allows payers to verify the payee before initiating a payment.
   • Real-time Verification: Implement a real-time VoP service that cross-references the payee details against verified data sources before processing payments. This ensures that the payee’s identity is confirmed, reducing the risk of money laundering and unauthorized transfers. 
   • User education: Provide clear information and guidance to customers on how to use the VoP service effectively, emphasizing its role in preventing illicit transactions. 
   • Feedback Mechanism: Establish a system for customers to report any discrepancies in payee information, allowing for prompt investigation and resolution. 
3. Shift to a Customer-Focused AML Model
   • IPR requirement: PSPs must move from a transaction screening model to a customer-focused model.
   • Customer Risk Profiling: Transition from a purely transaction-based screening model to a comprehensive customer risk assessment approach. Regularly update risk profiles based on transaction history, behaviors, and any flagged activities. 
   • Ongoing Monitoring: Implement continuous transaction monitoring that focuses on customer behavior over time, enabling the detection of unusual patterns that may indicate suspicious activity. 
4. Cost Transparency and Compliance Monitoring
   • IPR requirement: Banks and PSPs cannot impose charges for instant payments that are higher than those for regular credit transfers.
   • Transparent Fee Structure: Ensure that all charges related to instant payments are clearly communicated to customers, with no discrepancies compared to regular credit transfer feeds. This promotes trust and compliance with the IPR regulations. 
   • Regular Audits: Conduct regular internal audits to assess compliance with pricing regulations, ensuring that instant payments fees do not exceed those of standard transfers. 

By implementing these comprehensive AML measures, financial institutions can effectively comply with IPR regulations while enhancing their overall risk management and customer trust.

Your Roadmap to IPR Compliance Success

As the IPR deadline approaches,  adopting a proactive approach to compliance is imperative. Establishing a robust AML policy specific to IPR is essential. Building the compliance framework is laying the groundwork. This involves:

1. Aligning with existing regulations: integrating IPR requirements with existing frameworks. 
2. Developing internal policies: creating clear procedures for transaction monitoring and reporting. 
3. Fortifying your defenses with a risk management strategy: identifying and mitigating risks associated with instant payments is crucial. A robust risk assessment and management plan will help PSPs navigate the complexities of real-time transactions. 
4. Utilizing technology for real-time risk monitoring: Implementing advanced technologies like machine learning, can enhance risk assessments related to AML/CFT, enabling quick identification of suspicious activity.

The best side of the coin — IPR compliance as growth enabler

While compliance may seem overwhelming, it can also serve as a growth enabler. By adapting to IPR requirements, PSPs can attract more customers and open new revenue streams. Real-time payments enhance customer satisfaction and retention while enhanced payment networks can lead to new business opportunities.

Understanding the timeline for compliance is crucial. Depending on the size of the company, PSPs may need 6 to 24 months to prepare adequately. Early preparation and strategic planning are essential to avoid last-minute scrambles. 

Notably, the European Payments Council (EPC) has analyzed the new regulatory requirements and, following clarifications from the EU Commission, concluded that the current 2023 SEPA Instant Credit transfer (SCT Inst) scheme rulebook (version 1.2, in force since March 2024) already meets the IPR requirements set to take effect in 2025. As a result, current and potential SCT Inst scheme participants will not need to undertake any further implementation actions to remain compliant with these requirements. 

Our next blog in the series will detail best practices for transaction monitoring in the new era of IPR.