Mastercard’s and Visa’s dominance of electronic payments in Europe could be disrupted by the European Central Bank’s (ECB’s) new TARGET Instant Payment Settlement (TIPS) service, which offers superior speed, cost savings, and convenience compared to cards.

The ECB has launched the TIPS instant payment service, which allows consumers and businesses to send and receive money between bank accounts in the eurozone in 10 seconds or less. While similar domestic payment solutions have already been launched in countries such as Italy and Denmark, the new TIPS system allows money to be sent instantly across the borders of the 19 countries in the eurozone.

European in-store payments

One of the primary benefits of TIPS is that the recipient is credited within seconds of payment initiation, as the system is based on single transaction processing rather than regular credit transfers, which are normally processed in batches. TIPS is therefore strongly positioned for merchants, as it should enhance their capital management by improving cash flow.

An additional benefit for merchants is the lower fees compared with card transactions. The price per initiated TIPS transaction is set at a fixed rate of €0.002 for the first two years of operation. In contrast, the interchange fees charged to merchants for card payments are capped at 0.30% for credit cards and 0.20% for debit cards.

The benefits of TIPS for merchants are clear, but the service cannot succeed without consumer adoption. The primary benefit for consumers is that TIPS permits instant, cheap, cross-border P2P transfers within the eurozone. The system also offers instant bank-to-bank payments at the point of sale (POS) and online, although whether this feature will prove popular remains to be seen.

If consumers find existing tools such as cards sufficiently convenient they may be unwilling to change their method of payment. But if consumers adopt TIPS for P2P transfers, in time they may also utilise the system for POS and online transactions.

In spite of the benefits for merchants and consumers there are several caveats. The primary drawback of the system is that the majority of European banks would need to open a TIPS account with the ECB in order to create a large enough network for the service to rival the card schemes.

Another disadvantage is that making a payment through TIPS requires the user to know the bank account number of the person they are sending the money to, which could prove particularly problematic for consumer-to-business payments.

Despite these issues, TIPS has the potential to revolutionise in-store payments by improving speed, cost savings, and convenience.

Ultimately, if TIPS builds momentum it could become a serious threat to Mastercard and Visa.