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.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
I never understood why instant payments wasn’t done 20 years ago. It should be as simple as:
1. Bank routing number x, account y wants to put $5000 in Bank routing number z account w.
2. That gets sent to the Federal Reserve.
3. Fed’s computer reduces bank x’s account by $5000, increases bank z’s by $5000 with an instruction to its computers to add $5000 to account w.
Throw some security protocols around it and your done. It would work the same with credit cards. You just have to have the guts to cut the middle-men out: Visa and MasterCard.
I assume the banks are colluding to make money, but in reality it’s probably just utter incompetence.
Like I want to give ANY bank (especially a European bank) my routing & amount number…
One of the other reasons is the Federal Reserve is 12 different central banks.
No, the Federal Reserve is one central bank that includes the Board of Governors, which is a federal agency, and the 12 privately-owned regional FRBs. Monetary policy is set exclusively by the FOMC, which is made up of the 7 members of the Board of Governors, the president of the NY Fed, and on a rotating basis 4 governors of the other 11 FRBs.
That’s basically how Fedwire works. It’s a real-time settlement system. However, it’s mainly used for clearing real-time, high value transactions such as real estate closings. It handles about $3 Trillion in transactions per day.
If I am reading it right, this is a competition to SWIFT rather than PayPal, since the customer institutions are banks. I can see why it needs some political push with the SWIFT already established. The blockchain technology is just hype.
This sounds like block chain lite. Zero anonymity? A couple banks within the same system cherry pick a few parts of block chain, then drop their waiver times for money transfers which are ridiculous anyway. None of the big banks want to set aside their transfer fees, when they can overcharge the customer for making the same transfer without putting a hold on it.
If I understand it right, it works for person-to-person or person-to-business payments as well, via their bank accounts. For example, you sell me your old Honda CB750 for €300, and after we get through shaking hands, right there on the sidewalk I initiate the payment via my smartphone. 10 second later you get email confirmation from your bank that the money arrived in your account. Done deal. I got the bike and you got the money.
You can do this via PayPal, but PayPal charges 3%. And both have to have accounts at PayPal.
In the US, you can also do this via Zelle, which is owned by some of the biggest US banks. Money transfers are free. I used it, and it works great. But both parties have to have accounts with a participating bank, and there are limitations regarding the amounts.
There may be similar services for instant and free or nearly free person-to-person payments. But there is nothing universal.
XRP = scam. It has lost 92% of its value since Jan 4. It’s totally useless. You can’t even use it as toilet paper because it’s digital. So have with it.
My German Sparkasse (credit union) offers such a service. Just check a box “pay instantly” and the money arrives in seconds. Not all german banks participate in that service yet.
There is a real fear in the banking sector that the Big Tech companies will create an entire payments ecosystem that runs parallel to the traditional CC/checks/ACH system. For example, uBer driver gets paid via passenger’s Wallet, then uBer driver pays for gas via Wallet. Instead of two bank/CC transactions, there’s only been one accounting change on the Wallet server. Two 3% transaction fees just went poof.
Apple is halfway there because of its market share with devices and Apple Wallet, but its management only sees Wallet as a feature on its phone, and not as a full standalone product. If Amazon had the marketshare of Wallet, it would be integrating Wallet anywhere and everywhere, from ATMs inside Whole Foods to payments to Flex drivers via Wallet.
Unlike cyytocurrencies, TIPS is highly centralized.
Little typo there
Also, I was under the impression that cryptocurrencies were desired not because of speed but as an alternative financial system which is independent of central banks and is decentralized.
Besides Wolf thinks they’re a scam anyway.
1. Thanks for typo alert.
2. Seems I’m not the only one :-]
cryptocurrencies are a scam… Some (a large part) of its users are scoundrels so naturally we tend to describe the object/system as a scam!
I’d like a system where a piece of malware on my phone can’t transfer my life savings to a hacker. Some security info on this new product would be nice.
The TIPS system sounds like it’s designed to be completely transparent – no way to hide your identity like with Bitcoin.
A hacker transferring money from you would be just as visible as the fraudulent charges by credit card scammers, and going through the central banking system means it would likely have similar protections.
I thought Europe did have instant payments already. In the UK, you can shift money between banks in the IBAN system (so not North America) with FPO “Faster Payments Online” transactions. No fees and it quotes “within 2 hours” but in practice clear in seconds for same currency payments. Haven’t seen a paper cheque in over a decade.
