TIPS can do global pay­ment set­tle­ments in real time

The Euro­pean Cen­tral Bank’s new plat­form is ex­pected to trans­form the pay­ment set­tle­ment do­main:

Banking Frontiers - - Payments Systems - Mo­[email protected]­ingfron­

On 30 Novem­ber, the Euro­pean Cen­tral Bank (ECB) qui­etly car­ried out a real-time pay­ment set­tle­ment be­tween a Caixa Bank of Spain cus­tomer and one of Natixis of France. This was fa­cil­i­tated by a new pay­ment sys­tem that the cen­tral bank has rolled out af­ter about a year’s trial, which al­lows banks to set­tle pay­ments in­stan­ta­neously across the whole of Europe. The new sys­tem, called TAR­GET In­stant Pay­ment Set­tle­ment, or TIPS, en­ables cus­tomers - in­di­vid­u­als and cor­po­rates - of banks in Europe trans­fer eu­ros to each other in real-time, at a very low cost and 24x7. Ac­cord­ing to ECB’s ex­ec­u­tive board mem­ber Yves Mer­sch, who launched the sys­tem, TIPS would leave blockchain in the dust. He said TIPS is 10 sec­onds, 0.2 cents. DLT trans­ac­tions are at best 30 eu­ros and take at least one hour.


The ECB al­ready has a sim­i­lar sys­tem in op­er­a­tion, TARGET2, which is again a re­al­time gross set­tle­ment plat­form for euro pay­ment trans­ac­tions. TARGET2 set­tles pay­ments in cen­tral bank money. How­ever, TIPS ini­tially will set­tle pay­ment trans­fers in eu­ros, but it can un­der­take set­tle­ment in other cur­ren­cies as well. ECB claims TIPS will lead to stan­dard­iza­tion and har­mo­niza­tion of busi­ness rules, cre­ation of a state-of-the art mar­ket in­fra­struc­ture and fi­nally cul­mi­na­tion in the de­vel­op­ment of a sound le­gal ba­sis for pay­ment sys­tems. To start with, 8 Euro­pean banks - most of them small and medium level - are par­tic­i­pat­ing in TIPS, in­clud­ing Spain’s BBVA.

Us­ing TIPS set­tle­ments can be ex­e­cuted al­most in­stan­ta­neously on a bank-by-bank ba­sis rather than hav­ing to be net­ted at EOD pro­cesses on each work­ing day at the re­spec­tive cen­tral banks. This will ob­vi­ously bring in a lot of con­ve­nience be­sides cost sav­ings as well. It al­lows fi­nan­cial ser­vices providers to en­joy liq­uid­ity in the na­tional cen­tral banks. It is this liq­uid­ity that they can use to set­tle in­stant global pay­ments. The pro­cess­ing time of each trans­ac­tion will not be higher than 10 sec­onds. The ECB has al­ready made scal­a­bil­ity pro­vi­sions avail­able so that the sys­tem will meet the grow­ing user base.


Un­like blockchain-based in­stru­ments, TIPS is de­scribed as highly cen­tral­ized and there is no anonymity in trans­ac­tions. It is also touted as ex­tremely low-cost and with no en­try or ac­count main­te­nance fees. It also al­lows par­tic­i­pat­ing banks to set aside part of their liq­uid­ity on a ded­i­cated ac­count opened with their re­spec­tive cen­tral bank, from which in­stant pay­ments could be set­tled round the clock. The bal­ance on these ac­counts will count to­wards their re­quired min­i­mum re­serve. In­stant set­tle­ments will also elim­i­nate credit risk for all in­volved par­tic­i­pants. The broad par­tic­i­pa­tion cri­te­ria for TIPS will en­sure a high level of reach­a­bil­ity.


ECB has ex­plained how TIPS works: A par­tic­i­pant sends an SCTinst pay­ment trans­ac­tion mes­sage to TIPS. (The par­tic­i­pant may also be an in­struct­ing party act­ing on be­half of the par­tic­i­pant, or a reach­able party.) TIPS val­i­dates and re­serves the amount to be trans­ferred (con­di­tional set­tle­ment). TIPS then for­wards the pay­ment trans­ac­tion for ac­cep­tance to a re­ceiv­ing par­tic­i­pant. The re­ceiv­ing par­tic­i­pant sends a pos­i­tive re­ply mes­sage to TIPS. TIPS set­tles the pay­ment. TIPS then con­firms the set­tle­ment to the send­ing par­tic­i­pant. TIPS also con­firms the set­tle­ment to the re­ceiv­ing par­tic­i­pant.


TIPS is ex­pected to be a di­rect com­peti­tor for global pay­ment sys­tems op­er­ated by cor­po­rates like Ten­cent, PayPal, Google, Face­book, Ama­zon and Alibaba.

TIPS plat­form was de­vel­oped by the Banca d’Italia, in co­op­er­a­tion with the cen­tral banks of Ger­many, France and Spain. At present, Banca d’Italia is manag­ing the plat­form too.

While ECB’s Mer­sch has said TIPS will be a com­peti­tor for blockchain, cryp­tocur­rency ex­perts be­lieve that the launch is go­ing to be a good thing for the in­dus­try in fact. They be­lieve it could es­pe­cially change the game for Rip­ple’s tech­nol­ogy. Tech­nolo­gies like xRapid, xCur­rent and xVia can be in­te­grated to TIPS and if TIPS de­cides to use these tech­nolo­gies, the in­dus­try will cer­tainly stand to ben­e­fit from it, they aver.

Rip­ple on its part shas on­go­ing projects to fa­cil­i­tate a seam­less global tran­si­tion from tra­di­tional pay­ment sys­tems to blockchain based sys­tems. It is said to be in the fi­nal stages of cre­at­ing an API that will help con­nect with new plat­forms.

TIPS is ex­pected to change the way pay­ment set­tle­ments will be made glob­ally

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