One-Leg Out (OLO) instant credit transfer payments
Volume 1: July 2023
Background:
Based on the market research conducted by EPC3 there was a specific ask from the market participants, to support the processing of multi-currency international payments, through an instant payments framework, so as to strengthen the role of EURO in the international markets. The initial inclination was to enhance the existing scheme i.e., SCTInstant5 , to include cross border/cross-currency payments. However, suggestions from market participants, led the EPC3 to develop a dedicated payments scheme for instant OLO credit transfers. As, based on the initial analysis, it was concluded that an independent payments scheme, with separate rule books is expected to ensure faster time to market. Further, since PSPs are already following the SEPA framework; the implementation of this scheme is expected to be an incremental change for the market participants.
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This newsletter is a source of key insights relating to the evolution of payments systems.
Introduction
SEPA OLO/OCT2 instant is the new payment scheme that is developed by European Payments Council (EPC3) for supporting cross-border and cross-currency instant payments. The existing Single Euro Payments Area (SEPA4) framework allows instant payments in EUR currency only within the EEA1 region, through the SEPA Instant Credit Transfer (SCTInstant5) scheme.
However, this new scheme will extend the instant payments capability beyond the EEA1 region and EUR currency. This will allow participating international Payments Service Providers (PSPs6) to support cross-border and cross-currency instant payments.
The key requirement outlined by the scheme is that at least a single participant must be situated within the EEA1 region, necessitating one leg of the transaction to be conducted inEUR currency.
Benefits
PSPs will be able to provide better up-front transparency on costs and better payments status traceability (by leveraging UETR and inter-PSP inquiries)
Potential to improve the liquidity management for Euro leg-based PSPs and their preferred non-EURO leg-based PSPs via the offset between incoming and outgoing payments positions
Participants can select non-Euro leg-based PSPs of their preference, which can present them with the most efficient and cost-effective routing and processing channels
Improved initiation and reconciliation of payments and higher straight-through-processing (STP) rates based on structured and richer data under the ISO 20022 XML messaging standard
Key takeaways
To sum up, this scheme can be seen as European market's endeavor to extend its payments options globally, aiming to accelerate and streamline cross-border payments, while providing more transparency on the costs and better payments traceability.
To adapt to this new payments system, traditional banks must act quickly and make use of their current infrastructure, customer base, and compliance knowledge. However, their time to market would depend on the ability of the legacy platforms and processes to quickly adapt to the new requirements. However, as compared to traditional banks, FinTech players with the latest technology stack and agile processes are well positioned to foray into cross-border payments space, leveraging the OLO instant credit scheme.
