Have you ever wondered how to use money on a current account by transferring it to other accounts and choosing one of the many instruments available to do so, such as a payment card or a credit transfer? Or what the systems are that process tens of millions of cash transactions every day at ever increasing speeds? Who makes sure that they work properly, given that they never shut down, not even at night?
The answer to these questions lies in the functioning of the payment system, which is a set of instruments, intermediaries, procedures, settlement circuits and regulations that are designed to transfer money from one entity to another.
Throughout history there have been various ways to settle exchanges: from barter to the use of metal coins and payment instruments with no intrinsic value, such as banknotes. Banknotes still play an important role, but payments are increasingly made using tools and technologies that were unavailable even just a few decades ago. Many purchases are made using a debit or a credit card; home banking has become very common, which allows people to make credit transfers, top up their mobile phones and pay their taxes without actually having to go to a bank or use a payment institution.(1)
Transferring money, for a private citizen just as for a company or a government authority, is always a delicate process that has to be carried out quickly, with very high security levels, in a continuous and efficient way and with affordable costs for all users, thereby guaranteeing the success of each transaction.
Fostering the smooth functioning of the payment system is one of the main tasks assigned to the European System of Central Banks (ESCB).(2)
This objective is pursued jointly by the ECB and by the national central banks (NCBs).(3)
Specifically, the Eurosystem promotes the efficiency, stability and security of the payment system in various ways, ranging from the direct provision of payment services, to the fostering of cooperation between market players and the activities of moral suasion, regulation and control that typify the oversight of payment systems function.
Direct provision of payment services
Banca d’Italia has been using a significant amount of human and technological resources for several years to develop and manage large-value and retail payment infrastructures, which offer indispensable services to the Italian and European financial communities. In this way the Bank contributes to the smooth functioning of the economic system, to safeguarding financial stability and the efficiency and integration of markets.
In the large-value payments sector, Banca d’Italia – together with a limited number of other Eurosystem national central banks – plays a fundamental role in providing payment services in Europe: it helped set up the TARGET2 (T2) system for settling interbank payments and monetary policy operations in central bank money on a gross basis and in real time, and a second platform, TARGET2-Securities (T2S), for settling securities transactions also in central bank money. Both platforms offer payment services to the whole of Europe; they are owned by the Eurosystem and therefore by all the central banks that are part of it, including the ECB. Following their completion, Banca d’Italia now manages the technical operation of these platforms together with the German central bank.
TARGET2 has been operational since 2007 and was created on behalf of the Eurosystem by Banca d’Italia, Deutsche Bundesbank and Banque de France (3CBs). The technical and operational characteristics of the system help reduce systemic risk throughout the Eurozone, namely the risk that individual market players' insolvencies could provoke a chain reaction among other financial intermediaries, considering the great number and large value of the payments between banks. Given that market players can exchange funds in real time, TARGET2 contributes to levelling interest rates on the interbank market and makes possible a uniform transmission of monetary policy impulses throughout the euro area.
Together with the central banks of France, Germany and Spain (4CBs), the Bank has also developed TARGET2-Securities (T2S), the pan-European, multi-currency platform for the settlement of securities transactions in central bank money. This project enabled the removal of the technical and operational barriers to cross-border settlement that were hindering the integration of the European financial market, and that were identified in the Reports of the Giovannini Group set up within the European Commission.
In 2017 the migration of participating central securities depositories (CSDs) was successfully completed, bringing the number of financial markets operating in T2S to twenty; it is now one of the biggest securities settlement platforms in the world, capable of settling an average of over 550,000 transactions a day. Nowadays in Europe, with T2S, securities settlement takes place in the same way at both domestic and cross-border level.
One of the initiatives that involve the Bank in the direct provision of services is the completion of the TIPS project (TARGET Instant Payment Settlement). TIPS will be a pan-European platform operating 24/7/365, for the settlement, in real time and in central bank money, of instant payments, namely electronic retail payments that have to be settled within a few seconds of being sent. On 21 June 2017, the ECB’s Governing Council entrusted Banca d’Italia with the development of TIPS: the platform is operational as from November 2018.
TIPS is able to settle all payments made digitally, with no limit on the amount and potentially in several currencies, in the same way and at the same cost in every country in Europe. The service is offered to individuals and firms, enabling them to send payments in Italy or abroad, using a mobile phone or home banking services offered by their banks, in a safe way and with the funds made available to the beneficiary within a few seconds even on public holidays.
This project has reinforced the Bank’s role in managing and developing the infrastructures providing financial services not only to banks, as in the case of TARGET2 and TARGET2-Securities, but also to individuals and firms all over Europe.
With regard to the liquidity that the Eurosystem supplies to banks, such as monetary policy operations and intraday credit to support payment systems, counterparties must provide eligible assets for collateral (securities or bank loans). Banca d’Italia, with reference to the banks operating in Italy, manages such assets consistently so as to guarantee multiple financing operations (pooling).
Banca d’Italia has also developed and manages systems that enable the exchange, clearing and/or settlement of payments ordered by households, firms and central government, usually for limited amounts, settled in multiple intraday cycles.
Each payment that means transferring funds from the debtor to the beneficiary involves the customer and their bank in the initial and final phases of the transaction (i.e., in the relations (i) between the customer ordering the payment and their bank and (ii) the receiving bank and the beneficiary customer). The intermediate phase involves the banks and the operators that carry out the exchange and settlement of the various transactions. This phase deals with clearing (transmission, reconciliation, confirmation of payments and calculation of a final balance to be settled) and settlement (settlement: extinction of the obligations calculated during the clearing process) of the payment flows according to the CSM (Clearing and Settlement Mechanism) model, consisting of one or more entities that jointly carry out clearing and settlement functions. Clearing is mainly managed by private operators in a regime of open competition. Instead, the settlement phase is typically carried out by central banks and consists in the debit/credit of banks’ balances on the accounts they hold with the central bank.
Banca d'Italia manages the retail payment system BI-Comp, where the multilateral netting of payments (settled in central bank money in TARGET2) is carried out; BI-Comp handles the transactions entered by the clearing systems (such as those managed by Nexi, ICCREA and SIA).
The Bank also manages the CABI clearing system, which allows both own payments and payments pertaining to general government (such as paying salaries and pensions) to be made in a SEPA format, and settled in central bank money. This function completes the Bank’s role of state treasurer.
Banca d’Italia issues declarations in lieu of cheque protest. These are formal statements of non-payment of a cheque which make it possible, in the same way as the protests registered by other public officials (notaries, municipal secretaries and so on), to take action or 'exercise recourse' pursuant to the Legge Assegni or 'Cheques Law' (Royal Decree 1736/1933).
In order to facilitate and promote access to euro-area markets and settlement systems by international organizations and non-euro-area central banks, Banca d’Italia provides them with a broad range of euro reserve management services, in compliance with the standardized terms and conditions as defined by the ECB's Governing Council (Eurosystem Reserve Management Services - ERMS).
(1)These new forms of payment are known collectively as electronic money (e-money).
(2)Article 127.2 of the Treaty on the Functioning of the European Union and Articles 3 and 22 of the Protocol on the Statute of the ESBC/ECB.
(3)In Italy, the Consolidated Law on Banking (TUB) entrusts specific tasks to Banca d’Italia with regard to payment systems (Article 146 of Legislative Decree 385/1993).