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New Settlement Services Boost Pan-European Instant Payments

By Bill Camarda

Key infrastructure for settling instant payments is arriving across Europe in 2018, likely accelerating the availability of very fast cross-border payments throughout the continent – and promoting wider adoption by corporations, merchants, and individuals.

Overcoming the Risk of Fragmentation in European Instant Payments

 

SEPA Instant Credit Transfer (SCTinst) went live in late 2017, establishing a working regional framework for instant payments throughout Europe. SCT Inst ultimately aims to provide instant payments across 28 Eurozone nations, plus Switzerland, Norway, Iceland, Monaco, Liechtenstein, and San Marino.1

 

However, the SCT Inst rulebook doesn’t encompass clearing and settlement mechanisms (CSM). Thus, financial institutions chose multiple CSM options, each under the supervision of the European Central Bank (ECB), and seven CSMs were available when SCT Inst launched, most of these serving one or a few countries.2 One prominent private organization, EBA Clearing – owned by 51 major banks operating in Europe – introduced RT1, seeking to offer interoperability and reachability for settling instant payments throughout the Eurozone.3 Available concurrently with SCT Inst’s launch, RT1 processed its millionth transaction in mid-April.4

 

SCT Inst itself was partly a response to the ECB’s concern that retail instant payments within Europe would fragment, with national, proprietary, or closed-loop solutions that couldn’t easily interoperate. Such an outcome would increase costs and complexity and discourage cross-border trade.5 During 2016-2017, the ECB became increasingly concerned about similar fragmentation in the settlement of instant payments. In the ECB’s view, a proliferation of local in-country settlement models could potentially reduce control and increase settlement risks.6

 

In response, after consultation with stakeholders throughout Europe in early 2017, the ECB decided to introduce its own settlement solution, TARGET Instant Payments Settlement (TIPS). Now in development, TIPS will be tested this summer and fall, and is set for public release in November 2018.7

 

TIPS: A Central Bank Solution for Settling Instant Payments

 

TIPS will extend TARGET2, the ECB’s Real Time Gross Settlement System (RTGS).8 The ECB envisions that TIPS will facilitate pan-European reachability because it can draw upon TARGET2’s extensive network of participants, and the addressable Business Identifier Codes (BICs) it has already established.9

 

According to the ECB, TIPS will provide “final and irrevocable settlement for instant payments in central bank money on a 24/7/365 basis.” Participating banks will be able to set aside part of their liquidity on a dedicated account opened with their national central banks. Instant payments will be settled from this account, and its balance will count towards the bank’s required minimum reserve.10

 

The ECB will permit financial institutions to leave excess funds in their TIPS accounts overnight and during weekends and holidays, while still having those funds count towards their minimum reserve requirements. Institutions that rely on TIPS won’t have to maintain multiple local settlement accounts, with the attendant complexities in managing their liquidity positions, thus reducing the risk of running out of liquidity and having transactions declined.11

 

The ECB has said its goal is to maximize “reachability”: the ability of users to reach the system either directly or indirectly. To promote that goal, it won’t charge entry or maintenance fees for TIPS accounts; and, as a not-for-profit institution, it intends to set per-transaction charges at a level aimed only at recovering its cost. In the short term, it has promised to charge banks no more than two-tenths of a euro cent per payment until at least November 2020.12 ECB has also suggested that while TIPS will only settle euro payments at launch, it could add other currencies later.13

 

Key Decisions for Financial Institutions and Settlement Service Providers

 

Financial institutions will need to determine whether to connect with ECB’s TIPS, EBA Clearing’s RT1, or both. One observer suggests that ECB’s role as a central bank will enable it to earn a dominant position.14 Another expects that both systems – each backed by a strong and experienced organization – will develop successfully in parallel.15 Still another says TIPS’ entrance will push other providers to layer more value-added services atop their offerings to stay relevant and competitive.16

 

Both EBA Clearing and the ECB appear committed to providing methods of interoperability, and both rely on the ISO 20022 messaging standard. Meanwhile, others are also promoting interoperability. For example, SWIFT says it will launch its Europe-wide instant payments messaging service when TIPS goes live, and its solution will provide a single interface to multiple instant payment platforms and systems, including EBA Clearing and national or regional providers such as Equens, STET, and Iberpay.17

 

The
Takeaway:

The introduction of both SCT Inst and two viable solutions for pan-European instant payment settlement may accelerate the growth of instant payments throughout Europe. If so, corporations, merchants, and others operating in Europe could gain more value from instant payments sooner than they had anticipated.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.

