In the United Kingdom, Banks can join the Payment market infrastructures for the Pound sterling, but since UK belongs to the SEPA Area, UK Banks can join Euro Payment market infrastructures as well. Which impact does this have on banks in the UK and how can we model that? You will get the answer to that question and more in the following. If you prefer, you can watch the video version of this article on our Youtube channel right here.
The first important thing to understand is that the pound sterling and the Euro have their own payment market infrastructures. In the previous article and video, we considered the payment market infrastructures for the pound sterling. Now we want to consider the Euro payment market infrastructures that British banks can join.
Before looking at the market infrastructures for the Euro, let us review the generic structure of payment systems in any country:
We have central bank systems in the middle. The central bank systems take care of the settlement, and they are connected to interbank systems which are responsible for the clearing of payment transactions. The interbank systems provide information to the central bank systems for the settlement. That is why they must be interconnected.
Banks join the central system and can join one or many interbank systems. It depends on their needs. Banks play the roles of intermediaries between the end parties and the clearing and settlement systems. It is important to have this structure in mind. It makes things easy when you analyse the payment market infrastructures of any country.
And logically, we see that Euro market infrastructures are organized according to the same model. Central bank systems for the Euro are TARGET2 and TIPS. TARGET2 is used for urgent and high-value payments and TIPS is used for instant payments:
Around TARGET2 and TIPS, we see the clearing systems. EBA STEP2 is the pan-European A C H or PEACH, used for the exchanges and clearing of SEPA Credit Transfers and SEPA Direct Debits. EBA STEP2 is therefore used between UK banks or between banks located in two different SEPA countries.
EBA EURO1 STEP1 is the pan-European ACH, or PEACH, used for high-value transfers in Euro currency. It implements a continuous net settlement. Domestic Card payments in Euro go through Visa and Mastercard networks.
E B A RT1 is a system used for the clearing and settlement of instant payments. So, Banks can join TIPS or EBA RT1 for the clearing of instant payments.
And finally, we see CLS, the Continuous Linked Settlement system. It is used to settle the Euro leg of FX transactions in central bank money.
So, Banks in the UK can join TARGET2. For the clearing of instant payments, they may join TIPS or EBA RT1. They cleared retail payments like the SCT and the SDD through the PEACH EBA STEP2. And for high-value payments, they can go through EBA EUR01 STEP1 or through TARGET2 directly.
Cross-border payments are exchanged through the SWIFT network or the card network. A cross-border payment must cross the border, either because the beneficiary is outside the UK or because the currency of the transfer is neither the Euro nor the Pound sterling.
Now we can make the synthesis: Pound sterling payment market infrastructures and Euro payment market infrastructures. And here they are. Banks in the UK can connect to the payment market infrastructures of two currencies:
For practical reasons, we cannot put the arrows everywhere. Imagine each bank like the two in the middle of the picture. It can connect to infrastructures for the pound sterling on one side and to infrastructures for the Euro on the other side.
I am sure you now see how powerful the generic model for payment systems at country level is. It eases the analysis of payment market infrastructures in any country of the world.
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In the next article, we will look at the payment market infrastructures in the United States.