Common integrated IT infrastructure will facilitate cross-border payments in the EU

A standard payments system for countries in the European Union could reduce costs and allow banks to offer more sophisticated...

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.

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