What are instant payment networks and how do they work?

Instant payment networks, such as the UK's Faster Payments Service (FPS) and the Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst), have transformed the financial landscape, enabling real-time, 24/7 money transfers. These networks offer unparalleled speed, convenience, and security compared to traditional methods, benefiting both consumers and businesses.

What are instant payment networks?

Instant payment networks operate on specific payment rails, which are the underlying infrastructure and protocols that facilitate the transfer of funds. In the UK, FPS uses the New Payments Architecture (NPA), while SCT Inst relies on the SEPA Instant Credit Transfer scheme. These rails enable the rapid and secure movement of money between accounts, bypassing traditional intermediaries and lengthy processing times.

How do instant payment networks work?

Here's a step-by-step explanation of how these networks function:

1. Initiation: A sender initiates a payment through their bank's online banking platform, mobile app, or other approved channels.
2. Authentication: The sender's bank authenticates the transaction, verifying the sender's identity and ensuring sufficient funds are available in their account.
3. Messaging: The sender's bank sends a secure message containing the payment details to the instant payment network's central infrastructure.
4. Validation: The central infrastructure validates the payment details, checking for potential fraud and ensuring the recipient's account is valid.
5. Clearing: If the payment is deemed valid, the central infrastructure clears the transaction, calculating the net positions of the involved banks.
6. Settlement: The central infrastructure settles the transaction by updating the balances of the sender's and recipient's banks in real-time.
7. Confirmation: The recipient's bank receives the funds and credits the recipient's account. Both the sender and recipient receive confirmation of the successful transaction.

This entire process typically takes just a few seconds, allowing for near-instant transfer of funds between accounts. 

The growth of instant payment networks

The UK’s FPS, launched in 2008, processes over 4.5 billion payments annually, with a total value of £3.7 trillion. Similarly, Europe’s SCT Inst, introduced in 2017, facilitates instant, cross-border euro payments within the 36-country SEPA zone. These networks have driven innovation in financial services, increased financial inclusion, and improved cash flow management for businesses.

‍

The COVID-19 pandemic also dramatically accelerated the adoption of digital payments, further emphasising the importance of instant payment networks. In one Experian report, ‘Open banking demand triples during Covid-19 pandemic’, they found that ‘57% of lenders have adopted open banking technology in the last 12 months’. This can be seen as part of a broader trend, with all forms of contactless payments benefiting from a situation which encouraged low-contact environments.  

Volume of contactless card payments within all card payments

Moreover, this trend didn’t go unnoticed by prominent VCs, with investment in contactless payments further driving growth. 

The benefits of open banking and access to fast payment rails for merchants 

Open banking has significantly impacted the payments landscape, giving merchants access to the fastest payment rails previously reserved for banks. This benefits merchants in several ways:

• Faster settlement times, improving cash flow management.
• Lower transaction fees, reducing costs.
• Reduced fraud risk through strong customer authentication.
• Increased conversion rates, leading to more sales.
• Improved customer experience, resulting in higher satisfaction and loyalty.
• Access to real-time data for informed decision-making and personalised services.
• Streamlined refunds and payouts, enhancing customer experience.

Factors affecting payment speed

The speed of payments depends on the underlying payment rails. Card payments can take up to 3 days to settle, while digital wallets like PayPal are typically faster. Direct debit payments are comparatively slow, as the merchant pulls the money from the customer under a pre-agreed mandate.

In the UK, bank-to-bank payments through FPS typically settle instantly, with recipients receiving funds within seconds or up to 2 hours in some cases. In Europe, the picture is more complex due to the optional nature of SCT Inst and varying levels of coverage across countries. However, in a recent announcement in February 2024, the European Parliament unveiled a new regulation aimed at streamlining instant payments throughout the European Union. Under this new framework, all financial transactions conducted within the Eurozone will be processed in less than 10 seconds, thanks to the standardisation of real-time payment infrastructures across the region.

Michiel Hoogeveen (ECR, NL) the lead MEP said: “The Instant Payments Regulation marks the long-awaited modernisation of payments in the European single market. Customers can now say goodbye to the inconvenience of waiting two or three working days to access their money. We are delivering on something that people and businesses truly care about: transferring money within 10 seconds at any time of the day.”

The role of open banking providers

Open banking payments, processed through providers like Yaspa, allow merchants to benefit from these fast rails without the need for regulation or unsafe practices like screen-scraping. As open banking payment volumes grow, more banks are incentivised to join faster payment schemes, ultimately benefiting customers with consistently instant payments.

The rise of instant payment networks and the impact of open banking have revolutionised the way we conduct financial transactions. As these technologies continue to evolve and gain adoption, they will play a crucial role in driving innovation, promoting financial inclusion, and enabling a more efficient global economy.

Yaspa provides instant bank payments and account verification, using open banking technology. If you’re interested in learning more about what Yaspa can do for you, get in touch. We would love to hear from you.