Instant Payments: interoperability & TIPS
With the November deadline approaching quickly, Instant Payments in the eurozone is about to become a reality. Initiatives in the Netherlands, Belgium, Italy, France and Spain show that there is massive interest in this new payment method. However, these implementations initially focus on their domestic markets, as the volume and value of transactions, especially in the first use cases of Instant Payments such as mobile P2P, are local. Therefore a need arises to connect these local initiatives to make sure Instant Payments can be used across Europe seamlessly.
These local needs and activities are the reason the European Central Bank (ECB) and the European Association of Clearing Houses (EACHA) strive for interoperability. The ECB has stated the goal that a bank should be able to connect to only one Automated Clearing House (ACH) to achieve pan-European reach in Instant Payments. In order to attain this goal, the ACHs need to be interoperable.
Achieving interoperability between ACHs is not an easy task, as each has its own infrastructure and system rules. EACHA recognized the need for guidance and drafted the EACHA Instant Payments Interoperability Framework (EIPIF, available on eacha.org), which stipulates standards ACHs can adhere to when organizing bilateral interoperability, The ECB, together with the ACHs, defined the standards for the settlement layer.
The ECB defined three conditions for interoperability:
1. A single procedure for settlement of pan-European Instant Payments via TARGET2
2. A single model for risk management
3. A common access policy
In the working group, facilitated by the ECB, all ACHs planning to offer Instant Payments have committed to using the TARGET2 ASI6 Real Time settlement procedure and the use of full prefunding in cash to mitigate any settlement risk, thus achieving harmonization in Europe on these points.
TIPS – European Instant Settlement
The European Central Bank (ECB) officially announced on 22 June 2017 that it will offer an Instant Settlement service, called TIPS (TARGET Instant Payment Settlement), starting from November 2018. Their 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.
Two settlement models
With the projects in the aforementioned countries well underway and all based upon the use of a model with a Clearing and Settlement Mechanism (CSM) and settlement based on the TARGET2 ASI6 Real Time settlement model, this is not compatible with TIPS. Banks and PSPs need to make a decision in which model they wish to participate in, or even to participate in both.
As mentioned before, local communities have specific requirements, and these specifics may not be supported by TIPS, but this will be supported through the CSM model. The two models thus will coexist and be complementary.
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.