EU banks brace for lost interest earnings as SEPA Instant looms

Research from RedCompass Labs indicates that nearly half of European banks anticipate losing millions in interest as a result of new liquidity requirements mandated by the SEPA Instant Payments Regulation.

The study, which surveyed 300 senior payment professionals from across Europe, highlights the operational and financial consequences facing the banking sector as it prepares for instant euro payments to become mandatory throughout the European Union by October 2025.

A principal challenge stems from the European Central Bank's TARGET2 wholesale payment system, which operates only during limited weekday hours. To ensure compliance with the requirement for 24/7/365 instant payments, banks are now obliged to pre-fund their accounts within the TARGET Instant Payment Settlement (TIPS) system to cover evenings, weekends, and public holidays. This locks up funds, preventing their use in loans or investments, and potentially reduces the interest income banks could otherwise generate.

RedCompass Labs' research found that nearly half (47%) of European banks expect to forgo millions in interest earnings due to these liquidity demands. This is compounded by the imminent removal of the €100,000 cap on instant payments, which raises further uncertainty. A significant 93% of surveyed banks expressed anxiety about the end of the cap, with 48% saying they are very concerned.

To mitigate these challenges, 47% of banks report boosting their liquidity buffers, while 46% are upgrading fraud and sanctions screening tools tailored to increased transaction volumes at non-standard hours. Additionally, 44% are making adjustments to their risk management frameworks, and 43% are establishing bilateral agreements to manage interbank limits.

Sanctions screening poses another obstacle. More than half (54%) of banks have experienced an increase in rejected payments tied to rapid sanctions screening requirements under SEPA Instant, with most seeing a 30-50% rise. Many are planning to deploy artificial intelligence solutions, with 66% of banks seeking to reduce false positives and 65% aiming to speed up transaction monitoring.

Over eight in ten banks (82%) believe the benefits of SEPA Instant will outweigh the costs, an increase from 71% recorded last year. The rise in support reflects growing demand for instant payments, particularly from corporate clients. Every EU bank surveyed reported an increase in demand, with 56% seeing heightened appetite from corporates, 27% noticing increased demand from retail customers, and 17% observing growth in both segments.

The transition has not been without difficulties. Nearly half (44%) of EU banks struggled to meet the first set of Regulation deadlines in January. Additionally, concerns over fraud remain prominent, with 77% of banks predicting a rise in fraud linked to SEPA Instant. Over nine in ten (93%) agree that Verification of Payee solutions will be beneficial, though most acknowledge that such tools alone will not be sufficient to counteract all risks.

The urgency surrounding compliance is globalising. Just over half (51%) of banks say they are very likely to focus on SEPA Instant readiness for non-EU countries in advance of the 2027 deadline, and another 41% are somewhat likely to do the same. The transition to ISO 20022 messaging standards is also ongoing, with 39% of banks reporting completion and 43% still working on migration.

Confidence around the October deadline appears to have improved, with 85% now believing it is realistic, up from 42% last year.

Pratiksha Pathak, Head of Payment Services at RedCompass Labs, commented: "SEPA Instant is a transformative opportunity for commerce and society, but it brings serious operational and financial challenges."

Pathak continued: "With 24/7 payments now a reality, banks must rethink how they manage liquidity and risk in a world where weekends and holidays are no longer downtime. And with the €100,000 cap set to be removed, how much liquidity is enough? €300 million? €600 million? €1 billion?"

"Imagine it's a Saturday evening and multiple high-value instant payments hit your system. What then? The ECB isn't open. But instant payments are. If your TIPS account is underfunded, you'll be forced to reject payments, and that hits your customers, your brand, and your bottom line. You can't top up until Monday morning."

"That's the risk banks are now grappling with. And while many are focused on avoiding fines, a failed payment is more than a compliance cost. It's a blow to trust and reputation."

"However, the banks see and support the growing benefits of instant payments across Europe. For individuals, small businesses, and large corporations, and the broader boost to the economy and financial inclusion."