TIPS can do global payment settlements in real time
The European Central Bank’s new platform is expected to transform the payment settlement domain:
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.
SETTLEMENT IN ALL CURRENCIES
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.
COMPETITOR FOR BLOCKCHAIN
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.
HOW TIPS WORKS
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.
VIES WITH GLOBAL FIRMS
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