With the pan-European Instant Payments Scheme due to go live in November this year, real-time payments are about to become a reality for many businesses and consumers in Europe. Our own research shows that the demand for faster and innovative banking services among consumers and business is high.
Many banks and PSPs are currently developing business cases for immediate payments and are either in the process of committing or already have committed huge IT budgets in order to get ready for the brave new world of real-time banking.
However, one crucial issue that is overlooked by many banks when it comes to instant payments is liquidity management.
If you ever seen a treasury system in action you know it is a ‘wonder to behold’, with an array of monitors displaying complex graphics, curves and alerts all interacting in perfect harmony to meet the demands of a fast moving and effective treasury strategy. It is a treasurer’s job to manage the bank’s liquidity in the most effective way, whilst also juggling multiple aggressive departmental forecasts, several TARGET2 security events and reinvesting excess liquidity in the last few minutes of the day.
However, a treasurer’s task becomes even more complex when there is no forecast to rely on and they can’t predict a pattern of spend because they are dealing with a new payment method. How much money should they re-invest versus keep available for transactions? Welcome to the world of Immediate Payments, a treasurer’s worst nightmare or is it?
The issues that arise from Immediate Payments aren’t just based around technology though. A Financial Institution’s (FI) whole mind set and organisational model needs to change to be in line with a new way to treat liquidity. There is the serious risk of exceeding project timelines and budget when implementing Immediate Payments because FIs don’t realise the complexity of implementation. It isn’t as simple as just updating legacy infrastructure and tweaking a few alerts. The new frenetic scenario is not complete without taking into account another important ingredient in the new IP recipe: the Basel III regulations and the new intraday liquidity principles. Treasurers need to respond by dealing with liquidity in a precise way, monitoring the Intraday Liquidity in real time, where clearing and settlement need to be optimised to work 24/7/365. This will be the reality in Europe in November 2017 when the Pan European Rulebook comes into force and the pan-European scheme will go live. And banks that aren’t prepared will fair badly.
However, here is also good news for treasurers. In countries, such as the UK, FIs have been co-habiting with real-time liquidity management for several years. Whilst the solution is not complex, it does require a good understanding of the topic. This translates to equipping the treasury control room with a consolidated solution, possibly designed to treat big numbers in terms of transactions and being able to keep under control all clearing and liquidity processes, fund and defund the technical settlement accounts on time and have the ability to reserve the right liquidity during the week-end, bank holiday, night time, and in all other cases when the RTGS system is not available. Alert systems and sharp monitor tools are also vital in the modern-day treasurer’s control room. Finally, it is important to take into account the indirect participants that require additional functionalities to deal with the liquidity of all reachable BICs that are connected.
The ECB is currently developing a Settlement Instant Payment Service to mitigate liquidity risk. The so-called Target Instant Payment Service (TIPS) will be available for all members of the new pan- European scheme at the end of 2018. There is a lot of confusion among many PSPs in regards to TIPS. Some of them think they need to wait for TIPS to go live with instant payments. That view is simply wrong! Banks can and should join the pan-European scheme as soon as they can. In 2018, when TIPS goes live, the settlement layer will move from the IP scheme to the TIPS service without any new investments necessary, provided participants have chosen an IP solution that will allow them to do that.
Banks need to get ready for real-time now. Those who educate and raise awareness of their real-time offerings now are most likely to benefit from a first-mover advantage and the new opportunities a real-time payments environment will open up for their business.
If you want to discuss any of the issues above or questions such as what kind of synergy exists between Basil III Intraday Liquidity and Immediate Payments or the winning business cases some FIs see emerging from new payments regulation, please come and see us at EBAday in Dublin, Stand 30.