The benefits of implementing a cohesive instant payments system are manifold and well documented. As evidenced by the incoming European Single Market Infrastructure Gateway (ESMIG) and the need to integrate interoperable systems across Europe, the ability to access infrastructure that facilitates instant payments is vital.
Yet, the ongoing challenges and uncertainty due to Covid-19 means institutions are trying to find the balance between the need to innovate and evolve alongside the need to survive. Capitalising on this context is a key area explored in a recent Impact Study by Finextra Research and Volante Technologies, ‘Instant Payments: Why Covid-19 is Bringing the Roadmap Forward.’
While organisations may currently feel the need to prioritise Covid-19 contingency plans, appetite for instant payments is abundant: according to the ECB, TARGET processed over 7.9 million RTGS related payments in March 2020 alone - a daily average of 362,852 payments. TIPS itself is designed to settle more than 43 million instant payment transactions per day, up to 2,000 per second during peak times.
EBA CLEARING also notes that its instant SEPA credit transfer infrastructure RT1 boasts an average daily volume of 556,116 transactions, worth an average of €248 million.
Several impending Eurosystem changes are set to influence the instant payments landscape across the region. First, the TARGET2 and T2S consolidation project will see the introduction of a new Real Time Gross Settlement (RTGS) to satisfy developments in technology, regulatory requirements and evolving consumer demands.
Migrating to ISO 20022 standards, the enhanced and modernised services of the new RTGS system will improve and centralise liquidity management across the TARGET suite. A new interface, ESMIG, will be launched to harmonise TARGET services and to simplify access, boost connectivity, and allow firms to work from common reference data and to leverage shared data and billing systems.
In tandem, EBA CLEARING will oversee changes to its euro payment systems with migration of the large value payment systems, EURO1, to the ISO 20022 standard. The migration is scheduled to align with T2 consolidation during November 2021 as a ‘big bang’ event. This transition will ensure interoperability with the new TARGET2 RTGS system.
While the TARGET2/T2S consolidation project is currently scheduled for launch in November 2021, the ECB has strongly indicated that a 12-month postponement “would best accommodate the industry’s preferences.” The official decision will be announced in late July however it is widely expected that the delay will be granted.
These changes will bear a significant impact on the state of the payments landscape in both the near and long term across the region. Building pan-European instant payments infrastructure which is accessible to all financial institutions holds wide-ranging benefits. These include ensuring existing technologies will be streamlined, players enthusiastic to maximise the potential of these frameworks won’t be hindered from innovating due to outdated legacy systems and vitally, regardless of whether it’s an institution or everyday consumer, the end user will have faster, more convenient and secure methods to transact.
An ECB study observes that due to the introduction of regulations and new platforms allowing non-banks to participate in payment systems, “the introduction of instant payments may be considered by banks to be part of their strategy to compete with non-banks in the retail payments market.”
Instant payments can also boost immediate access to government stimulus payments or loans, the need for which has been confirmed during the Covid-19 crisis. Reconciliation burdens across B2B transactions are reduced, and straight-through processing (STP) rates raised, thanks to the extended ISO 20022 data which travels with the payment. These benefits, along with new services based on Request to Pay, help support automated delivery and receipt of goods.
By tapping-in to the increasingly connected ecosystem with countless new partners and reachability, doors are opened to new products, services and potential to build market share. McKinsey research reveals that Europe is home to about 4,000 fintechs that have incubated disruptive propositions and many of these fintechs may be facing pressure due to the pandemic, making them ripe for acquisition.
Fabio Panetta, member of the executive board of the ECB commented: “The COVID-19 crisis is reinforcing an existing trend: the rising demand from consumers and merchants for efficient payment schemes. […] Likewise, efficient payment systems are necessary to quickly mobilise the resources made available to support small companies, self-employed workers and social institutions.
“The Eurosystem has always been at the forefront of efforts to facilitate innovative payment solutions for European citizens - and continues its work in this area in these difficult times.”
In this sense, the integration and uptake of instant payments at this time provides something of a litmus test for financial institutions’ ability to compete in the brave new post-pandemic world of contactless, real-time, data-rich 24x7 payments interactions
To read more on the subject you can download a complete copy of the report here.