Payment systems operations

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Introduction

Each day, millions of financial transactions are processed in a very short time thanks to the proper functioning of the payment system, which is a set of instruments, market players, procedures and regulations that are designed to transfer money from one entity to another.

For a bank, just as for a private citizen, a company or a government authority, transferring money is a frequent but nevertheless delicate process. Each payment has to be processed quickly, with very high levels of safety and at an affordable cost, thereby guaranteeing that the economy functions efficiently. This is why one of the main tasks of the European System of Central Banks (ESCB) - composed of the national central banks and the European Central Bank (ECB) - is to promote the smooth operation of payment systems (Article 127.2 (formerly Article 105) 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). In Italy, the Consolidated Law on Banking (TUB) entrusts specific tasks to Banca d'Italia regarding payment systems (Article 146 of Legislative Decree 385/1993).

The Eurosystem - that is the ECB and the national central banks of the countries that have adopted the euro as their currency - promotes the efficiency, stability and safety 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.

Direct provision of payment services

To ensure monetary and financial stability, the Eurosystem needs safe and efficient payment and settlement infrastructures. Banca d'Italia, as a Eurosystem national central bank, plays a role in achieving these goals by developing strategic policies for euro-area payment systems and by committing a significant amount of human and technological resources to construct and manage these infrastructures.

The name 'TARGET Services' refers to the following Eurosystem infrastructures that ensure the transfer of central bank money[1] and securities across euro zone and non-euro EU countries alike:

The T2 service is, in turn, made up of two components: Central Liquidity Management (CLM) and Real Time Gross Settlement (RTGS). The former is used for the settlement of central bank transactions and for the monitoring and management of liquidity, while the latter is used for the real-time gross settlement[3] of interbank payments. As of 20 March 2023, the T2 service has replaced, and integrated with new functionalities, the previous TARGET2 system that had been in operation since 2007. T2 was developed on behalf of the Eurosystem by Banca d'Italia and Deutsche Bundesbank as part of the T2-T2S Consolidation project.[4] By settling central bank money, T2 helps to reduce systemic risk in the euro area. Moreover, by enabling market players to exchange funds in real time, it contributes to levelling interest rates on the interbank market and to providing a uniform transmission of monetary policy impulses throughout the euro area.

Together with the central banks of France, Germany and Spain (4CB), Banca d'Italia has also developed TARGET2-Securities (T2S), the pan-European, multi-currency platform for the settlement of securities transactions, in operation since 2015. This project has made it possible to remove 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 report of the Giovannini Group set up within the European Commission.

TIPS (TARGET Instant Payment Settlement) is a pan-European, multi-currency platform operating 24/7/365, for the settlement, in real time and in central bank money of instant payments.[5] There are no limits on the payment amount of any transaction carried out through TIPS and the cost to participating providers is very small. In 2017, the ECB Governing Council entrusted Banca d'Italia with the tasks of developing and managing the TIPS platform, which became operational in November 2018. This project has reinforced Banca d'Italia's role in managing and developing the infrastructures providing financial services not only to banks, as in the case of T2 and T2S, but also to individuals and firms all over Europe typically carrying out retail transactions involving modest amounts.

At the national level, Banca d'Italia manages the retail payment system BI-Comp, where multilateral payments are netted (multilateral netting) and settled in T2. BI-Comp handles the retail payments[6] processed by the clearing systems[7] managed by BCC Sistemi Informatici, Equens Wordline, Nexi Payments and Global Payments.

CABI is the system managed by Banca d'Italia to clear both its own payments and payments made out on behalf of general government (such as salaries and pensions) in SEPA format.

Alongside the provision of payment services, Banca d'Italia also 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).

For each bank that is a monetary policy counterparty and/or participant in the TARGET Services, Banca d'Italia holds and manages the pool account in which its eligible financial assets (securities or bank loans) are recorded. These assets serve as collateral for credit granted by the Eurosystem through financing monetary policy operations and/or intraday liquidity (i.e. which must be repaid at the end of the business day).

Banca d'Italia provides a broad range of euro reserve management services to international organizations and central banks outside the euro area, in compliance with the standardized terms and conditions defined by the ECB Governing Council for all of the Eurosystem national central banks that offer these services (Eurosystem Reserve Management Services - ERMS). This activity facilitates and promotes access to European markets and the use of the euro as an international currency.

The evolution of payment systems: Eurosystem projects

The world of payment systems has undergone significant transformation because of recent technological developments and demand for new products and services from market players. Near the end of 2017, within the context of its broader development strategy, the Eurosystem approved three projects to develop market infrastructures[8] in order to:

  • identify new services in support of financial markets, financial intermediaries, individuals and firms in Europe;
  • provide incentives for innovation in cash and securities settlement services and for the modernization of Eurosystem market infrastructures;
  • promote the further integration and harmonization of cash- and securities-based financial services.

The first project focused on the creation of TIPS, which, as mentioned, was launched in November 2018.

The second project concerned technical and functional T2 and T2S consolidation in order to develop a new real-time gross settlement system capable of offering advanced services, in part to satisfy the demand expressed by financial market operators. The project, launched in March 2023, integrates the functions previously performed by TARGET2 (now merged in the T2 service), T2S and TIPS. The changeover to the new platform required significant technological adjustments to the existing infrastructures.

The third project envisages the development of a single system for managing the collateral for Eurosystem credit operations (Eurosystem Collateral Management System - ECMS) which will replace the several systems now used by national central banks.

 

[1] 'Central bank money' indicates the funds that are held in accounts at their respective central banks by the subjects that participate in these infrastructures.

[2] 'Gross payments' refers to typically large-value payments made in interbank transactions and monetary policy operations.

[3] 'Gross settlement' refers to the settlement of each transaction one by one, without netting, in the accounts held by institutions with their respective central banks.

[4] T2-T2S Consolidation was a project presented by the Eurosystem as part of its market infrastructure evolution strategy (so-called Vision 2020) aimed at integrating the functionalities previously offered by TARGET2, T2S and TIPS into a single platform and offering advanced services to meet the needs of financial market participants.

[5] Instant payments (SEPA Instant Credit Transfer - SCT Inst) are electronic retail payments that are settled within a few seconds of being sent.

[6] These involve transactions using 'domestic' instruments, such as electronic cheques and debit cards.

[7] Clearing systems manage the exchange of payment information and calculate individual financial positions on a bilateral netting basis between participants.

[8] These projects are consistent with the European Commission's Capital Markets Union (CMU) plan to fully integrate EU financial markets. Within the CMU plan, the role of the Eurosystem is to stimulate and direct the harmonization of the operational practices of the European capital markets, complementing the Commission's legislative and regulatory work.