RedCompass: How SEPA Instant Poses Risks to Banks by Tapping into Idle Capital

As the EU gears up for the enforcement of the SEPA Instant Payments Regulation in October 2025, banks across Europe are bracing for a transformative change in how euro payments are processed. This regulation promises to enable transactions within seconds, 24/7, throughout the year, but it also raises significant challenges for financial institutions.

Impact on European Banks

Recent research from IBS Intelligence highlights that nearly half of European banks foresee substantial losses in interest income due to the necessity for continuous liquidity. The study indicates that:

• 47% of banks expect to incur millions in interest losses as they adapt to the new payment obligations.
• 93% of banks show concern about maintaining liquidity during off-hours.
• 48% are “very concerned” about the implications of these changes.

Challenges in Liquidity Management

The SEPA Instant Payments system requires banks to maintain capital in the TARGET Instant Payment Settlement (TIPS) system, even during off-hours when the European Central Bank’s TARGET2 system is not operational. This creates a significant challenge for liquidity management.

Pratiksha Pathak, head of payment services at RedCompass Labs, emphasizes the uncertainty in determining adequate liquidity levels, stating, “How much is enough? €300 million? €600 million? €1 billion?”

Measures Adopted by Banks

In response to these challenges, banks are taking several proactive measures:

• 47% are increasing their liquidity buffers.
• 46% are enhancing fraud and sanctions screening systems.
• 44% are updating their risk frameworks.
• 43% are forming bilateral agreements to share liquidity responsibilities.

Increased Compliance and Fraud Risks

The push for rapid payment processing has resulted in a rise in rejected payments due to sanctions, with 54% of banks reporting more such instances. To mitigate compliance and fraud risks:

• 66% are investing in AI technology to improve accuracy.
• 65% are focusing on better transaction monitoring tools.

Growing Confidence Despite Challenges

Despite the hurdles presented by the SEPA Instant Payments Regulation, confidence among banks is increasing. Currently, 82% believe the benefits of instant payments will outweigh the costs, a rise from 71% the previous year. Demand for instant payment services is also on the upswing, with:

• 56% of banks reporting heightened interest from corporate clients.
• 27% noting increased inquiries from retail customers.

Concerns About Fraud

Even with this optimism, concerns about potential fraud remain prevalent. A significant 77% of banks anticipate that instant payment systems could lead to an increase in fraudulent activities. While 93% acknowledge that Verification of Payee (VoP) can help, many doubt its sufficiency as a standalone solution.

Looking Beyond the EU

The momentum for instant payments is not limited to the EU. With regulations for non-EU countries expected by 2027, 51% of banks are likely to prepare in advance. Additionally, 43% of institutions are currently working on migrating to the ISO 20022 standard, while 39% have already completed this transition.

Conclusion

Encouragingly, confidence in meeting the October 2025 deadline has surged from 42% to 85% over the past year. However, as Pratiksha Pathak warns, “A failed payment is more than a compliance cost. It’s a blow to trust and reputation.” The transition to instant payments necessitates not only technical readiness but also strategic clarity and liquidity precision for successful implementation.

For further insights, read the full story on RegTech Analyst.