With real-time payments fast becoming the norm, the landscape of global payments is undergoing a significant transformation. Be it the FedNow in the USA, SEPA in the EU, UPI in India, or NPP in Australia, these platforms are revolutionizing transaction speed, cost, and efficiency, allowing people to effortlessly transfer funds across borders and time zones. 

In 2023 alone, more than 266 billion real-time payment transactions occurred worldwide, with over 70 countries now supporting these systems. And the real-time transaction volume is estimated to reach $575.1 billion by 2028.

For financial institutions, real-time payments unlock unprecedented opportunities, such as operational efficiency, enhanced customer satisfaction, and market expansion. Yet, as adoption accelerates, these institutions face a fast-evolving and complex regulatory environment that demands careful navigation.

The Regulatory Challenge of Real-Time Payments

Global real-time payments are largely driven by FedNow, SEPA, UPI, and NEPP. While they all share a common goal, enabling instant, frictionless transactions, their structures and regulatory frameworks differ significantly. Let’s first understand what each of these systems actually represents.

• FedNow: Developed and operated by the Federal Reserve, FedNow is subject to U.S. banking regulations. Its regulatory model is still evolving, with banks and consumers gradually adapting to the realities of instant payments. The focus is on fostering adoption and interoperability among banks and payment service providers. FedNow has more than 1400 participating financial institutions, expanding interoperability with core banking platforms and fintechs.

• SEPA: Overseen by the European Central Bank and national regulators, SEPA Instant operates within the EU’s robust regulatory environment. The EU mandates strict compliance with data privacy (GDPR), consumer protection, and cross-border payment standards, making it one of the world’s most comprehensive frameworks.

• UPI: Managed by the National Payments Corporation of India (NPCI), an RBI-regulated entity, the system is notable for its rapid innovation, regulatory mandates, and open environment that encourages multiple companies to operate within the same system.

• NPP: Overseen by the Reserve Bank of Australia, NPP is designed to be open and flexible, with features like overlay services and no mandated transaction limits at the system level.

Apart from navigating these differences between different global payment systems, financial institutions also face compliance complexity while facilitating real-time payments, including:

• Anti-Money Laundering (AML) screening: The speed of real-time payments leaves little time for traditional AML checks and sanctions screening. 

• Know Your Customer (KYC) Requirements: Real-time payments demand robust KYC protocols at onboarding and during transactions. 

• Data Privacy and Protection: Compliance with data privacy laws, such as GDPR (Europe) and CCPA (U.S.), adds complexity, as real-time payments involve rapid, large-scale data flows. 

• Cross-Border Regulatory Variations: Facilitating real-time cross-border payments means navigating different regulatory frameworks, reporting standards, and compliance rules in multiple jurisdictions. This further increases operational complexity and the risk of non-compliance.

Moreover, new regulatory bodies and global initiatives are shaping the future of real-time payments as well:

Bank for International Settlements (BIS): BIS is actively working on frameworks to harmonize cross-border payment standards and improve the security and efficiency of RTPs globally. It has launched Project Nexus to standardize the way domestic instant payment systems connect globally. 

Financial Action Task Force (FATF): FATF sets international standards for AML and KYC and is increasingly focused on real-time payments to ensure they do not become channels for illicit transactions.

Key Regulatory Obstacles Facing Financial Institutions

Here are some significant regulatory challenges financial institutions face:

1. Interoperability and Standardization

   Achieving seamless interoperability across global real-time payment systems is still quite challenging. While many systems are adopting the ISO 20022 messaging standard to enable a universal language for payment data, true interoperability remains elusive. Differences in operational guidelines and system architectures create friction and fragmentation. 

2. Cross-border Settlements and Compliance

   Moving funds in real-time across borders requires compliance with multiple regulatory regimes, each with its own rules for AML, KYC, and sanctions screening. Financial institutions must navigate varying requirements for customer verification, transaction monitoring, and reporting, often in real time.

3. Data Security and Privacy Concerns

   Real-time payments generate massive volumes of sensitive data, subject to stringent data protection laws. Ensuring compliance requires robust data governance, secure data transmission, and strict access controls. Financial institutions are deploying pre-transaction risk scoring, behavioral biometrics, and velocity-based flagging to detect anomalies, key in preventing fraud in RTP ecosystems.

4. Evolving Compliance Requirements

   Regulators continually update their guidelines to keep pace with technological innovations in payments. Financial institutions must remain agile, regularly updating systems, policies, and staff training to ensure ongoing compliance.

Strategies for Financial Institutions to Stay Compliant

Here’s how financial institutions can rise above these obstacles and stay compliant:

1. Adopting a Holistic Compliance Strategy

   Financial institutions must prioritize compliance from the outset when designing and implementing payment solutions. This means embedding regulatory requirements and data privacy into the core architecture of payment platforms.

   Additionally, building a unified compliance framework enables continuous monitoring, rapid adaptation to regulatory changes, and streamlined internal controls. 

2. Leveraging Technology for Compliance

   Artificial intelligence and machine learning automate complex compliance tasks, including real-time KYC/AML checks, transaction monitoring, and suspicious activity reporting. These technologies increase accuracy, reduce manual workload, and enable instant detection of anomalies. Agentic AI platforms now automate compliance playbooks, contextualizing KYC/AML policies with adaptive learning models, and integrating regulatory change alerts directly into risk decisioning systems.

   Blockchain and Distributed Ledger Technology (DLT) can enhance transparency and traceability in cross-border payments, providing immutable records that simplify audits and regulatory reporting. 

3. Collaborating with Regulatory Bodies

   Financial institutions should maintain open channels with regulators, seeking guidance and clarifications to ensure current and future compliance. Early engagement helps institutions anticipate regulatory shifts and adapt their systems accordingly.

   Being actively involved in industry forums and working groups, such as those developing ISO 20022 messaging standards, enables institutions to influence regulatory development and stay informed about best practices and upcoming requirements.

4. Investing in Compliance Automation Tools

   Modern compliance platforms automate the tracking of regulatory updates, reporting, and audit processes. These automation tools reduce the risk of human error, accelerate compliance workflows, and provide real-time dashboards for oversight. Embedded RegTech dashboards now provide real-time visibility into exposure by geography, channel, and risk typology, helping boards and compliance heads drive proactive governance.

The Future of Real-Time Payments and Regulation

Global harmonization is emerging as a top priority for the future of real-time payments. As more countries adopt them, the next major leap will be connecting these domestic rails to enable seamless cross-border settlements.

AI-driven solutions can automate KYC/AML checks, monitor transactions in real-time, and adapt to new regulatory requirements as they emerge. Machine learning models will help institutions detect anomalies and fraud faster by 30-50%, reducing manual intervention and error.

The next few years will see continued regulatory innovation. New rules will focus on consumer protection, fraud prevention, and interoperability. The move toward open banking and standardized APIs will further drive efficiency and regulatory clarity. 

Embracing the Regulatory Shift with Confidence

Real-time payments present tremendous opportunities for financial institutions. However, the opportunities bring with them complex regulatory challenges, from evolving compliance standards to stringent data privacy requirements. 

A proactive compliance strategy that leverages advanced technologies like AI, ML, and blockchain and maintains open engagement with regulators will enable financial institutions to not only keep pace with regulatory demands but turn them into a competitive advantage.

The path forward is clear for those ready to adapt. Financial institutions that embrace the intricacies of regulatory compliance in real-time payments will not only reduce risk and ensure operational resilience but also unlock new realms for growth in an increasingly interconnected and digital-first financial ecosystem.