Everything has moved so fast in the last few years, in all aspects of life, but also in banking. I still remember back in the mid 90s, doing my first ever wire transfer to Germany at my local branch. Employees gathered around to figure out the process as no one had done anything like it yet.

And now, especially inside Europe, you can open a bank account in another country or transfer money in seconds. But still money takes a long time to arrive at its destination in a wire transfer.

Why is that? What takes so long? The simple reason is banks legacy systems. The fact is that banks couldn’t keep the pace. The banking system was not prepared to let us buy goods online with a wire transfer or to book a vacation house 5000km from home and so on. So what are the systems in place that cause this, and what needs to change in order for us to get our money faster?

Building a System on Trust

Banking is an industry of trust. You need to believe that the money you have with them is secure. But also banks need to believe that the system is secure and that they can trust you and the other banks. All this and on top of that regulators need to believe that nobody is doing anything wrong.

If we leave all checks out for now, for a wire transfer this means that the destination bank needs to be sure they have the money before making it available to the recipient. If not, money is missing and the trust disappears. This sounds easy, but imagine this process 50 or 60 years ago. It’s not that an employee with the money of each wire transfer drove back and forth to the destination bank, but almost.

So banks started to build a system to trust each other and simplify things. Account Clearing Houses (ACH) were born. Account clearing houses are a hub that connects all banks in a jurisdiction that help build trust between banks. Instead of communicating with the destination bank of each wire transfer, you send and receive your transactions to the ACH and they communicate with the destination bank. So far so good.

The Need to Optimise

But again, think back to 1970. Can you imagine that without ADSL and the cloud? With the technology of the time? The amount of programmers available? You would probably look for ways to be more efficient and end grouping transactions in batches instead of sending each one by one, delegating responsibilities to the ACH like the settlement and so on. For that, you would probably use a lot of humans to do most of the work and you would see the need of having fixed times where the transactions are shared. And since you have a lot of humans, you will have weekends off, work from 9 to 5, etc.

So, you would end with a system similar to this:

In the best scenario, you order a wire transfer today and it reaches the destination bank tomorrow. But, if you place your order beyond 14:00, you lose one day. If you do it on Friday, you lose the weekend. And, if you send money to another jurisdiction– start to add new days because one ACH sends to another ACH and this second one needs its time too.

And now take into account that those processes are not isolated and they are related with other processes the bank needs to follow, like Anti Money Laundering (AML) checks, account statuses validation, official seizures, concurrent operations like direct debits, etc.

Then, add that each country built their own system, their own ACH, their own rules. It seems more complicated now, right?

I know, I know, we are no longer in the 70s, we have faster internet connections, our computers are super powerful and there are a lot of programmers to build anything a bank might need. We can settle with the ACH many times a day (which some banks do), and so on. So then why can’t I get my wire transfer on Easter weekend?

Transforming Legacy

In order for this to change, we need two things:

1. First, interoperability. As expressed above, each jurisdiction built their own solution, each one had a different way of identifying the bank accounts, their own processes, etc. This is what SEPA solved with the SEPA SCT scheme. So, we could say that this part is solved. Great.
2. But the second issue was more difficult to solve, because it was systemic and about trust, it affected the processes in its core: the settlement. Or in other words, the moment when the money arrives at the destination bank and it’s credited to the recipient of the wire transfer. This has also been addressed by SEPA SCT-Inst scheme, where basically the two parts of the transaction are connected in real time and the settlement is part of it. You can learn more in this post, but basically the trick is that the settlement is done at European Central Bank level, where all payments institutions that are part of the network hold an account with funds.

Ok, now we have the tools and the processes. But that still doesn’t explain why it hasn’t been implemented.

Simply because it is not easy to implement something like this, especially if you think that there are more than 5 thousand financial institutions in Europe (there were even more at the time) that needed to deploy the solution at the same time. In order to give you an idea, the deployment of SEPA SCT (the traditional way of doing transfers) took more than 8 years from their inception in 2008 to the moment it started to roll out in 2014 and became mandatory in 2016.

And there is a second issue. It might seem that banks have unlimited resources but they don’t and this is not the only issue they have to address at the same time: open banking, privacy, regulation controls and checks, customer protection, etc. So, like any other company or person, they choose what to dedicate their resources to and if they are not forced to change this, they wait. Only smaller banks that need to differentiate and increase their market share offer the service in an affordable way.

In this case, SEPA SCT-Inst was defined in 2014 and became operational in November of 2017. But it was not mandatory for all banks, so its support and usage varies from country to country. Spain, for example, is the country where it’s most used mainly because of BIZUM, a service created by the biggest Spanish banks to facilitate peer-to-peer transfers. The usage has grown so much that all banks have been forced to support instant payments and, this will be important later, to limit its use.

Money Transfers: Next Steps

Ok, so it depends on the banks?

Yes, but not exactly. Sometimes the different regulators of an industry act as a parent. You don’t want to add pressure, so you expect your children to follow the directives on their own. But normally they don’t, so you end up forcing them to. The same happens here. In 2022 (5 years after deployment!) the European Commission expressed their concern about the deployment of Instant Payments and… as you probably know, in Feb 2024 the European parliament voted to make this a reality..

Hey!, good news! Well, yes. There is some room for frustration, but good news. I would say that in 2025 -probably- we will have instant payments 24x7x365, which is great.

What Are The Main Concerns?

Mainly, price. Regulation says “no more cost than traditional transfers”, which is different from free. Remember the example from Spain’s Bizum and its limits because we all understand that processing 1 file of 100.000 transactions costs less than processing 100.00 individual transactions in real time. We can expect to only have a limited number of instant payments for free, then you must pay a fee. This, of course all depends on our bond with the bank.

All this to say that we haven’t even touched it’s affects on corporate usage. This is a subject for a whole article itself, but corporations use payments in a totally different way than consumers, so I wouldn’t say they’re going to be prepared beyond some use cases.

In the end these changes will come with it’s own challenges, but the changes will come! And we will be there to help inform you on how to navigate these changes.