With the ECB telling Sibos that it is looking at merging the Target2 real-time gross settlement payment system with the T2S securities settlement mechanism, providing a single platform for cash and securities processing in the eurozone, Anna Milne speaks to SWIFT’s Carlo Palmers to get the gen on its plans for 2017
If the ECB’s proposed merger of Target2 and T2S goes ahead, SWIFT stands to lose its status as sole provider of the Target2 network, which it has had since 2004 when the central bank selected SWIFT.
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At the time it made sense for SWIFT to be the network provider as it already had a system in place, but it meant SWIFT employed its own proprietary solutions, differentiating it from the network-agnostic T2S, the single pan-European platform for securities settlement in central bank money.
The ECB now wants to consolidate the two systems in an open, agnostic solution, and is even looking at blockchain as a means by which to achieve this.
For now, SWIFT’s stance is clear: “We’re eagerly watching how the ECB study will evolve; how far will the ECB step into the European retail market? We are closely following Europe, where there are lots of systems – Nets, Equens, EBA, and now potentially also the ECB. The ECB prefers a pan-European rather than multiple domestic solutions to support the Eurozone. They demand at least interoperability,” says Carlo Palmers, market infrastructures solution manager at SWIFT.
For SWIFT, of course, this could constitute great business. SWIFT is currently working intensively on its Australia rollout, for which testing has started. The system will be going live next year, after stress tests.
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By GlobalDataThe SWIFT board said in June that any solution should be applicable across different communities and the differences needed to be analysed in order to come up with a common solution harmonising all sets of requirements for all parties.
If sufficient community support is garnered by June 2017, SWIFT will rebuild the Australian solution and build the standardised system. But what does Palmers expect thereafter?
“In Hong Kong we are closely following their Faster Payments and we will look at Canada once it has built its new large value payments platform. PSR in the UK, where you have BACS, Link and FPS serving the retail market, is looking at whether it makes sense to harmonise into one single solution for all retail payments. Last year we still had uncertainty as to whether there would be real-time payments in Europe and now the question is rather how it will happen. We need to bring the banks round the table to agree on a messaging standard together with the operators to ensure the solutions will be interoperable and provide a good, pan-European customer experience."
SWIFT is also eagerly watching how the announcement Yves Mersch made pans out regarding the consolidation of the T2 and T2S platforms. How would this affect SWIFT?
T2 runs on SWIFT. The new system is likely to go multi-network so SWIFT would no longer have exclusivity, and the harmonised solution SWIFT would build for retail payments would also have to support ECB real-time payments.
“We need to see the development first to make sure we build the right thing,” adds Palmers.
Asked whether there is more uncertainty now than ever before, Palmers replies: “Last year we had uncertainty as to whether there would be real-time payments in Europe.
“Now we know for certain real-time payments are going to happen, but the question is how it will happen,” he explains.
To what extent do the banks need to work together? As far as SWIFT is concerned, this is essential. Palmers worked in standards at SWIFT for many years, and drew comparison with this.
“We need to bring the banks round the table to build a messaging standard. We need to get the operators round the table in the same way.”
“There is a necessity, definitely in the Eurozone, for operators to be interoperable. Banks being connected to different operators need to be able to exchange the payment in seconds – it’s not up to the consumers to find out whether their counterparty is instantly reachable.
We believe only a common solution can support that, specifically in the Eurozone. (Interoperability across currencies is a different story.) A common settlement scheme has been agreed with the ECB. Schemes on service levels, SEPA single credit transfer (SCT) and now SEPA SCTInst, have also been agreed at the EPC. All the details – including how quickly the payment will happen, how to reject it if need be, how to abort, how to decide if the payment is too slow, how to stop execution – all this has all been agreed, but technically how this will be achieved between two operators needs to be figured out. The UK, Denmark, Sweden and Australia do not need this because they rely on a single operator for their community, but across Europe we do.”
US market plans
The US is already working on instant payments, and TCH has chosen VocaLink as the operator – using its own network, not relying on the SWIFT network.
SWIFT’s approach is to see if there is demand for a connecting platform for larger institutions.
“Our interface – AMH, for larger institutions – needs to be upgraded for real time, but we are seeing if there is demand for a connector to hook up to TCH,” explains Palmers.
“The other thing about AMH is that it is one thing to build a connector, but AMH is a multi-network interface not bound to the SWIFT network.
“Larger institutions in the US have said if they used AMH they would also use it in other communities with real-time systems, which is yet another reason for us to harmonise the communities to come up with the same real-time payments offer so all banks have the same connector, and therefore a similar experience when connecting to different systems.
“Otherwise it’s very difficult for the bank each time they want to connect to a new or different real-time network because they have launched a full-scale project.”
On blockchain
We know, and Palmers reiterates, that SWIFT is looking into blockchain, however he remains sceptical as to its current potential capacity for real-time retail payments.
“It doesn’t seem to be ready yet today to step into the real-time retail market for high-volume, low-latency, high-capacity traffic; it does not seem ready to handle this yet.
“Maybe in the future, but other areas, such as trade finance and correspondent banking, are areas where blockchain is more appropriate right now than real-time payments.
Common standard
One of SWIFT’s goals is standardisation in the financial services industry.
“It has always been, and we’ll do everything we can to achieve that.
“Members don’t want to kick off big projects from scratch for every community they want to connect to. The challenge with instant payments is there is no time to do conversions. Everyone now seems to agree on ISO 20022 as a common payments messaging standard, but next comes different technical and security protocols. If these are not harmonised as well, the end consumer risks standing in the shop, wanting to pay with his mobile, but not being able to. Palmers explains.
So who is doing what and where? Palmers explains that Belgium has issued a request for proposals and is choosing a system that will serve the Belgian market.
In the Netherlands each bank is choosing its own operator, already assuming that these operators will be able to work together.
“Otherwise you will never be able to do a five-second payment in the Netherlands.
“The ECB is saying you should not look at this domestically; you need to look at it eurozone-wide. They don’t like the fact they are all choosing their own solution.”
