ECB on TIPS: Carving out the future of payments
Without doubt we’ve entered a new era for payments, says Mehdi Manaa, Deputy Director General, Market Infrastructure & Payments, European Central Bank (ECB), as he reviews the rise of instant real-time payments, SCT Inst in Europe & discusses the imminent TARGET Instant Payments Settlement (TIPS) platform.
The rapid digitalisation of the economy has made today’s consumers and businesses come to expect immediate and accurate services tailored to their respective needs. Under these circumstances, real-time payment (RTP) systems represent the next logical step for market infrastructures and their communities.
Today, there is a general impression that electronic e-commerce transactions take place in real-time. However, even though goods may reach beneficiaries shortly after an order is placed, settling the underlying payments actually requires at least one full business day.
Lately, however, emerging technologies have inspired a shift in the general economic rationale towards the ambitious direction of instant payments – that is electronic retail payment solutions available instantaneously, around the clock.
This trend is evident in the recent launch of the single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme in Europe and the imminent unveiling of the European Central Bank’s (ECB) own TARGET Instant Payments Settlement (TIPS) platform on 30 November 2018, which can act as a settlement engine for SCT Inst compliant payments.
Background: Moving from batch to real-time
Instant payments entail account crediting within seconds of the payment initiation. They are irrevocable and based on single transaction processing, as opposed to regular credit transfers that are normally processed in batch format. As a result, instant payments are ideally positioned to optimise capital management by improving cash flow and minimising financial risk against concomitant payments.
Recognising the potential of instant payments, in 2014 the European Central Bank’s (ECB) Euro Retail Payments Board (ERPB) invited the European Payments Council (EPC) to develop a pan-European instant payment scheme. This is the aforementioned SEPA Instant Credit Transfer (SCT Inst) scheme, which became operational on 21 November. SCT Inst supports transfers in euro within a 10-second limit across the 34 SEPA countries, at any given time. Even though the scheme is optional, over 1,000 Payment Service Providers (PSPs) have so far joined in.
The voluntary SCT Inst scheme ensures that instant payment providers deliver services based on a common set of rules, but it does not ensure that those providers collectively deliver an integrated service for instant payment in euro. Domestic payment solutions have already been launched over Europe to this end, but the risk of reverting to a fragmented landscape would have a negative impact on the continuing efforts to harmonise the European Single Market and could prove detrimental to European competitiveness.
Automated Clearing Houses (ACHs) have responded to the call to avoid fragmentation by producing a framework for interoperability to facilitate developing a pan-European reach for instant payments and some countries have improved their domestic payment infrastructures. However, the implementation of interoperability arrangements between the different ACHs has remained difficult to achieve in an efficient and cost-effective way across the entire European continent.
For all these reasons, the Eurosystem has decided to act in favour of European financial market integration and single market harmonisation. We believe TIPS will help meet the demand for instant payments at a pan-European level.
How will the TIPS platform work?
On 22nd June 2017, the Governing Council of the ECB decided to launch the TARGET Instant Payments Settlement (TIPS) project in the service of European integration and to offer instant settlement in central bank money. In fact, the Eurosystem has been settling transactions in real-time for the last decade thanks to the TARGET2 real-time gross settlement (RTGS) platform. The difference is that TIPS has extended operating hours to render the service available 24x7x365. Moreover, TIPS will feature a multi-currency technical capability.
TIPS will adhere to the SCT Inst scheme and support its successful deployment. In addition, the service will tap into the TARGET2 RTGS’ vast and established network of participants to guarantee a high level of reachability. Adopting the TARGET2 participation criteria and flexible structure, TIPS will allow market actors to play the role of:
- Participant: These will be PSPs with one or many TIPS accounts. Balances on TIPS accounts will count towards the calculation of the Minimum Reserve Requirement (liquidity).
- Reachable Party: These will be PSPs with no TIPS accounts, but with the authorisation to settle on participant accounts.
- and/or Instructing Party: These can instruct on behalf of either of the above classes of user. In practice, this will mean participants and reachable parties could decide to technically interact directly with TIPS or to rely on the service of instructing parties, which will be entities that can send instructions to TIPS on behalf of participants or reachable parties.
How will TIPS be priced?
In an effort to encourage participation in TIPS the Eurosystem has removed entry and maintenance fees. The service will:
- Go live on 30 November 2018 at the maximum price of 0.2 euro cents per payment, during at least the first two years of operation.
- Thereafter, TIPS will function on a full cost recovery principle, with charges per transaction being proportional to the volume of the instant payments processed.
The ramp-up ahead of November 2018 start date
Last year, the ECB ran a market consultation on User Requirements for the TIPS service, receiving more than 1100 contributions from different institutions. The initiation of the realisation phase was officially approved shortly afterwards. We are now going through the development and procurement tasks in readiness for the 30 November 2018 ‘go live’ date for TIPS. The User Detailed Functional Specifications were made available in March 2018 and software aspects will be finalised by July this year.
Internal testing will run throughout August 2018, followed by user testing from September to November. TIPS will be based on the latest International Organization for Standardization (ISO) messaging standards (ISO 20022).
I believe that eventually instant payments will come to revolutionise all facets of the payment chain and serve as the catalyst for a new wave of innovative banking services. The Eurosystem has stepped up to the challenge and is developing the necessary infrastructure that will support the financial industry in developing and offering the innovative and efficient services that European consumers and corporates need.
Now is the time for forward-thinking providers to come up with efficient and innovative approaches that will make instant payments accessible to all users. Instant payments will not become the new normal across Europe unless all market participants and technologists collaborate and pursue the same objective. This is one of the reasons why we ran a #TIPSapps Challenge in February this year inviting vendors to present mobile apps for the initiation and processing of instant payments on the SCT Inst-compliant platform.
This is a truly exciting age in economic history, one that promises to be full of opportunities. I look forward to working with the market to carve out the future of payments and to seeing TIPS play a full role in this real-time future.