But will the big banks play along?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
On Friday the ECB launched, with minimal fanfare, a brand new system aimed at enabling banks to settle payments instantaneously across Europe, helping them to compete with PayPal and other global tech giants. Developed in little over a year, the ECB’s not-for-profit TARGET Instant Payment Settlement (TIPS) system will let people and businesses in Europe transfer euros to each other almost instantly, at extremely low cost, and irrespective of the opening hours of their local bank.
The first ever payment via TIPS took place on Friday between a customer of Spain’s CaixaBank and one of French bank Natixis. The payment went through in a matter of seconds.
“In launching TIPS, the Eurosystem is acknowledging the changing reality that digitization is erasing the borders between wholesale and retail,” said ECB Executive Board Member Yves Mersch at the TIPS launch event, in Rome. Mersch was one of the senior European central bankers who oversaw the new payment system’s roll out, work on which began in June 2017.
Earlier this year he bragged to Bloomberg that the new system would leave blockchain in the dust. “TIPS is 10 seconds, 0.2 cents. DLT transactions are at best 30 euros and take at least one hour,” Mersch said. “We have a mandate for efficient payment systems, and we go for efficiency. We are not bound to a technology, we are bound to results.”
TIPS was developed as an extension of TARGET2, the ECB’s real-time gross settlement platform for euro payment transactions, and settles payments in central bank money. The newly launched system currently only settles payment transfers in euros, the ECB says on its website, but “in case of demand, other currencies could be supported as well.”
According to Mersch, the TIPS system has put in place “three strong building blocks” for unleashing the potential for retail payments innovation in Europe:
- The standardization and harmonization of business rules: One year after its launch, more than 2,000 payment service providers from 16 different countries — roughly half of all of Europe’s payment service providers — have joined the TIPS scheme, “proving their commitment by following the Euro Retail Payments Board guidance on instant payments.”
- A state-of-the-art market infrastructure: TIPS is a “truly domestic market infrastructure for pan-European instant payments” with settlement in central bank money. Using TARGET2 as a basis, TIPS “can provide wide reach and scale, tapping into an established network of over 1,700 participants and more than 51,000 addressable Business Identifier Codes (BICs).”
- A sound legal basis: “The revised Payment Services Directive (PSD2) provides the legal framework for retail payments innovation by setting rules for third-party payment service providers. PSD2 enhances consumer protection and increases security for payment services.” But it is still not fully implemented.
One major obstacle holding TIPS back is the low number of banks that have agreed to participate in the scheme. So far, just eight mostly medium- or small-sized banks from Spain, Germany and France have signed up, with Spain’s BBVA the only A-league banking giant to have joined so far. The other participants are Spain’s CaixaBank, Abanca Corporación Bancaria, Banco de Crédito Social Cooperativo and Caja Laboral Popular Cooperativa de Crédito, French bank Natixis and Germany’s Berlin Hyp and Teambank.
“We need to address the reasons for the scarcity of major European players in the payments market,” ECB director Yves Mersch said. “If there is a lack of investment capacity…we should not shy away from pooling resources and volumes and creating bigger players.”
The lack of participation in the initiative is not due to a lack of interest in instant payment (IP) solutions. During a poll conducted by the ECB itself at a banking event in February, 61% of the banks in attendance said they are actively preparing for the roll out of IP; 15% of the audience believe IP will be the new norm within one year; 63% expect a take-up in the coming five years; and 21% believe that regulation is necessary to drive IP adoption.
As we reported a year ago, big banks on both sides of the Atlantic are all over blockchain technology and have been pouring money into developing their own “digital currencies.” They include European too-big-to-fail giants like Santander, Deutsche and UBS, which, alongside New-York based BNY Mellon, have been working together to create a digital currency known as Utility Settlement Coin (USC), which will facilitate payment and settlement for institutional financial markets.
It’s easy to see the lure blockchain holds for alpha lenders such as these: Combining shared databases and cryptography, the technology offers multiple parties simultaneous access to a constantly updated digital ledger that cannot be altered. With it, banks could offer a safer, faster, cheaper, more transparent service to their customers, while doing away with the need for a central operator.
Settlements could be executed almost instantaneously on a bank-by-bank basis rather than having to be netted at the end of each working day by the respective central bank. The subsequent cost savings could be huge.
But now the ECB may have stolen their thunder, by launching a cross-continental instant payments system. By doing so, it has become the first major global central bank to try to offer an alternative to the payment systems offered by tech giants such as Apple, Google, PayPal and Amazon that currently dominate Europe’s digital payment industry.
Unlike cryptocurrencies, TIPS is highly centralized. It is also largely untested, at least at the sort of levels the ECB aspires to achieve, offers zero anonymity and is extremely low-cost, with a transaction fee of just 0.2 cents and no entry or account maintenance fees, which is great news for bank customers but not such great news for banks themselves.
This may help explain why only eight out of thousands of European lenders have so far signed up to the system. But rest assured that in the coming months the ECB will do everything it can within its not insignificant power to change that dynamic. By Don Quijones.
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