A standard payments system for countries in the European Union
could reduce costs and allow banks to offer more sophisticated
services.
The expansion of the European Union last month was hailed as an
historic moment for continental unity. However, away from the photo
opportunities, the economic fortunes of the EU will hinge on an
ambitious IT shake-up of its payments infrastructure.
The consultation period on the future of a European real-time
payments system ended last week, resulting in far-reaching
technical and business implications for UK banks.
The proposed Target2 system is due to begin operations in about two
years. It will update Target, the existing real-time gross
settlement system infrastructure used and owned by the European
central and domestic banks for domestic and cross-border
payments.
In a bid to make the service more efficient and cope with the
recent expansion of the EU, a shared technology platform to link
into the system for high-value payments will be developed.
Although UK banks are likely to continue making payments through
Target using Swift, the existing inter-bank messaging and payments
network, a common technology platform means that banks in countries
that have recently joined the EU could be saved from having to
adapt their banking IT infrastructure to link into Target2.
Analysts believe the new system could simplify cross-border
payments for UK banks and offer more sophisticated services, such
as ensuring payments are only made once a transaction has been
settled.
Although the cost and technical specifications for the revamped
payments system have yet to be decided, messaging standards such as
ISO 15022 will play a central role in its development.
ISO 15022 provides information about the payment and confirmation
that it has been reconciled. Software is needed to interpret
messaging standards.
"A common platform for UK banks should provide easier access to
payment systems across Europe and, hopefully, lower prices," said
Daniel Mayo, lead analyst in the financial services practice at
research firm Datamonitor.
Standardising the IT infrastructure of the gross settlement system
will also minimise the integration costs posed by the enlargement
of the EU, Mayo said.
The new EU-wide payments platform will be assessed after three
years and new features could be added, the European Central Bank
said.
Elsewhere in Europe, rival settlement services are also updating
their IT infrastructure in a bid to reduce costs and improve
service levels.
Euroclear, formed by the merger last year of Brussels-based
settlement house Euroclear and the Crestco settlement system, said
it will be able to reduce the cost of cross-border settlement
tariffs at City firms by 90% by 2005. This will be underpinned by a
single settlement engine.
Currently, firms trading on markets have to send payments to
different systems across Europe to settle deals. Using a single
integrated system would reduce risk and costs. IT savings from
market firms are also expected if the integration project goes
according to plan.
Back-office savings can be made by standardising procedures across
domestic European markets. This will reduce the need for firms to
use different interfaces with various European financial markets by
trading directly, rather than through an intermediary.
International payment initiatives
Straight-through processing Plans for a global
standard for straight-through processing (STP) technology, a key
element in settling cross-border trades and payments, move a step
closer with the demise of the influential not-for-profit Global
Straight-Through Processing Association last November. Its demise
leaves City firms with only one STP system standard, Omgeo, for
cross-border trades in the securities industry.
STP, the automation of the trade and clearing process for
financial transactions, is one of the biggest challenges facing
global financial markets. Currently, much of the cross-border
processing is still done manually.
Visa The European arm of Visa launched a
cross-border money transfer service in 2002, designed to allow
member banks to comply with forthcoming EU legislation on
cross-border payments.
From July 2003, banks in the EU will no longer be able to charge
more for low-value cross-border EU transfers than for domestic
transfers. Visa EU said its Visa Direct service, which operates
across the company's newly implemented IT infrastructure, will
provide member banks with a ready-made, low-cost way of complying
with the new regulations. The service plugs into existing systems
and uses globally recognised Visa account numbers to provide an
end-to-end service.
Target 2 The consultation on the proposed
Target2 system ended last week. A new cross-border payments system,
underpinned by a shared IT platform, is due to come into operation
in two years.
The banks in newly-joined EU member countries could avoid the
cost of changing their IT infrastructure to work with the existing
Target system and use the common technology platform Target2.
Banks in countries which have been connecting to Target through
Swift, the inter-bank messaging and payment network, are likely to
continue using it. Analysts believe the new system could simplify
cross-border payments and offer more sophisticated services.