UK Open Banking expanded to cover all PSD2 products
Banks need to implement instant payments as soon as possible and provide an alternate narrative to the ongoing public debate on the alleged innovation brought by virtual currency schemes, says Yves Mersch, an executive board member of the European Central Bank.

In an introductory speech to a joint ECB and Banca d’Italia conference in Rome, Mersch accepted that the banking ecosystem has developed inefficiencies, with many incumbents losing the ability to innovate and adapt to the changing needs of the end-user.

"In Europe technological disruptions, competition from non-banks and regulatory pressure has forced banks to re-examine how they provide retail payment services," he told the conference. "The ability to provide real-time services will be essential if banks want to retain and gain customers. The strategic importance of instant payments cannot be overstated."

The European Payments Council last week set the ball rolling with the introduction of the Sepa credit transfer instant scheme, enabling banks to send and receive instant payments across Europe in less than 10 seconds. Further enhancements will come with the future initiation of an instant payment using the recipient’s mobile telephone number as a proxy for their IBAN, and the introduction by the ECB of an instant payments settlement system in central bank money, which is scheduled to go live in November 2018.

The revised Payment Service Directive (PSD2) is also playing its part, providing a regulatory framework to encourage innovation from new market entrants by providing payment account access for regulated and authorised third party providers.

"The competition introduced by the revised Payment Service Directive can also provide an opportunity for incumbent banks but only if they act urgently to implement instant payments," says Mersch. "It is crucial that banks invest to upgrade their legacy batch systems to enable real-time processing and offer end-user solutions for instant payments. These solutions can provide them with a strong tool to face the upcoming competition."

This is especially salient in view of the ongoing public debate around the "alleged innovation" brought by private virtual currency schemes or tokens, Mersch adds, branding such assets as "unfit for recognition from the point of view of our mandate of efficient payments systems".

"While we have seen a substantial increase, albeit from low levels, in the value of some of the virtual currencies lately, we should not forget that their usage as a settlement asset is marginal and the overall user acceptance as a means of payment is negligible," he says. "In view of the speculative market environment for virtual currencies and for other types of virtual financial assets, one should bear in mind that these are by definition virtual: they do not constitute a claim on an issuer and do not formally qualify as currency."

Mersch's speech comes the day after bitcoin prices went on a wild ride, breaking the $11,000 valuation mark before slipping back to below $10,000 as profits takers cashed in their holdings.

"Their purchasing power fluctuates wildly and depends solely on the market activity of speculators," Mersch continued. "It remains to be seen whether these virtual currencies can be considered as a payment alternative for consumers - except in extreme case like in failed states - and to what extent they can compete with the solutions market players will be able to develop in the safer and more efficient European retail payments market."