Getting ready for Europe’s new payments architecture - Transactions & Technology -
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The modernisation of Europe’s payments infrastructures will be a global market event. Getting it right means thinking strategically about the emerging global trends in cross-border payments.

SWIFT gpi

The European Central Bank (ECB) is well underway with its most ambitious payments modernisation initiative to date, the TARGET Consolidation project. This will create a harmonised interface and single entry point to TARGET services, called the Eurosystem Single Market Infrastructure Gateway (ESMIG). It will also deliver a new real-time gross settlement system, based on ISO 20022 messaging, a central liquidity management system and a common reference data, data warehouse and billing system. At the same time, EBA CLEARING, the private provider of pan-European payment infrastructure, is also preparing to migrate its EURO1 high-value payment system, for same-day euro transactions, to ISO 20022.

These complex projects will bring about a large amount of change for participants in the European payments market at a time when they are already adapting to new regulatory requirements and delivering meaningful improvements in customer experience. Those that plan strategically, however, can realise a unique opportunity to capitalise on the wider trends affecting the global payments landscape.

Moving early to a new global language for payments

The move to the ISO 20022 messaging standard is a major facet of the project to modernise the European payments market infrastructure. ISO 20022 messages deliver more, through structured data that allows payment providers to exchange information seamlessly between systems to deliver a consistent customer experience across markets.

SWIFT acts as the Registration Authority for ISO 20022 and is working globally to facilitate adoption, as well as preparing for the migration of all SWIFT-based cross-border payment messages and reporting to ISO 20022, starting from November 2021.

The financial industry has collectively agreed to implement the new standard over the next five years, meaning that by the end of 2025, ISO 20022 will support over 80% of high-value payments worldwide. When it comes to the TARGET consolidation project and the changes to EURO1, participants will have to be ready for a ‘big bang’ migration from the current MT messages to the data-rich ISO 20022 messages over a single weekend at the end of November 2021.

With such transformational changes taking place in a market as big as Europe, there are good reasons why those operating outside the continent should consider migrating to ISO 20022 at the same time as TARGET2 and EURO1. Moving early will reduce the costs and risks of opening internal systems for multiple rounds of re-engineering and will ease the overall compliance burden, as a third of all cross-border payments have a least one leg carried via TARGET2. Migration in 2021 will also deliver early benefits for payment providers and their customers, including end-to-end visibility on payment flows, easier reconciliation and transmission of more data to the final customer.

“At SWIFT, we have an important role to support banks in their migration to ISO 20022 for TARGET Services, EURO1 and cross-border flows. But it’s more than that. All our assets are aimed at guaranteeing a smooth and future-proof infrastructure, so banks can focus on their core business with their customers across the payments landscape," says Saskia Devolder, head of western and Central Europe, SWIFT

Preparing for the transformation

Beyond the major technical challenges presented by the consolidation project lie tangible benefits: a 21st century payments market infrastructure for high-value payments; information-rich, standardised, ISO 20022 messaging; always-available cross-border euro instant payments settling in central bank money; and flexible, integrated collateral management across European market infrastructures.

Before financial institutions can realise these, however, there are some considerable milestones to pass. Migration to Europe’s new payments architecture will be a significant market event demanding careful planning and implementation, and tight, industry-wide coordination. There’s little room for manoeuvre, given the big bang approach adopted for both the TARGET2 and EURO1 migrations.

There’s a lot to do between now and the deadline. Participants first need to procure and sign a contract with a Network Service Provider, finalise internal development plans, adapt their IT and internal processes, complete connectivity and user testing, finalise their configuration and then complete migration activities on production environments.

SWIFT has developed the solutions and services necessary to support all market participants through the transition. Its solution for ESMIG connectivity has been designed to help financial institutions realise their strategy efficiently and cost-effectively, and will provide a single window to connect to ESMIG using organisations’ existing SWIFT infrastructure. Along with an end-to-end, turn-key technical solution, SWIFT provides unmatched standards expertise, expert professional services, and compliance and business intelligence tools specifically designed to support market participants operationally and strategically through TARGET consolidation, EURO1 and ISO 20022 migrations.

“We have worked closely with our customers to determine the products and services needed to help them manage the impact of these projects on their back-office systems and realise the benefits of ISO 20022 for their operations and for their clients,” says Isabelle Olivier, head of securities and payments initiatives, SWIFT

A global move to instant cross-border payments

The ECB’s consolidation project comes at a time when market infrastructures around the world are accelerating the development of instant payment solutions and during a period of unprecedented global renewal of payment infrastructures. Customers want faster, friction-free payments, while regulators and central banks want to encourage innovation, enable interoperability and give customers control of their data.

International cross-border payments and traditional correspondent banking are also changing to meet these demands. In 2017, SWIFT and its community delivered the global payments innovation (gpi) initiative, a radical new approach to international cross-border payments. SWIFT gpi has made international payments fast and trackable, and has provided transparency on fees. Take-up of gpi has been rapid. Nearly 60% of SWIFT cross-border payments, representing more than US$300 billion of value each day, are sent via gpi. Half of all these payments reach end beneficiaries in minutes, many in seconds, and almost all in under 24 hours.

Linking innovations to deliver end-to-end service

Work is well underway to link SWIFT gpi to domestic real-time market infrastructures.  A successful pilot has been run between SWIFT and the ECB to enable gpi in the TARGET Instant Payments Settlement (TIPS) system and extend the reach of instant cross-border payments across Europe. A group of 19 pilot banks worldwide carried the cross-border legs of the payments, which they then settled through TIPS.

A payment was initiated in Australia before being sent via gpi to TIPS where it completed the final leg of its journey to a bank in Spain. This payment was settled, account to account, in 41 seconds. Once the consolidation of the Eurosystem’s market infrastructures is complete, and the process has been optimised, payments can be expected to reach the end beneficiary bank in just a few seconds.

This is just one of several successful proof-of-concept projects. SWIFT has done the same with Australia’s New Payments Platform (NPP) and a trial in Singapore with Fast And Secure Transfers (FAST), involving 17 banks across seven countries, saw the fastest payment in just 13 seconds and payments between all continents settled within 25 seconds.. Now past the testing phase, SWIFT is working with major infrastructures across the world to rollout truly instant payments, from any account to any account in seconds.

Planning beyond 2021

With so much change underway, and so much at stake across European payments businesses, financial institutions must plan strategically for the TARGET Consolidation and EURO1 migration projects. Success will involve careful consideration of the wider changes affecting the global payments landscape and the inter-dependencies and, importantly, the opportunities that will result.

“The landscape is changing very fast. There’s a lot to do, but none of it can be done in isolation. SWIFT will continue to work on solutions that mutualise the cost and effort of change for the industry, so the benefits can be unlocked,” says Harry Newman, head of banking, SWIFT

Global market participants need to take into account the future payments system migration plans and options for participation. Understanding the pathways to future interoperability – and what will be required to fully participate in the payments ecosystems of tomorrow – is a crucial part of the overall picture.

Find out how SWIFT is helping the financial industry prepare for the future of payments in Europe and across the world by downloading A Brave New World: be ready for Europe’s new payments architecture.

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