Dean Wallace, Practice Lead, Real-Time and Digital Payments, ACI Worldwide
Domestic instant payments schemes are either live or in progress across the world. In Europe this poses some challenges for the next stage of real-time evolution: cross-border. Even though there is a single pan-EU rulebook “SEPA Inst”, Europe has 34 markets that are either implementing or have successfully implemented domestic schemes, which in turn makes true instant payments both within the Eurozone and beyond the single-currency borders a little complex. As well as domestic needs to transact with local banks, banks across Europe are acutely aware of the need to deliver cross-border real-time payments to their customers. Connecting to a pan-European scheme therefore is a strategic priority for any bank who needs to transact outside of their home market. But with both EBA Clearing RT1 and The European Central Bank’s TARGET INSTANT PAYMENTS (TIPS) schemes competing for members, how can banks decide where to prioritize their resources and decide which to connect to?
Reachability is Key
For banks to be competitive with their real-time services across Europe, they need to join the scheme with the highest reachability
At first it might seem like RT1 wins this round, but the equation is more complicated than it appears.
RT1 has more members so far, 28 to be precise, but it’s a closed scheme controlled by the investing banks, with membership fees charged and strict windows for testing. In contrast TIPS charges no membership fees and has the potential to be accessible to all. The key difference is the indirect model available for TIPS which requires that a TARGET2 settlement account be used at the European Central Bank (ECB), but does not dictate that the account must belong to the Payment Service Provider (PSP) or a Payment Initiation Service Provider (PISP). Particularly under the PSD2 regulations, smaller banks or new Fintechs can look to partner with a sponsor bank that does have an account in TARGET2 (T2), in accordance with the T2 indirect model participation. This could expand the reachability of TIPS to be far broader than RT1, especially when we consider the role of these new payments players in servicing the un- or under-banked.
TIPS will also be multi-currency and expand its service to non-eurozone countries such as those in Eastern Europe, again expanding the reachability of the scheme in comparison to RT1. However, comparing that reachability against your actual business is critical – if a bank’s cross-border payments are primarily between banks in countries that have strong RT1 penetration, then the business case for prioritising RT1 becomes much stronger.
The EBA consortium banks have made a significant investment in RT1 to ensure an efficient scheme. There’s a strong motivation for banks to join RT1 where they can exert more control over non-banks’ ability to connect. Banks have the majority both in terms of customer numbers and transaction volumes, so most instant cross-border payments will be bank-to-bank reachability, not necessarily a network beyond banks, at least in the short term. Therefore, the scheme with the highest number of banking participants carries significant weight. These factors may influence banks’ decisions over which real-time scheme to prioritise, tipping the balance in favour of RT1. But with a relatively closed network comes risk; you cannot offer real-time services to customers if there is a high risk that you cannot send all their payments in real-time, low reachability could kill the service forever if customers feel ‘burned’ by their initial experience.
Overall, the question of, ‘how do I ensure maximum reachability?’ seems most easily answered with ‘connect to both RT1 and TIPS’.
Not ‘Which’, but ‘When’
Based on the reachability potential of both RT1 and TIPS, the logical solution would seem to be for banks to enable both schemes, but the reality for banks is a complicated legacy environment that makes any new integration a serious consideration, and they have to prioritize their budgets across competing demands. Their fintech competitors are unencumbered by legacy technologies, and there essentially is only one scheme available to them: TIPS, because they aren’t members of the European Banking Association (EBA) and can’t access RT1. For fintechs, connecting their payment systems to TIPS is a less complex project, in part because it isn’t directly governed by the EBA. In this way they can work around the EBA clearing certification period, which can add months to project timelines for otherwise nimble Fintechs. Added to this, TIPS goes live November 2018 which means Fintechs are likely to be live with competing instant payment services relatively soon.
Banks must be cognizant of the timelines too; TIPS is scheduled to go live this year, whereas RT1 has yet to move all 28 original banks off the batch scheme and onto true real-time, despite a head start. TIPS appears to be winning the race for banks’ prioritization of budget when it comes to connecting to a pan-European instant payments scheme.
Unfortunately, too many banks are employing the industry’s ‘wait and see’ attitude to decide which scheme to connect to, but it’s not really a question of ‘which’, more of ‘when’. It is highly likely that banks will have to connect to both schemes in the medium to long-term if they want to ensure the highest possible reachability – connecting to both schemes will give banks the competitive edge over those to whom RT1 is not open. The imminent go-live of TIPS presents a strong business case for many banks to prioritise getting up and running with TIPS at a minimum for current budget planning.
Road to Real-Time
Ultimately, connecting to TIPS and offering pan-European instant payments services is just another step on the road to becoming a truly real-time bank. In the first instance TIPS implementations may be small-scale due to low current volumes, but that doesn’t mean they will be low quality services. The initial development of pan-European instant payment services with TIPS will be to meet the needs of your largest and most important corporate customers. But corporate customers need more than just the real-time payment; the ability to provide real-time remittance information, liquidity management, and additional data should be in banks’ plans when considering a strategic instant payments solution. This could be in the form of added intelligence and business processing within the solution, as well as the ability to integrate other schemes and messaging types into the solution along the way. A ‘good enough’ TIPS implementation now includes the capability to scale functionally and to growing volumes as new business cases crystalize.
The pan-European scheme question is not just about a new payment type, but about a new business environment. That environment is increasingly global for both the bank and its customers. When considering any real-time payments decision banks must be confident that every step along that journey is with long-term strategy in mind; any pan-European implementation now must easily scale to expanding volumes and integrate with global cross-border payments schemes to provide the quality and reach of service that customers expect.