I recently had to get some cash out of America; even with TransferWise as an intermediary it was a pain getting the other party to sort out whether they were using ACH or wire transfer, took 3 days of emails and 20 bucks of fees, and all the time asking if they could just “send me a check”
I don’t get the need for this kind of new (?) system. How is it so different from an ATM card?
And who pays transaction fees these days? I haven’t been charged any sort of transaction fees for years and I’m with very wicked & greedy Bank of America.
Just because you don’t see the fee, doesn’t mean it’s not there.
You pay a transaction fee every time you buy anything with a debit or credit card. The cost of the transaction is rolled into the price you pay to the merchant, who then gives a cut to the transaction processor (e.g. VISA) and the financial institution that does your card’s accounting. I believe typical fee is 3-5%, and that’s how some people get “cash back” card offers.
Some of that fee is waste (too many intermediaries) but some of it is legitimate because the system costs money to maintain and there are always criminals trying to steal money.
The ECBs new system sounds like a genuine step forward – for everyone except for the middlemen profiting from the old system. I can believe 0.2 cents might be the incremental cost per transaction, without fraud or capital investment included. But no way is the all-in cost-per-payment going to be as low as 0.2 cents (in any currency). With only a year of development and very limited testing, I doubt the system is as secure as it needs to be for mass-market use. Scalability is also going to be a question until proven.
What will be really scary is when a central bank’s zero-privacy payments-system data gets mated to something like Facebook or Google’s personal-profile data together with the government’s “social credit” data (China) or FBI dossier (USA) etc. No privacy left anywhere. At that point, anyone with access to all that data can cherry-pick whatever they like and feed it into the media Big Lie machine, where the reports will distort it beyond recognition. Not even the most innocent people will be immune from character assassination, being pressured to do the wrong thing, or whatever other torments people dream up. Whoever owns your data owns you.
Typical Visa/Mastercard/Amex fee = 2=3%. Amex generally higher overall & really higher in some fairly unique circumstances.
“You pay a transaction fee every time you buy anything with a debit or credit card. The cost of the transaction is rolled into the price you pay to the merchant, who then gives a cut to the transaction processor (e.g. VISA) and the financial institution that does your card’s accounting.”
That’s not the case. Any store I go to around town the price is the same weather I pay cash or opt to use my debit/visa card. I pay no annual fees for the card either. Nada.
You’re not understanding Lisa or are playing dumb Wisdom Seeker clearly explained that it’s the merchant (store) that pays the transaction fee. Also once every blue moon you’ll run across merchants that offer discounts for using cash.
Howard Fritz — “Wisdom Seeker clearly explained that it’s the merchant (store) that pays the transaction fee.”
No, he said: The cost of the transaction is rolled into the price I pay to the merchant. The price *I* pay.
He spoke of a 3% fee on each transaction. But this is not rolled into the price I pay when I purchase, nor are there any charges to me from the bank.
Lisa, they charge ALL their customers combined enough to make a profit, which includes the transaction fees that some of their customers trigger. There is no free lunch here. So even cash-buyers help pay the transaction fees. You end up paying more because costs have to be pushed on to customers.
Wolf yes, but that’s not what I was responding to — I was making a simple point. Whether I use my debit card at the supermarket, or I use cash, it’s all the same. I’m not being punished “extra” when I use my debit card at the supermarket. So I don’t see a clear advantage in joining on with this new system written about in the article. The situation with debit transactions and store policy is what it is, whether I use my debit card or not. And if I stop using my card I don’t think it’s going to matter to change that general hidden cost to all their costumers, is it?
Anyway, I’m just asking what I think are reasonable questions, really not playing dumb.
” I haven’t been charged any sort of transaction fees for years and I’m with very wicked & greedy Bank of America.”
You think you havent.
The retailer pays the fee, every-time you use plastic crap card.
So builds it into the cost of the goods.
You only dont pay the fee.
If you use cash and hold out for a minimum cash discount of the transaction fee, or I go elsewhere. Which is how hard you have to push to get the transaction fees removed from a cash purchase.
Banks, just like the “extortionist state” with GST, VAT, and other sales/point of sales taxes, have attached a “TAX” to every transaction with any retailer, that takes cards.
Which is also why so many banks charge cash handling fees for larger amount’s of cash or coins, to ensure they get their “transaction tax” from non card commercial transactions.
Banks, just like Governments, no longer serve the people, they both, heavily, leech, from the people.
