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How to make instant payments the new normal in Europe?

MIP OnLine - 2020

November 2020

The Governing Council of the ECB has agreed to update the TIPS participation rules in an effort to ensure that payment service providers (PSPs) and automated clearing houses (ACHs) provide pan-European reach for instant payments. This will support the wider EU objective of ensuring a successful roll-out of instant payments across Europe. The ultimate goal is to enable European citizens and businesses to make electronic payments in real time from and to any country in the EU both at the point-of-sale and online.

A vision in the making

Ever since the first instant payment solutions emerged around the globe, many industry leaders shared the belief that instant payments would become the “new normal”, and that we would soon be sending and receiving money as quickly as we send and receive text messages or emails. This promise seemed revolutionary for an industry that often depends on complex processing involving multiple actors and systems.

Together with the market, the European Commission and the ECB both embraced this vision from the outset as well. The European Commission declared its support for EU-based instant payment solutions for the European market in order to prevent global internet platforms, social media and global card schemes from prevailing over local providers of payment services. In the same vein, the ECB committed to ensuring that the euro area has at least one efficient and reliable instant payment solution with a pan-European reach.

The European Payments Council, a body that represents the European banking industry on issues related to payments, ensured that the market played an important role as it developed and launched the SEPA Instant Credit Transfer (SCT Inst) scheme. SCT Inst enables pan-European credit transfers and thus serves as a key element in ensuring the desired widespread adoption of instant payments.

Instant payments have shown encouraging growth since the scheme was launched. An ECB indicator for the euro area shows that at the end of the first half of 2020 SCT Inst transactions made up about 7% of all SEPA credit transfers. Nevertheless, despite their increased use and various policy developments and technological breakthroughs in the area of retail payments, instant payments have not yet become the “new normal”.

A new push for pan-European instant payments

The ECB has recently looked at what is preventing the euro area from achieving a full roll-out of instant payments and discussed the issue with market actors. The conclusion was that action is needed to improve the interconnectedness of infrastructures involved in the clearing and settlement of instant payments.

The TIPS instant payment settlement service is well placed to address these issues. TIPS was introduced to connect a wide range of market participants such as banks, other payment service providers and ACHs and to thereby become the backbone that enables pan-European reach. Recognising this potential, and as suggested by market participants, the ECB has reflected on how to use TIPS to ensure pan-European reachability.

The ECB Governing Council has therefore approved a package of measures to tackle the identified gaps by increasing the reach of its TIPS instant payment settlement service to a pan-European level.

By the end of 2021:

  • all PSPs in TARGET2 that adhere to the SCT Inst scheme shall become reachable in TIPS either as a participant or a reachable party
  • ACH instant payment settlements shall move from TARGET2 to TIPS

Benefits for PSPs and ACHs

Regulatory compliance

The SEPA Regulation calls for the equal treatment of payments in the euro area. All parties that are domestically reachable should also be reachable across Europe. The new measures adopted by the ECB will therefore help PSPs that comply with SCT Inst to meet their legal obligation under the SEPA Regulation. This way, a PSP or ACH will no longer depend on the actions of other PSPs or ACHs for its own pan-European reachability.

Reachability as a commodity

The measures will also support all ACHs that provide instant payment services by allowing them to automatically include pan-European reachability as part of their service offer. In this regard, ACHs will no longer depend on bilateral agreements to establish links between one another, and there will be no potential credit exposure for cross-ACH transactions.

Removing liquidity traps

With the implementation of the aforementioned measures, ACH technical accounts can be funded and defunded from central bank money accounts in TIPS around the clock, no longer being limited by the opening hours of TARGET2. This also facilitates moving liquidity from one ACH to another at any time, which can be particularly valuable during long weekends.

Increased competition

Finally, the measures will foster the creation of a competitive marketplace where each PSP may decide independently how to instruct instant payments (through an ACH or directly in TIPS) and where to hold its liquidity and to settle payments (in an ACH or in TIPS).

The big picture

By introducing these measures, the ECB is taking decisive steps towards the full roll-out of instant payments in the euro area. The ultimate goal is to provide certainty to European citizens and businesses that they can instantly transfer funds in euro, both in physical shops and online, throughout the EU. They can be certain that the funds will reach their counterparty and confident that their instant payments will be settled, regardless of the numerous actors that may be involved in the process.

Furthermore, pan-European reachability across the payment processing chain is necessary to foster innovation in the area of safe and convenient front-end solutions which will benefit both businesses and consumers.

With the step towards pan-European reachability, the ECB is confident that the vision of instant payments as the “new normal” in the euro area will soon be a reality.

Are you a PSP or an ACH that is looking for more information on the technical details of the new pan-European reachability measures? Please consult the dedicated section on our website.