Main infrastructure components
Payment systems are classified into two main categories: large-value and retail. This depends on the types of payments they transmit and settle. Payment instruments are used for making cashless payments.
Large-value payment systems typically process a relatively small number of high-value and time-critical payments.
These systems are essential to the proper functioning of the financial system. A failure could trigger disruptions in the markets or transmit shocks, both at the local and at the cross-border level. Therefore, large-value payment systems in the euro area are always classified as systemically important.
The TARGET2 system is owned and operated by the Eurosystem. It provides for real-time gross settlement in central bank money of euro payments. It is used for the settlement of central bank operations, interbank transfers and other large-value or urgent euro payments.
TARGET2 is an essential vehicle for the implementation of the monetary policy of the Eurosystem and the functioning of the euro money market.
The EURO1 Service of EBA CLEARING is a privately owned and operated EU-wide multilateral net settlement payment system for large-value euro payments.
EURO1 processes interbank payments by means of both credit transfers and direct debits. EURO1 balances are settled once a day in TARGET2 via a settlement account held with the European Central Bank.
Large-value euro payments related to foreign exchange transactions are being settled in the Continuous Linked Settlement (CLS) system.
CLS settles payment instructions related to foreign exchange transactions on a payment-versus-payment (PvP) basis in the books of a privately owned single-purpose bank (CLS Bank). The PvP mechanism ensures the synchronous settlement of the two legs of a foreign exchange trade.
The ECB acts as the settlement agent for CLS Bank’s euro payments. All euro funding payments to and from CLS are settled via TARGET2. The euro is the most important currency settled by CLS after the US dollar. It accounts for about one-quarter of all settlements.
Retail payment systems typically handle large volumes of payment orders, e.g. card payments, direct debits, credit transfers and cheques. The value of the individual orders tends to be low and they are not usually time-critical.
Although retail payment systems are not necessarily a source of systemic risk, their effectiveness and reliability in the provision of payment services is of vital importance for the economy and social welfare at large.
Most euro area retail payment systems were originally set up to serve national needs and therefore do not have an area-wide reach. The SEPA project aims at facilitating an integrated euro retail payments market.
Payments are made either in cash (banknotes and coins) or by cashless payment instruments. While the relative importance of cash payments is decreasing, the absolute value of the outstanding stock of cash is expected to continue to grow.
The most frequently used cashless payment instruments in the euro area are:
- payment cards;
- direct debits;
- credit transfers;
Usage of the first three instruments is increasing, while that of cheques is declining. E-money payments have remained of marginal importance. National preferences vary widely as regards the use of the various instruments in cashless retail payments
Payment cards (debit or credit cards) are cards issued by a credit institution or card company. They indicate that the holder of the card may charge his/her account at the bank (debit card) or draw on a line of credit up to an authorised limit (credit card). Card payments have been supported by the existence of cheap and efficient national card schemes, complemented by international card schemes. Acceptance of national cards for transactions outside the home country is typically achieved by means of co-branding with one of the international card schemes. Cards account for more than one-third of non-cash euro payments.
Direct debits are pre-authorised debits on the payer’s bank account that are initiated by the beneficiary. They are often used for recurrent payments (such as utility payments). Around one-third of all non-cash payments are effected as direct debits.
Credit transfers are instructions sent by a payer to its bank requesting that a defined amount of funds be transferred to the account of a payee. Around one-third of all non-cash payments are effected as credit transfers.
A cheque is a written order from one party (the drawer) to another (the drawee, normally a bank), requiring the drawee to pay the indicated sum on demand to the drawer or to a third party specified by the drawer. Cheques are still common in a few countries but usage is diminishing. In most euro area countries cheques are practically non-existent.
Electronic money (e-money) is a monetary value (claim on the issuer) which is stored in an electronic device (e.g. a card or computer) and accepted as means of payment by undertakings other than the issuer.