Sources

1. “Instant payments are the future - here’s why,” Nordea; https://insights.nordea.com/instant-payments-are-future-heres-why
2. “A Closer Look at the European Central Bank’s TARGET Instant Payment Settlement System (TIPS),” CGI; https://www.cgi.com/sites/default/files/pdf/tips_issue_brief.pdf
3. “RT1 Instant Payments,” EBA Clearing; https://www.ebaclearing.eu/services/instant-payments/introduction/
4. “EBA Clearing’s instant payment RT1 platform tops 1m transactions,” Instapay; https://www.instapay.today/article/eba-clearings-instant-payment-rt1-platform-tops-1m-transactions/
5. “The new TARGET instant payment settlement (TIPS) service,” European Central Bank; https://www.ecb.europa.eu/paym/intro/news/articles_2017/html/201706_article_tips.en.html
6. “A Closer Look at the European Central Bank’s TARGET Instant Payment Settlement System (TIPS),” CGI; https://www.cgi.com/sites/default/files/pdf/tips_issue_brief.pdf
7. “All about TARGET Instant Payment Settlement (TIPS): a new actor in the European payments landscape as from November 2018,” European Payments Council; https://www.europeanpaymentscouncil.eu/news-insights/insight/all-about-target-instant-payment-settlement-tips-new-actor-european-payments
8. “Payment, clearing and settlement systems in the euro area,” CPSS; https://www.bis.org/cpmi/publ/d105_eu.pdf
9. “All about TARGET Instant Payment Settlement (TIPS): a new actor in the European payments landscape as from November 2018,” European Payments Council; https://www.europeanpaymentscouncil.eu/news-insights/insight/all-about-target-instant-payment-settlement-tips-new-actor-european-payments
10. “The new TARGET instant payment settlement (TIPS) service,” European Central Bank; https://www.ecb.europa.eu/paym/intro/news/articles_2017/html/201706_article_tips.en.html
11. “Real-Time Payments Will be Europe’s Most Dominant Payments System – Are You Ready to Realize the Full Value?” ACI Worldwide; https://www.aciworldwide.com/insights/expert-view/2018/february/real-time-payments-will-be-europe-most-dominant-payments-system
12. “The new TARGET instant payment settlement (TIPS) service,” European Central Bank; https://www.ecb.europa.eu/paym/intro/news/articles_2017/html/201706_article_tips.en.html
13. “Real-Time Payments Will be Europe’s Most Dominant Payments System – Are You Ready to Realize the Full Value?” ACI Worldwide; https://www.aciworldwide.com/insights/expert-view/2018/february/real-time-payments-will-be-europe-most-dominant-payments-system
14. “A Closer Look at the European Central Bank’s TARGET Instant Payment Settlement System (TIPS),” CGI; https://www.cgi.com/sites/default/files/pdf/tips_issue_brief.pdf
15. “Top 5 Tips for the introduction of SCT Inst,” Icon Solutions; https://www.iconsolutions.com/blog/top-5-tips-for-the-introduction-of-sct-inst/
16. “Flavors of Fast: A Trip Around the World of Immediate Payments,” FIS; http://empower1.fisglobal.com/rs/650-KGE-239/images/FIS_Flavors_of_Fast_2017.pdf
17. “SWIFT offers an instant payments messaging service,” SWIFT; https://www.swift.com/news-events/news/swift-offers-an-instant-payments-messaging-service

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