27 June 2017
Instant Settlement by the European Central Bank is the alternative for interoperability
he European Central Bank (ECB) officially announced on June 22nd that it will offer an Instant Settlement service, called TIPS (TARGET Instant Payment Settlement), starting from November 2018. The ECB aim is to ensure the demand for instant payments is met at European level and to further facilitate the integration of the euro area.
The ECB has already published its draft User Requirements Document, which shows the ECB aims for this new Instant Settlement service to be fully compliant with the European Payments Councils Instant Payments initiative, SCT Inst and will offer banks and Payment Service Providers (PSPs) the ability to settle instantly at the European Central Bank, effectively eliminating credit and liquidity risk. This is important, as this allows volumes and value to grow without increasing risk for the users of Instant Payments.
This does raise questions however, as several Instant Payments initiatives are already well underway. In this blog, Mark Munne, Senior Product Marketing Manager at equensWorldline, addresses some of these questions.
How does TIPS relate to the other initiatives in Europe?
Mark Munne: “Instant Payments is a hot topic in Europe, and we have seen a lot of traction in various countries. The Netherlands are well under way with their implementation and are on track for a full roll-out in 2019. Belgium and France also have projects underway, as well as Spain and Italy. But all these projects have one thing on common; they all have chosen for the model with a Clearing and Settlement mechanism and settlement based on the TARGET2 ASI6 Real Time settlement model. As it stands today, this model is not interoperabile with TIPS. Banks and PSPs need to make a decision in which model they wish to participate in, or even to participate in both.”
How does TIPS impact this CSM model, do these models coexist or is the expectation that one model will eventually prevail?
Mark Munne: “In my opinion the models can coexist. TIPS offers great benefits to the participating banks, as it eliminates credit risk through instant settlement in Central Bank money, and the funds the participating banks needs to prefund in TIPS still count for the liquidity reserve, which makes prefunding in TIPS cheap and liquidity efficient. However, the ECB will implement Instant Settlement according to the EPC SCT Inst scheme rulebook in a generic way. Local communities may have specific requirements. Again, in the Netherlands, the banks have defined local specific additions to the generic scheme, such as a non-time critical variant and a variant with a faster SLA and higher value limits. These specifics will not be supported by TIPS, but this can be supported through the CSM model.”
With these two models coexisting, how do banks ensure optimal reach in Europe?
Mark Munne: “Unfortunately it is unclear at this moment which of the models will be dominant. CSMs in Europe have committed to realizing interoperability in Instant Payments, thus achieving reach within the CSM model. However, as TIPS is not interoperable with the CSM model, banks may opt to participate in both models. Some CSMs, among which equensWorldline, have already expressed their intention to connect to TIPS as an Instructing Party. This then allows banks to connect to their preferred CSM through a single technical connection and a single gateway, while benefitting of the additional reach provided by TIPS.”
Finally, how do you see this announcement in the longer term payment trends?
Mark Munne: “Instant Payments definitely is the new normal and this initiative from the European Central Bank shows there is interest not only from banks and CSMs, but also from Central Banks. It is my belief that TIPS will help in making Instant Payments as success in Europe. From a global perspective, we see initiatives in other continents as well, with implementations under way in Australia, the US and South East Asia. This will eventually lead to an interconnected Global Instant Payments world.”
Visit this page for more information on Instant Payments.
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