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The Next Stage of Real-Time Payments Evolution is Here

We are facing a proliferation of Pan-EU instant payment services in Europe. Most industry players and experts are aware of the dangers of fragmentation and the reasons why this issue needs to be addressed. And even though the new schemes are pan-European, the problem lies in getting them all to communicate and connect with each other.

Financial institutions that are interested in expanding their business into other markets and regions must undertake rigorous analysis before any decision is taken, to understand which immediate payments service guarantees the highest reachability. In most cases, there is the need to join more than one immediate payments service to get maximum coverage.

However, identifying which service to join is just the tip of the iceberg; the next step requires conducting an analysis of the “rules of the game” for each service. This can be a real challenge; even though all Pan-EU instant services are compliant with the SCT Inst rulebook financial institutions should consider other aspects like local regulation, sanction screening, multiple currencies, and one of the most troublesome aspects – the liquidity layer. The liquidity layer is not covered by the rulebook, but instead is regulated by the different clearing and settlement mechanisms.

Liquidity in the Real-Time Era

Ensuring you have control of your liquidity in the real-time world is of paramount importance and is an essential element of implementing real-time payment solutions. There is a direct link between the fragmentation of Pan-EU instant services and the liquidity; in fact, most of these services require their own technical settlement account. Indeed, this absence of a centralized LQ position means that treasurers must spread the liquidity across several accounts, risking being able to achieve the RTGS minimum reserve requirements and making it near impossible to be compliant with the BASIL III intraday liquidity principles. If that wasn’t bad enough, the treasurer’s ‘bread and butter’ of generating interest on funds held, is hampered by having to place funds in multiple non-interest bearing accounts. But there is a solution…

TIPS, The ECB initiative – A Hero Solution

SEPA and SEPA Inst have many of the same characteristics, including fragmentation across their services. The difference is those ‘knights in shining armour’ – the European Central Bank. Sometimes mistakenly perceived to be more of a hindrance than a help, they have a clear strategy to dispel this reputation. This comes in the form of creating a solution that supports financial institutions, helping them be more efficient and competitive through offering new services based on the new real-time business model.

How can TIPS help?

TIPS is a new solution launching in November 2018 across Europe. This is incidentally exactly one year on from the SEPA Inst launch that coincided with Il Salone Dei Pagamenti in 2017. The key liquidity benefit is being able to concentrate all Technical Settlement accounts in one dedicated Target2 account named TIPS.

This enables treasurers to consolidate their liquidity, still be part and under the jurisdiction of Target 2, and be subject to the RTGS minimum reserve requirements. Another benefit is related to the nightmare of providing forecasts for 24/7/365 real-time payments because the scheme operates outside traditional working hours (night time, bank holidays, weekends). This poses a liquidity dilemma because it is difficult to reserve the right quantity of funds to settle immediate payments and invest the rest. This problem is reduced with TIPS because apart from the Target2 security settlement, there is nothing to settle when traditional Target2 is offline; a financial institution can simply reserve all their liquidity for TIPS in one consolidated account.

Consequently, fragmentation is reduced and gives the treasurer more leeway, whilst enabling them to still control limits, set CAPS and benefit from all the services TIPS provides. The key is to start implementing TIPS now so that you are prepared for the November launch. You can do this by using solutions that are already compatible with TIPS, which includes ACI’s UP Real-Time Payments solution. It is important for innovative banks to ACT NOW, as it takes at least six months for integration to TIPS internally.

From adoption to innovation: Transitioning from an old legacy system which is heavily siloed

The recipe for success lies in finding the right ingredients for modernization. Any time we are faced by changes in regulation, it always seems frustratingly urgent – this could be due to specific deadlines internally or industry wide. We are also often under pressure because of limited budget or a fight for fund allocation from other parts of the business. This frequently results in decisions being taken with a short-term solution in mind – the infamous Elastoplast or Band-Aid solution, depending on your geography. A bank will often use their 40-year-old legacy system to solve the problem, to save time and reduce costs. However, this short-term strategy does not prepare the bank for the fast pace that real-time and payments generally is setting. Banks need to take a long-term view and invest in a solution that allows them to fulfil any internal request or market expectation now and in the future. 

According to a new whitepaper ACI will launch in April in collaboration with KPMG, use of straight-through processing (STP) to streamline processes and minimize costs is one of the fundamental initiatives that financial institutions should undertake to decommission inefficient payment systems, reconcile disparate infrastructure, promote automation in back office processes and replace high unit-cost options such as checks and cash with efficient, low-cost real-time payments.

It is time for financial institutions to stand up for taking a long-term view on becoming more dynamic when new upgraded applications/solutions are needed. There is only one option to deal with this – a sustainable solution, able to be quickly integrated with banks’ legacy systems, allowing a gradual and progressive system modernization, breaking down silos that have characterized banks’ core systems for 40 years.

I accept that some banks chose a tactical implementation of real-time a few years ago because they were unsure of volumes and how much in demand real-time would be for their customers. However, we now know that customers want everything ‘NOW’ and that 40% of consumers and 74% of SMEs in Europe will actively switch banks if they aren’t offered real-time payments. Banks need to implement real-time payments strategically, so they offer the speed, convenience and innovation that their customers demand and this will also open-up new revenue streams through added services supplied by third-party providers (TPPs).



Find out more about the impact of immediate payments on financial institutions and intermediaries and what ACI can do to help organizations capitalize on the opportunities created by the new payments ecosystem.

Principal Consultant, Immediate Payments