The European Payments Council (EPC) has confirmed a November 2017 launch date for a pan-European SEPA Instant Credit Transfer scheme (SCT Inst) that will bring real-time money transfers across the Single Euro Payments Area (SEPA).
At a pan-European level, the TARGET Instant Payments Settlement service (TIPS) is being established by the European Central Bank to provide instant payments settlement services to PSPs and ACHs which have access to TARGET2, focused on EUR, but also capable of settling in other currencies. It is based on the same message formats and aligned with SCT Inst. We discussed with the Senior Product Marketing Manager of equensWorldline about the implications of such a service on the market.
In June 2017, the ECB announced the development of a new service for the settlement of instant payments, TARGET Instant Payment Settlement (TIPS). What does this new service provide and how will businesses and consumers benefit from this service and when?
This ECB initiative is planned to go-live in November next year. TIPS offers instant settlement of transactions to any PSP in Europe and allows banks to offer instant payments to their customers by reusing their connection to TARGET2. It is a different model than the one currently being implemented by the ACHs in Europe, but the two can coexist. TIPS offers great benefits to the participating banks, as it eliminates credit risk through instant settlement in Central Bank money. The ECB will implement Instant Settlement according to the EPC SCT Inst scheme rulebook in a generic way. However, local communities may have specific requirements as the banks have defined local specific additions to the generic scheme, such as a faster SLA or a specific domestic product - iDEAL in NL or MisterCash in BE. These specifics may not be supported by TIPS, but this will be supported through the CSM model.
Moreover, this initiative from the ECB shows there is interest not only from banks and CSMs, but also from Central Banks. It is my belief that TIPS will help in making Instant Payments a success in Europe, as it helps to move the market.
For businesses and consumers, specifically, TIPS will offer instant payments against higher value limits (which will be of particular interest to businesses) and has the premise of offering pan-EU reach.
In recent news, equensWorldline has signed up with three Dutch banks for instant payments projects. How should banks approach the implementation of instant payments?
We are well underway in projects with our banks implementing instant payments. Each bank has its own specific challenges, but they all go through a similar process. At equensWordline, we have a standard project setup with several streams: a legal one (dealing with contracting and SLAs), connectivity and security, a clearing and settlement stream, testing, and one focusing on operational embedding.
What is interesting to see is the debate within the banks on the role of payments processing as a core competence and the strategy to follow. With instant payments and the upcoming PSD2, banks are discussing and redefining the role they want to play. Payments processing is increasingly becoming a commodity and obtaining scale is key to remain relevant and competitive. Using a shared infrastructure in a SaaS or Business Processing Outsourcing model is one way of obtaining that scale in a very efficient way. equensWorldine is in a bit of a unique position in Europe in the fact that we are the only end-to-end provider of payment services, not only offering Clearing and Settlement, but also outsourced payments processing services. We have noticed an increasing interest in using a shared payments platform to leverage the scale and solve the technical challenges of moving to 24/7 and instant. This also has the benefit that it frees up key resources to focus on the areas where a bank sees its adding value for its customers.
What is the impact of instant payments on banks’ infrastructures and the related investments? What are the technical challenges in processing instant payments?
When it comes to processing instant payments the four main challenges for banks and processors are low latency, 24/7 availability, connectivity and scalability. This new way to make payments has a lot of market potential, but the underlying infrastructures and processes need to be upgraded to facilitate instant payments.
Sub-second processing times can only be met if participants make sure the process is optimized for processing single messages instead of files and batches. They need to make use of parallel processing steps (validating the message and checking the reach and availability can be done in parallel to the fraud check for instance) and most importantly, they need to optimize the database I/O as this typically is the biggest bottleneck. This can be done with various methods: by loading static tables in memory, by optimizing indexes or even by switching to different database technology, such as MongoDB or Cassandra.
It is critical that the instant payments processing is designed to be scalable (up and out) without impacting the latency of the service, for instance by using components designed with parallelism and asynchronism in mind. By having a load balancer/dispatcher model, horizontal scalability can be obtained, which is crucial in order to keep the TCO under control, as costs rise exponentially when scaling vertically, while costs rise linearly when scaling horizontally.
Many solutions are already available for merchants to embrace the evolution of instant payments. What are the opportunities that you see for them?
The good thing about instant payments is that it benefits everybody and the use cases are very interesting: splitting a restaurant bill, paying for the loaded cargo on a ship waiting in the harbour on Sunday, buying a used car without carrying an envelope full of cash, or paying the plumber for an emergency repair in the house late at night.
With instant payments, merchants have the immediate availability of the funds, and also have access to these funds on a 24/7 basis. This then opens up a plethora of new opportunities. In the UK, for instance, we have seen the advent of new shopping concepts. There is a store on the high street in London which sells expensive hi-fi equipment. Instead of having an inventory, whenever they sell something they place the order directly at the warehouse and pay using faster payments. The equipment can be delivered the same day, as supply chain risk and liquidity is optimized.
Another example can be seen in international cash pooling. With instant payments becoming available in Europe, companies no longer need to have local accounts filled with excess liquidity to support local business. With instant payments, cash management can be optimized and liquidity can be used where it is necessary.
How does PSD2 impact the instant payments landscape? What is happening on a global scale (making instant payments a reality for cross-border payment across the globe)?
The combination of PSD2 and instant payments will be a driver for innovation and disruption. One of the cornerstones of instant payments is the use of ISO20022, which allows for a richer dataset than for instance card payments used today. The ability to tap into this using PSD2 mandated APIs means that parties in the financial services space can develop applications that impact traditional payment methods. A big retailer, for instance, can integrate this into his own app, allowing customers to shop, collect loyalty points, pay, and get their receipts, without leaving the retailer environment.
This is a major threat to banks, specifically, who are relegated to being the mere infrastructure provider. On the other hand, banks can use PSD2 and Open Banking to their benefit, as well and become the central contact point for the customer.
About Mark Munne
With over a decade of experience in payments, Mark Munne, Senior Product Marketing Manager at equensWorldline, is responsible for Clearing and Settlement for both batch payments as well as instant payments. He represents equensWorldline in Europe in the EACHA Innovation Group and several ECB led Task Forces on Instant Payments and TARGET2.
About equensWorldline
EquensWorldline is the pan-European leader in payment services. As part of the Worldline Group, the company combines proven expertise in traditional bulk payment systems (issuing, acquiring, intra- and interbank payment processing) with innovative e-commerce and mobile payment solutions. Building on more than 50 years of experience, equensWorldline serves a broad international customer base in several countries across Europe. Customers rely on equensWorldlines expertise to anticipate changing regulatory environment in Europe, benefit from new technologies, optimize processes, ensure operational excellence and manage risk and fraud.
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