You have to work at stopping them leeching from you, hard, or they will leech you to death.
Most peopel think they are working for themselves/their Familys, they are not, they are working for their governments and finance institutions.
“Even bank robbers pay GST (VAT/Sales Tax)” Sir Robert David Muldoon
The vendor pays transaction fees, and charges the customer for it via prices.
You cannot use your ATM card to pay another person. But you can use this system to pay another person.
Does that mean if everyone pays for everything by cash, the prices will be lower?
No. If a business were doing that, then Visa/MasterCard may revoke their contract when they find out.
“Equal prices for cash or card” is one of many clauses in the contract one must sign to be able to accept credit card payments.
Merchants have always been able to give “cash discounts”. They just had to avoid any language that implied a higher charge for credit card use (e.g. “surcharge”, “penalty”, “transaction fee”). But as part of the Amex antitrust settlement against V/MC, merchants are now allowed to charge transaction fees and require minimum purchase amounts, unless prohibited by law.
That’s a very important clause. If given a choice, people would pay cash to save money most of the time.
With the current system they can strong-arm the businesses into accepting the fees and then offer “cash-back” incentives to induce customers to use cards by giving a small part of their fee back.
My understanding is that Visa, MasterCard, etc. lost a court ruling and merchants can now charge extra for the use of credit cards if they can get customers to pay it.
The Old & Feeble of mind do not take to change kindly.
I am surprised that the Geriatrics of the days of yore got it together at last !!
For the world’s economic business to flow smoothly, we need to bring back a compulsory retirement age of 60.
And, compulsory, annual, cognitive testing from 50 years.
My goodness, I assume you are still very young. When you reach your middle years I think you will find that you are cognitively just fine. A decade or so later you will likely be surprised to discover that you are well able to hold down a demanding job and be of value to your employer. If you have a high level of education and plenty of experience in your chosen field, it would be a terrible waste not to use it.
You may still have loads of energy, too.
Yea, blockchain my buttocks.
Hundreds of millions of “blockchain” assets have been stolen – haven’t read of a single cyber cent being recovered.
TIPS – yea, whatever. Visa/Mastercard are one of he biggest profit makers (explanation for EU banks: makes more money than it costs) ; banks are REALLY going to want to carve into that.
Since blockchain is also an open ledger, they know who took your bitcoins, it’s there for all to see. The real problem, which was not mentioned, is recourse. Can you reverse a fraudulent transaction? Nobody is addressing that yet and they won’t want to address it. They need network security which is not infallible and cryptography which is not infallible. Good luck with that!
This is basically a digital cash experiment to get you use to no recourse transactions. Once you spend your “cash” good luck getting it back.
So if I’m understanding correctly, multiple thefts of occurrences of hundreds of millions of crypto-coins have occurred, and nobody has been upset enough to go get the money back?
You obviously don’t understand that transactions cannot be reversed in the blockchain. You have to hunt down the thief and physically steal them back.
I understand your point that the transaction (probably) cannot be reversed, yet making statements about absolute computer security has proven to be a fool’s game (I am not accusing you of being a fool).
People obviously kill over amounts of money much smaller than hundreds of millions of dollars. If the thief is known, why zero recoveries?
My point is, whatever alleged advantage the current process called “blockchain” offers, assets are no better protected than with legacy systems.
I’m focused on the result, not the process (I want to accurately know what time it is, not how to build the world’s best watch).
Without having read in depth on TIPS, it seems that the payment system will bypass NCBs and tie straight into the Target2 framework as European currency at an efficient private (non national) scale.
One reason for doing this might be to descend a priority onto private accounting that would survive in the event of a stalemate/wipeout of ECB accounting due to a sovereign event, or to allow the currency use to continue at a working level during financial or banking or political “adjustments”. The scrutiny by centralised authority is the price to pay for its relative security, and it is obviously hitched to the valuation of the euro being a block ledger of Euro payment and not a currency of itself.
ATM withdrawal within own country , European wide transfers, are free already, if you choose the right bank. For transfers there is a delay though of a day or two.
“ATM withdrawal within own country , European wide transfers, are free already, if you choose the right bank. For transfers there is a delay though of a day or two.”
Some would find a “List” of those “Wright Bank’s” useful Methink’s.
Wolf, came across some of your bitcoin data at this site, well done.
Thanks. Looks like they just stole my chart without even giving me credit for it. I removed the link. No reason to send these thieves any traffic.
