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The switch to a continuous gross settlement mechanism (CGS) effectively creates a new near real-time pan-European payments service with added advantages for certain payment use cases, says EBA Clearing.
Participants in STEP2, EBA Clearing’s pan-European mass payment system, have successfully migrated to a new CGS mechanism.
The move is expected to help banks across Europe shorten end-to-end processing times for SEPA payments from hours to minutes, complete with extended opening hours for STEP2.
Speaking with VIXIO, EBA Clearing said that CGS will enable real-time settlement of large payment volumes at any time during the business day.
CGS replaces a cycle-based settlement approach, whereby payment transactions were settled several times a day at predetermined intervals.
Better than instant?
According to Erwin Kulk, head of service development and management at EBA Clearing, the STEP2 upgrade will effectively create a new real-time payment system, similar to its RT1 instant payments system.
“We sometimes call it ‘better than instant’, at least for certain use cases,” he said. “Instant payments have unique properties and hold many benefits.
“They can be a real game changer, especially for situations where the payer and payee need certainty on the execution of the payment here and now."
However, an issue with traditional instant payment services is that they are designed to meet this need for certainty.
So if there is a disruption to the transaction and it cannot be executed, it times out in a matter of seconds. This means the payment will fail and have to be re-sent.
With CGS, payment files are processed as soon as possible, and normally in near real time.
But if there is a disruption, the payment files do not time out, they are simply processed as soon as the disruption has been resolved.
“This makes the process more robust for many use cases, such as salary and pension payments,” said Kulk.
For banks, a significant advantage is that liquidity management is also aligned with RT1, allowing participant banks to streamline and manage their liquidity needs more efficiently.
“It also enables our participants to have their payments settled at any time of the day, as soon as they make liquidity available for the settlement process,” said Kulk.
“Another advantage for corporates is that they can continue to use their existing interfaces for submitting and receiving batched payments.
“Basically, CGS allows our STEP2 participants to offer better service levels to their customers, while leveraging a highly resilient channel and very efficient liquidity management tools.”
David Renault, head of STEP2 Services at EBA Clearing, said that with the migration successfully complete, all of STEP2 participants from across 28 countries are now using CGS.
Currently, 4,700 payment service providers (PSPs) across the EU participate in STEP2.
“Thanks to a phased migration approach with six windows over a 13-month period, and a comprehensive information and testing programme, we managed to ensure a very smooth changeover,” said Renault.
“Our next step is to roll out further enhancements, which will enable our users to fully take advantage of the faster delivery of settlement results and the extended operating hours of the service going forward.”
Upgrading STEP2
As a pan-European automated clearing house, STEP2 is a cornerstone of the SEPA processing infrastructure.
At present, STEP2 processes close to 60m debit and credit transfers via SEPA per day, on average.
Following the migration to CGS, participants will still send batched payment files to STEP2, and STEP2 will still batch settled transactions into payment files for delivery to the counterparts.
Kulk said this form of batch processing offers a “very efficient” approach, as it leverages existing infrastructure components and interfaces.
“Given that the settlement happens in a continuous manner, the end-to-end delivery times can, in the near future, be significantly shortened thanks to faster settlement and more frequent output,” he said.
“CGS also paves the way for payment processing around the clock seven days a week.”
At present, CGS is available during the opening hours of the STEP2 system, which currently settles on working days between 7am and 4:30pm CET and between 7:30pm and 3am CET.
“The latter window is an optional processing timeframe, used by around 40 participants,” said Kulk.
“Payment file validation in STEP2 is already available seven days a week during 22 hours of the day.
“But starting from November, it will also be possible to settle payments during weekends, on national holidays and in the early morning hours.”
EBA Clearing is currently discussing with participants when 24/7 reach could be ensured for all users, and is aiming to agree on a migration path that will unlock these benefits for end users throughout SEPA in the coming years.
