SCT Inst migration of the German market
After the successful launch of the single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme five months ago, now is a good time to take a closer at the migration status of one of the largest payment communities, Germany, says Britta Kotthaus-Krahmer, Principal Director, FS, Accenture GmbH.
The retail market for SEPA transactions has been successfully established for batch processing in Germany in a cost-effective manner. However, unlike in other European countries, there is no privately owned or operated automated clearing house (ACH) in Germany, so no possibility to launch an upgraded collective ‘instant service’ domestic module. There is no prospect either of building a purely national ACH.
Whereas other countries like Finland expressed a need for faster payments processing and even started to search for a solution early in the this cycle, instant payments were not identified as an immediate necessity for retail payments processing in Germany before the European Central Bank’s (ECB) vision paper in late 2014 – neither by consumers or via direct or indirect national regulatory demands.
This is counter to what happened in Sweden and Denmark, where banks got together to build successful real-time payment (RTP) systems in 2012 and 2014, before SCT Inst came to fruition on a pan-European basis. The German banking sector did not consider building a national SCT Inst-compliant clearing and settlement mechanism (CSM) back then, which is why it is playing catch-up now and reliant on pan-European solutions.
Several press comments on the fast new payment method were evident during 2017, particularly around the launch of SCT Inst on 21 November, but public knowledge about what instant payments (IP) are is still low. Only a few German financial institutions (FIs) actually decided to join the scheme on the launch date via a pan-European CSM like EBA Clearing’s RT1, which isn’t reliant on a pre-existing or technologically overhauled ACH.
ECB’s Target Instant Payment Settlement (TIPS)
German FIs count on RT1 as a pan-European solution with an expected general reach of 80% of SEPA eligible payments by 2020 – or they will look to the ECB’s Target Instant Payment Settlement (TIPS) platform launching in November 2018. This new initiative allows flexible liquidity management across various Eurosystem processing platforms that will overlap and integrate in future years to ensure smooth money and liquidity management – namely, the TARGET2 real-time gross settlement (RTGS), Target2 Securities (T2S) engine, and TIPS itself.
Due to the fact that TIPS isn’t live yet, however, it means many German banks are adopting a ‘wait and see’ attitude to instant payments and the SCT Inst scheme.
Given the large number of credit institutions in Germany migrating to a new standard, such as the European Payments Council’s (EPC) SCT Inst rulebook, was always going to take time.
There are more than 1700 German FIs, with around 260 commercial banks, 415 saving and regional banks, plus over 970 credit cooperative institutions. Moving them all to SCT Inst is no easy task.
While a large group of savings banks have decided to migrate via RT1 during a summer 2018 ‘joining window’, some of the big top ten banks are still holding back. They are waiting for others to join first and prepare the domestic market’s readiness, or they simply prefer to observe the introduction of TIPS before deciding what settlement engine to use.
This means the mere counting of enlisted FIs in the SCT Inst Adherence agreement – reflected in the EPC Register of Participants – might not be the expected guarantor for reachability and full adoption that some foresaw for the next 12-18 months. After all, bigger banks joining bring more uptake volume on the consumer side than smaller banks, but they’re holding back in the main. In addition, market adoption is also dependent on a general marketing and coordinated ‘branding’ strategy for other stakeholders to come in and participate in supporting the new payment method. This is yet to happen.
Bank experiences & use cases
Accenture has had the chance to speak to a number of representatives at the larger German FIs about their views on RT1 and TIPS in recent times and we’ve detailed the experiences of various institutions from a standout ‘early joiner’ outlier, through to other banks [listen to the InstaPay German webinar to find out more –Ed.]. Some institutions need more time to migrate than others. Each has their own story.
When questioned about the reasons for an early migration, a representative at a large German bank mentioned the benefit of participating in RT1 during the early design stage of it as an in-force pan-European CSM. The opportunity for this bank is to migrate before customer numbers truly take off and to test systems with fewer transactions was too tempting to resist, as was the chance to be seen as an active market participant. The strategic consideration to realise real-time payments (RTP) processing before others, as part of an over-arching digital technology improvement project that also future-proofed the bank, was a deciding factor.
The initial potential was mainly seen in the peer-to-business (P2B) market, covering time-critical invoices and the like. But further use cases are being developed for the peer-to-peer (P2B) and business-to-business (B2B) sector by this bank. Expectations are also high to see a more promising fee structure for the corporate sector due to the data-rich messaging that the SCT Inst rulebook mandated ISO 20022 messaging allows. The new liquidity services in the rebranded and overhauled ECB Target Services offering are also attractive.
Interoperability & competition
With regard to TIPS, which is part of the Eurosystem overhaul, and other pan-European CSMs like RT1, interoperability and a complementary approach to instant payments is seen as a fortunate development, rather than a pre-planned desire for increased competition.
Volume was expectedly low during the first months with EBA Clearing saying that 10,000 transactions per day in total would exceed their expectations, but this figure is steadily rising with very positive projections for 2018 RT1 uptake, based on the number of enlisted new participants from the upcoming aforementioned ‘joining windows’.
Another regional bank Accenture has been speaking to is considering joining SCT Inst this year, even if only in a passive mode with the majority of its key clients being corporates that have not yet expressed an immediate need for instant payments. This bank, as with many other of the hundreds of saving banks in Germany, would be part of a mooted central project of a Technical Service Provider that intends to migrate en masse over the summer to RT1.