Bank transfers to foreign countries have huge fees. They are buried in the exchange rate they use.
Western Union and MoneyGram are a little cheaper. They still rape you on currency exchange rate.
HSBC has a special deal for holders of a Premiere account that charges a total of about half a percent for all fees if you use an HSBC ATM. You can withdraw the maximum twice a day, also. This is cheaper than TransferWise.
Other international banks mat have similar programs.
Or just get a Revolut account.
Wolf and Don,
It seems to me that TIPS was inspired from UPI (Unified Payment Interface) of India rather than Blockchain. Unified Payments Interface (UPI) is an instant real-time payment system developed for facilitating inter-bank transactions and works by instantly transferring funds between two bank accounts with a smartphone app. UPI was promoted mostly by Reserve Bank of India under leadership then-governor Raghuram Rajan and launched in India in early 2016. And, unlike TIPS, it was lauched with maximum fanfare with every major bank offering UPI app. And not only banks but even telecom companies and tech and ecommerce companies like google , flipkart , whatsapp etc, and even Indian government itself are offering UPI based payments apps.
However, response to UPI by consumers have been tepid at best. India still remains mostly cash-based economy and usage of everything from Credit/Debit card to these UPI apps have been very low. Most people still don’t trust all this payment systems.
So with Instant Payment Systems in place, what’s next ? Abolish cash and grab the customers/citizens by the b…. and charge the customers whatever the corporations/banks please.
Most of the comments here take the view that paying fees for transactions is a negative without taking into account what you get for the fee. While most payment processors exploit customers with high fees, they also provide insurance against losses. This is what is being lost in the conversation. What does the current fee based system provide the customers?
There are transactions I engage in where I would risk the loss of the transaction amount and others where I would pay for recourse or privacy. This is really how the debate should be framed. Obviously, there need to be multiple processors or tiers for the system to succeed.
Seems I am running into more and more merchants who charge an extra 3 – 4% of the bill for using a credit card. Whether they raise prices or use this method, the customer will pay the credit card fees.
South East Asia is well into this trend of instantaneous payment, Singapore being in the front for this. In there, you can even link your bank account to your mobile number, and send money to anyone in your contact book without knowing its bank account (there is even a WhatsApp plugin !). The Government is 100% behind it, even offering early payment of state benefits for those who link their account. Lots of Shops display QR code that can be interpreted by smartphone banking app to pay the vendor. Credit card companies only remaining games are rewards programs and vanity cards.
I read from one of the participating bank (Natixis) it can be used to replace banker’s draft for transactions when parties don’t necessarily trust each other (such as buying a second hand car). I find this angle interesting, as banker’s draft are one of the banking loopholes which prevents negative interest rates.
Another development I would follow closely is when some EU countries treasuries will decide that Tax Identification Numbers should be suitable identifiers for the TIPS system first for receiving money, and then for sending money. Once this second stage is achieved, voila ! banks other than the NCBs are not needed for money creation and circulation … It is the end game IMHO.
In my area some gas stations charge 5 cents less per gallon if you pay with cash over a credit card.
TIPS appears to be an amazing service. Security might be the only issue only it back right now. I for one am tired of the major banks taking 2.5% cut of every single foreign exchange transfer I do. And for people who are travelling using Visa or other credit cards, they take another 2.5% cut. It is a silent robbery of the consumer and I’m hopeful that TIPS is the breakthrough we’ve been waiting for.
Hopefully next they provide deposits and foreword trades, FRAs, IRS, bonds bunds Repos the lot ! Take out the City of London and all the merchant banks. In theory if the technology is there to make an open system then the banks and financial companies are no longer necessary. They don’t produce anything, merely take a slice, so let them go. The trouble of course is this would give them control of the whole financial system. Central bank heaven !
” The trouble of course is this would give them control of the whole financial system.”
Unless people start issuing their own money. Why should anyone have a monopoly of the money supply? Monopolies are not good for a free market economy, so I’m told.
In Canada we have been using e-transfers for years, no biggie.
My bank charges $0 , the transaction takes a couple of minutes at the most.
Even I can do it from my phone.
At $40 a throw, PYPL looks like dead meat to me.
What happened to the CIPS system? I thought that was replacing SWIFT.
In the old system if transfer money it leaves my account immediately and arrives three days later somewhere.
In between the clearing bank has a free loan for three days. With all transfers that is big money the clearing bank gets now that is going to disappear with instant paying