European real time payment system will boost UK banks, say analysts

Consultation on the future of a European real-time payment system closed last week with far-reaching technical and business...

Consultation on the future of a European real-time payment system closed last week with far-reaching technical and business implications for UK banks.

The proposed Target2 system is due to begin operations in around two years. It will update the existing real-time gross settlement system infrastructure, which is 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 European Union a shared technology platform for linking into the system for high-value payments will be developed.

Although UK banks are likely to continue using the exisitng inter-bank messaging and payment network, Swift, to make payments through Target, a common technology platform could save banks from countries that recently joined the EU 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 that payments are only made once a transaction has been settled.

Although the cost and technical specifications for the revamped payment system have yet to be decided, messaging standards will play a central role in its development.

Messaging standards, such as ISO 15022, provide information about the payment and confirmation that it has been reconciled. Software is needed to interpret message standards.

"For UK banks [a common platform] should provider easier access for payment systems across Europe and, hopefully, lower prices," said Daniel Mayo, lead analyst of 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 added.

The new European-wide payment platform will be assessed after three years in operation and new features could be added, the European Central Bank has also 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 by 90% the cost of cross-border settlement tariffs at City firms 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. There will be back-office savings by standardising procedures across domestic European markets and reducing the need for firms to have different interfaces with the various European financial markets, by trading directly, rather than through intermediaries.

Read more on IT risk management