Immediate Payments And Humpty Dumpty

As I collected the broken and uneaten remains of my children's Easter eggs, it reminded me of a particular egg: Humpty Dumpty, from the English nursery rhyme. Poor Humpty fell off a wall:

"And all the King’s horses, and all the King’s men,
Couldn't put Humpty together again."

There is no King of Europe, but there are plenty Presidents – of the Council, Commission and Parliament. Despite that, I am wondering whether the immediate payments egg is so broken that all the Presidents’ men (and women) will be able to put it together again.

One Egg For All?

The European Central Bank (ECB) and the ERPB (Euro Retail Payments Board) see instant payments as the next deliverable after SEPA migration, and have a vision for a pan-European euro instant payment scheme, to be available “in the short term”.

Not everyone shares the Eurocrats’ enthusiasm for a one-size-fits-all European solution. Carina Olsson, CIO of Swedish clearing Bankgirot, points out that “Rules and regulation differ, systems differ, and even the wishes of consumers and businesses can vary from country to country. It would be too difficult an undertaking. I think it would be more realistic for countries to develop their own platform and then connect to each other’s systems.”

But What If You Already Have Your Egg?

Sweden is one of several countries in Europe that have already gone ahead and implemented their own immediate payments systems. The UK (Faster Payments), Sweden (Swish), Denmark (RealTime 24/7), Poland (Express ELIXIR) and Norway have all gone live, and Finland is at RFP stage. If the adoption of a pan-European solution meant decommissioning and writing off their domestic systems, it is unlikely that any of them would support such a scheme. But they have all adopted different scheme rules, message formats and technical implementations, so Ms Olsson’s vision of making them interoperate would also be a formidable challenge.

Although all of the countries except Norway are EU members, only Finland is Euro-in. This could provide a lifeline for the ERPB vision, if the emphasis is placed on it being a €uro scheme rather than a pan-European scheme. The Finns would be delighted if their solution were to be rolled out across the Euro-zone (though less happy if a different pan-European solution were mandated). As for the Euro-out countries, well they can bear the cost of implementing the pan-European real-time scheme alongside their domestic real-time clearings, just as they have done with SEPA alongside domestic bulk clearings.

You Can't Make An Omelette Without Breaking Eggs 

As well as the political challenges, the ERPB vision of a pan-European instant payments scheme also faces some major technical hurdles. The ERPB paper sees payment systems in layers, and the vision is to “make payments with increased speed leveraging the current payment instruments (first layer) and the underlying clearing and settlement infrastructures (second and third layer)”. The definition of these layers is not altogether clear – for example, the paper seems to see the use of ISO20022 as a defining characteristic of a SEPA Credit Transfer (first layer), rather than a characteristic of the clearing mechanism (second layer). Even if the definitions were sharpened, the vision still implies a more fundamental challenge.

The SEPA clearing mechanisms have been built to process payments in batches, and the paper’s comment that “current ACHs could possibly need to upgrade their availability and capacity” must be a candidate for the understatement of the year. The ERPB has committed the fallacy, common among non-technical folk, of believing that instant payments are just like bulk payments, but faster.

The fact is that no amount of technical jiggery-pokery will make ACHs that were designed for bulk payments able to process single immediate payments. The best that could be achieved would be faster batches (which is the position that the US Fed has settled for), but the ERPB is insistent that they are looking for genuinely instant payments (immediate availability of funds to the payee), and not just “fast” or “faster” payments.

If an existing technical infrastructure is to be adopted for pan-European real-time payments, it would be much more sensible to use the international card scheme networks. They are designed for high-speed request-response message processing, which is exactly what is needed for real-time payments. All significant banks across Europe – whether Euro in or out – are already connected to one or both of the networks.

What Could Possibly Go Wrong?

I think we all know the answer to that question. Visa and MasterCard are not “made in Europe”, and the European powers-that-be have spent many years beating them up and trying in vain to establish a third card scheme that does not have an American accent or create such large American profits.

So no matter how sensible it may be to leverage those infrastructures, the European payment czars will not countenance it. They are more likely to settle for second-best after all and have a slightly-faster-SEPA, or (even more likely) to follow their normal practice and impose an additional financial burden on European banks and their customers by mandating them to build yet another costly technical clearing infrastructure.

Good luck with reassembling that eggshell, I’ll be buying shares in superglue manufacturers.

If you’d like to find out more about Immediate Payments, then please do have a read of my whitepaper.  It should hopefully answer most questions you have!