Confusion over faster payments, and what it could mean for bitcoin

The Spanish press has been reporting today on the rollout of TIPS, a payment system that allows instant reconciliation, even across borders within the European Union.

Only they’re wrong.

why pass up an opportunity to insert a Ryan Gosling gif?
(why pass up an opportunity to insert a Ryan Gosling gif?)

TIPS, which stands for TARGET Interbank Payment Settlement, launches in November of 2018. Seriously, the European Central Bank bringing forward the launch of a new payments system by a whole year would be pretty big news. Only, it didn’t happen.

email from ECB

Did a careless journalist just get the year mixed up?

Possibly, but it’s more likely to be a case of alphabet soup.

What does launch today is SCT Inst, which stands for SEPA Credit Transfer Instant, a different faster payments system.

Why the confusion? Because they’re similar, but not the same thing at all. And the difference may seem trivial, but it’s not.

Both promise almost instant payment finality within the Eurozone. Up until now, payments generally settled at the end of the day as totals were added up and net amounts were transferred. With the new, faster systems, settlement occurs on a transaction-by-transaction basis, generally within 10 seconds or so. Even across borders. I live in Madrid – if I make a transfer using this system to a friend in Paris, for example, it will get to her account almost immediately.

One drawback is that you can’t “change your mind” during the day, as you can with the current batch settlement system. But the benefits are many, and go beyond more immediate access to funds, a better service for clients and the possibility of new business models (more on this in a later post).

The main difference between the two systems is the promoting organization.

SCT Inst (the one that launches today) is organized by the European Payments Council (EPC), a not-for-profit group representing payment service providers (PSPs). It is not an EU institution. It was created by the banking industry in 2002 to develop harmonized electronic payments. In other words, it works for private companies, and it is these private companies that execute the payment settlement.

TIPS is organized by the European Central Bank (ECB), which represents central banks.

Private companies… central banks… not the same thing.

With SCT Inst, the private payment service providers settle the transactions, for a fee. With TIPS, the payments settle in central bank money – at 0.2 cents for the first two years, and a maximum of 1 cent thereafter. SCT Inst will have a hard time competing with that.

Plus, it’s fair to assume that the reach of TIPS will be greater, not just geographically, but also sectorially through the possible roping in of automated clearing houses (currently left out of SCT Inst).

However, SCT Inst is here today, and TIPS isn’t. Although the launch is relatively modest – almost 600 PSPs have signed up (about 15% of the possible pool), and it’s available in a limited list of countries: Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain (so you’d think they’d report on it correctly?). Others are expected to follow in the next two years.

For participating institutions, it means an opportunity to offer a better service to clients. The focus is likely to be on consumer payments, at least to start with – the transfer limit is currently set at €15,000, which rules out most B2B payments.

TIPS and SCT Inst will co-exist. The TIPS documentation insists that messaging will be compliant with the standards adopted by SCT Inst. But it will be interesting to see how the launch and take-up affect the movement of funds, and which system ends up impacting the market more.

I confess that I have some more digging to do to unravel the relationship map (it looks like spaghetti), after which I hope to uncover more differences.

Meanwhile, we should focus on the big step forward that SCT Inst represents, and the bigger push that its colleague/competitor TIPS will give the payments sector. And on the removal of one of bitcoin’s supposed advantages: that cryptocurrency will replace fiat transfers because of speed.