The EU banking sector, which has lost ground in the bank card industry, dominated by Visa and Mastercard, wants to be ready to take the fight to American behemoths such as Google, Amazon or Apple, and China’s Alibaba, which are offering international payment services.
“In launching TIPS, the Eurosystem is acknowledging the changing reality that digitization is erasing the borders between wholesale and retail payments,” said Yves Mersch, a member of the ECB Board of Directors, who went to the headquarters of the Bank of Italy to launch the TARGET Instant Payment Settlements (TIPS).
Thanks to TIPS, the customers of payment service providers can transfer money throughout Europe in real time, around-the-clock, 365 days per year, he added, before giving the go-ahead for the first transactions by pressing on a digital tablet.
The first transaction was registered immediately when a client of Spain’s CaixaBank used TIPS to effectuate an instant payment to a customer of the French bank Natixis, the ECB announced in a press release. The two banks are the first to have joined TIPS, along with Spain’s Abanca Corporación Bancaria, Banco Bilbao Vizcaya Argentaria, Banco de Crédito Social Cooperativo and Caja Laboral Popular Cooperativa de Crédito, and German institutions Berlin Hyp and Teambank, according to the ECB.
What is special about the new system is that the euros that will circulate on its network will come from accounts opened by the banks with a central bank, so transactions will be done very quickly and practically free of charge by cutting out the intermediate stage of electronic portfolios of the Apple or Google type. It will thus be possible to use the TIPS to do every-day transactions such as supermarket shopping and buying gas.
The system’s possibilities go beyond that, ECB General Director for Market Infrastructure and Payments Marc Bayle de Jessé told AFP. “Think of your child in a queue at a cinema asking you online to send 10 euros within seconds,” he said. By resolving in a simple way this type of situation, TIPS will allow us “to replace the liquid cash you keep in your pocket with an instant digital payment,” he explained.
Online express payment apps already exist in the Euro zone, such as Paylib in France and others in the United Kingdom and Scandinavia. However, these are “national mechanisms reserved for members of the same community,” Bayle de Jessé noted.
While practical for users, the new type of payment will cause banks to miss out on profit-making opportunities, since they would no longer have liquid cash to invest in the market by juggling with maturity dates as in the case of classic bank transfers. Nevertheless, the ECB expects them to sign on to TIPS in large numbers once the new activity takes off and allows them to offset installation costs.
The Frankfurt-based institution aims to recover its costs and will charge the banks a modest 0.20 eurocent per transaction. Moreover, each bank will be exempted from charges for the first 10 million transactions. After that, the banks will need to define how they will charge their clients for the service, while keeping their fees lower than those applied in the world of bank cards, Bayle de Jessé explained.
According to a survey conducted by the ECB among market players, in about five years’ time, the number of instant payments conducted daily in the euro zone could amount to about 10 million. This is equivalent to about 10% of the transactions conducted today using payment cards.