This would make the technical set up for the smaller participants smooth and save not only investments into infrastructure, but also economies-of-scale costs otherwise needed for fulfilling the strict service level agreements (SLAs) required in regard to providing confirmations or rejections of the beneficiary part of IP within seconds. 10 seconds is stipulated in the SCT Inst rulebook. But there are also system rules to comply with at certain CSMs, like RT1, with even lower time intervals and time-outs in effect there. These require additional adaptation of internal bank processes for managing risk, anti-money laundering (AML) checks, and the actual steps needed to make funds available to the account holder.
One of the biggest banks in Germany decided to join RT1 this autumn to become better acquainted with instant payments procedures internally first before making the leap. Another has decided to observe the early months of TIPS, before connecting later in 2019.
From batch to real-time processing
Transforming the current batch format of most banks’ operations to the single transaction processing needed for instant payments is seen as the biggest challenge, according to the programme lead that Accenture has been talking to.
Transforming the core banking systems at an FI is the first challenge but overhauling subsequent applications for reconciliation, compliance and booking systems is necessary as well. In addition, instant payments require new network connectivity and protocols. Again, strategic consideration of where investments will be beneficial is critical.
The corporate sector benefits
When considering new use cases and service offerings for corporates, internal transformation is also necessary. Procedural, and data reporting changes, have to take place during the extended 24×7 ‘always on’ market for the submission of payments as instant transactions. Continuous booking and reconciliation never stop. Internal integration and alignment with corporates’ own enterprise resource planning (ERP) and treasury systems may be necessary. As a consequence, this implies a need to modernise web-services and align interactions for limit status restrictions and booking procedures.
Use cases in the P2B, B2P and B2B space were regarded as the most promising for businesses. For example, in-store Point-of-Sale (PoS) payments via mobile phones, emergency payments or instant pay-out of insurance claims are all possible. As are mission-critical ‘just-in-time’ payments in the supply chain that allow businesses to pay and be paid on delivery, or to settle fees and do cash pooling. Indeed, future options identified by Accenture’s interviewees at a number of banks, said that offering cash pooling solutions to their corporate clients were an attractive IP use case.
The current limit of EUR15,000 for SCT Inst transactions would need to be bypassed for large corporates for some of these use cases, but this could be agreed in a closed user group arrangement by those banks willing to participate with mainly big corporate customers.
An additional incentive for German corporates and merchants to move to instant payments over the long run is replacing the costlier card payment arrangements currently in place. This could save them hundreds of thousands of Euros per year in fees, network costs, and other infrastructure expenses.
TIPS and RT1 were considered as rather competitive, but a more detailed evaluation can only be made once both systems are live. While pre-funding for RT1 requires separate liquidity, funding for IP processing via TIPS is counted as part of the minimum reserve, which is seen as positive aspect of TIPS.
The network connectivity options for introducing IP are also a critical element mentioned by several banks when interviewed by my Accenture colleagues. RT1 have offered SIA Net and the Electronic Banking Internet Communication Standard (EBICS) as options so far, but the announcement made by SWIFT to offer yet another new protocol and connectivity approach to support real-time messaging from November 2018 onward has been widely welcomed by the majority of participants. It allows for a larger variety of options and potentially a smoother integration into the network legacy set-up of banks’ own internal IT and technical environment.
German banks are high-volume SWIFT users, so the acceptance of SWIFT components by technical third-party service providers (TPPs) or simply the technical centres was higher than for an unknown new managed network, or even an internet-based concept such as EBICS. Thus 2018 will enhance the market opportunity in general.
Pricing announcements by either the RT1 or TIPS CSM were not seen as an immediately critical aspect for the realisation of instant payments, since the initial investments were to be made in any case for dealing with the digital transformation challenge at banks. This helps customers, bank running costs and has many other benefits anyway.
The majority of institutions were aware of the fact that IP did not have a well-known ‘branding’. This makes the marketing more challenging and fragmented, as opposed to countries like the UK where they have the Faster Payments Service (FPS) on a national ACH. With this the interest and willingness to adopt associated products and services was increased and payment service providers (PSPs) in the UK were able to charge premium fees from corporates, depending on the importance of the real-time nature of the payment to their business.
In the long run, though not expressed as clearly as in the Netherlands, there was a strong belief with all the German interview partners we spoke to for SCT Inst to become the ‘new normal’ in the long run. Our key findings were:
- First, with some European communities being very strong pushers, CSMs like RT1 continue to attract participants and the ECB offering TIPS on time, reach was not seen as an issue within the next 4-5 years.
- Second, once the majority of European banks are SCT Inst-capable, the batch-based SEPA approach could ever so slowly become obsolete. Thus, slow movers would be rather pressed to migrate by the market, not by regulators. Any regulatory pressure is likely therefore to become unnecessary, although it is not completely out of the question that the SCT Inst scheme could become mandatory in the future if the voluntary approach isn’t deemed to be working.
German banks are surely on their way to SCT Inst compatibility, and as the saying goes: “Many roads lead to Rome”. It doesn’t matter how they get ‘there’ (i.e. towards instant payments) as long as the banks do eventually get there.
Lacking a coordinated approach to one national CSM, the German banking sector has instead got the challenge of migrating without a single central project that is industry and management-lead. On the other hand, this multifaceted approach means there are a variety of CSM solutions on offer, with additional flexibility of network connectivity from this November onwards. This makes 2018 a very exciting year that should, and will, lead to a great leap forward in Germany moving to instant payments.