Instant Payments and the latest ECB TIPS developments
This blog was originally posted on LinkedIn. The original can be found here: https://www.linkedin.com/pulse/instant-payments-latest-ecb-tips-developments-mark-munne/
Big news was announced yesterday by the European Central Bank on their plans with the TARGET Instant Payment Settlement service, also known as TIPS.
"All Payment Service Providers (PSPs) which have adhered to the SCT Inst scheme and are reachable in TARGET2 should also become reachable in a TIPS central bank money liquidity account, either as a participant or as reachable party."
Although the announcement sounds simple and easy enough, there are great consequences, from a technical, commercial as well as settlement risk perspective. I have no intention to provide a full list of all the consequences (there is far too little information on how the service would work with ACHs at this stage for example), but there are some interesting statements made by the ECB in the announcement which are worth a highlight.
All PSPs which currently offer Instant Payments or are planning to do so, will need to be reachable in TIPS by the end of 2021. At this moment in time, the most successful Instant Payments systems are equensWorldline (by volume) and EBA Clearing (by number of PSPs connected). The ECB states in their announcement that "all Automated Clearing Houses (ACHs) offering instant payment services should migrate their technical accounts from TARGET2 to TIPS." It is unclear to me at this moment if this would open up the possibility to settle between an ACH technical account and a PSP TIPS account directly. The ECB states in the announcement that PSPs are free to decide whether to hold their liquidity and settle in the ACH or in TIPS. The funds would reside on the TIPS account in both cases, and the ECB also states that "the choice that one PSP makes in this respect does not condition the choices of other PSPs", which at least points to some interoperability between the ACH model and the 'pure' TIPS model.
If indeed an interoperability model emerges from this initiative, this would mean 100% reach across the SEPA zone (which is the goal of the ECB, as stated "...TIPS [would] benefit from 100% pan-European reachability, [and] ACHs competing in the provision of instant payment services would automatically make this part of their service offer"). This leads to the next point.
Today, a big part of the competition between ACHs in the provision of clearing and settlement service is the reach an ACH is able to offer. It is a winner-takes-all model, which is not necessarily good for the payment service user (they might find themselves with a bank which has chosen an ACH with limited reach), or for the market as a whole, as innovative new services do not have the reach to launch and thrive. As reachability becomes available as a commodity (and as the ECB states 'a legal requirement'), this would mean each PSP is able to select the partners which fit their needs from a technical and product offering standpoint, rather then from a community reach standpoint. It opens up the competitive space for ACHs to a true pan-EU landscape. ACHs from France can now offer their services to PSPs in Greece, without having to onboard the entire Greek community. Reach is covered through TIPS.
I believe this will be a great opportunity for the ACHs which have a richer service offering. As clearing and settlement becomes a commodity (and the basic functionality offered by the ECB in a 'pure' TIPS model), PSPs will increasingly look at their partners to help them in the adjacent areas. ACHs can expect questions from their customers and prospects on value adding services, fraud detectection and sanction screening services and stand-in services. ACHs will need to evolve into technical partners and help PSPs integrate Instant Payments into compelling use cases for their customers. The ECB included this vision in a bold statement at the end of the announcement: "The ultimate goal is to enable European citizens to make electronic payments in euro from and to any country in real time, both in physical shops and online." ACHs which already have a broader service portfolio today, including for example cards processing and core banking, should be better positioned for this massive change. In any case, it is a very interesting time to be working in payments.