European treasurers are concerned by the PSD2 review, as well as by the regulations on instant payments.
This is an area where we have seen, in the USA for example, massive fraud. In addition, the identification of the IBAN account holder, even if this account is controlled and controllable, is not automatic. We believe that it is necessary to promote any means to verify that the holder of a beneficiary account is the one to whom this account belongs. Unfortunately, this is not the case everywhere and especially not at the cross-border level in Europe. So what solution should be recommended?
We are facing a rapidly evolving European payments markets, with businesses becoming ever more reliant on new digital solutions. A well-functioning payments market is an essential component of commercial transactions for corporates and should ensure that businesses can conduct transactions in an efficient, secure, and cost-efficient manner. No one could contest this objective for treasurers. As you all know we at EACT try to defend corporate’s positions and the “real economy”. We must admit that we welcome the European Commission’s proposal on Instant Payments which aims to make instant credit transfers (i.e., ICT) the European standard practice across the Union. Corporate treasurers are benefiting from the increased uptake of instant payments. It paves the way for a more digitally interconnected B2B and B2C market.
However, people can easily acknowledge that the current payments ecosystem present underlying issues linked to operational inefficiencies, limited access, and lack of transparency, all of which undermine the ability for corporates to fully benefit from such payments systems. The security (tough as payments are by nature immediate) is complicate. But as mentioned earlier, the checking of beneficiaries and the perfect alignment between their IBAN and their company names are important too for cross-border or domestic payments. It is so easy to pay to a correct IBAN belonging to a third party. The IBAN “classic” fraud is an important one we must fight. But to ensure that this initiative can unlock its full potential and improve the way corporates conduct their business operations, it is important to consider due diligence processes as well as the respective technological solutions to be implemented to control.
The EU Commission’s proposal to mandate a checking process that the payee’s IBAN matches the payee’s name for instant credit transfers is a very important measure. We must recognize that we need more means to tackle increasing cases of fraud. Fraud in payments is a major issue for EU international companies and is regularly identified by treasurers as a key priority and concern. Nevertheless, to be effective, any solution and approach must consider this essential and preliminary checking. Any even smart identification system based on matching a payee’s name with the name associated to the IBAN account will present many shortfalls in terms of certainty and hence security. If we only consider the name is used, we could easily anticipate many false instructions and the payer will have to investigate before doing any payment, which is a loss of time and resources, for potentially poor results in terms of security. This could impede businesses and users from resorting to instant credit transfers. The proposed solution also does not consider technological alternatives already implemented in the market.
The introduction of complementary due diligence measures is crucial to ensure instant credit transfers are executed in a fast and secure manner, without overburdening businesses with additional compliance costs. In cases of ICT or cross-border payments, between 2 legal entities, we could imagine to use / to reuse the already widely applied and known “Legal Entity Identifier” (i.e., LEI) standard. It could be used as a complementary tool for controlling the identification of legal entities and that the beneficiaries are the IBAN account holder as it claims. Since many corporates already use their LEI for EMIR reporting, an option to check the IBAN against an entity’s legal identifier (LEI) would have the potential to make use of a reliable, international, and tested global solution. We could imagine inserting an optional field for corporates to add further means of identification. It would be a real “plus” to extend this concept of “IBAN checking” in future regulatory changes to other types of payment regulations because we do need to enhance the framework to tackle fraud in payments.
As the EU Commission plans to introduce daily sanctions screening mechanism to identify sanctioned entities and individuals, we can here again consider a unique identifier. All payments must be fully compliant with the EU sanctions regime at any time and upon short notice. The LEI (or any other good, reliable, and international solution) could be explored as a complementary tool for the efficient identification of sanctioned entities and their related subsidiaries. No treasurers wouldn’t be keen to promote efficient solutions to ensure compliance with sanctions. The global nature of the identifier LEI could prove particularly useful for the identification of sanctioned entities headquartered in third countries. It can also be useful to facilitate, with more consistency, the corporate onboarding screening processes with banks. It is always recommended to adopt harmonized approaches to onboarding, because it would ensure corporates can comply efficiently with existing regulations without jeopardizing potential safeguards of such due diligence process. Therefore, it is important for the “real economy” to endorse and support the ICT reinforced framework and to impose solutions for checking IBAN and beneficiaries’ account holders. The review of instant payment scheme and PSD2 are opportunities to express treasurers’ concerns.
François Masquelier – CEO of Simply Treasury – Luxembourg December 2022
This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers.