Instant Payment Between Two TIPS Participants: Process Flows

The SCT Inst scheme is the rulebook that governs instant credit transfers in euro across the Single Euro Payments Area, and it sets the ten second deadline that every participant must meet. Under SCT Inst, the payer bank must send the payment, the payee bank must accept or reject it, and the funds must be available to the payee, all within ten seconds. TIPS is the settlement service that makes that deadline achievable, because it settles the payment in central bank money in milliseconds once both banks have agreed. A customer in the Netherlands who sends EUR 1,000 to a supplier in Belgium expects the supplier to see the money in seconds, and the SCT Inst scheme plus TIPS together deliver that promise. The Non-Euro settlement scheme is the arrangement that allows TIPS to settle instant payments in currencies other than the euro, where a central bank has agreed to offer its currency in TIPS. The Swedish krona is the leading example, with Sveriges Riksbank offering settlement in Swedish krona through TIPS. The process flow is the same as for euro payments, with validation, reservation, and settlement, but the accounts involved are denominated in Swedish krona, and the liquidity is held in that currency. A bank in Sweden can therefore offer instant payments in krona to its customers, settled in central bank money, using the same TIPS engine that settles euro payments for banks in France and Germany. The Single Instructing Party settlement model, known as the SIP model, is a simplified flow used where one party instructs TIPS on behalf of both the payer and the payee sides. In the standard model, the payer bank sends the payment to TIPS, TIPS reserves the funds and forwards the payment to the payee bank, and the payee bank sends back an acceptance or a rejection. In the SIP model, a single instructing party, often an ancillary system or a clearing house, sends one instruction that covers the whole payment, and TIPS settles it without waiting for a separate acceptance from the payee bank. The SIP model is faster and simpler, but it requires trust in the instructing party, because that party is acting for both sides at once. The standard process flow between two TIPS participants has five clear steps, and each one has a purpose. First, the payer bank sends a pacs.008 to TIPS with the payment details, including the amount, the payer, and the payee. Second, TIPS validates the message, checks that the payer bank has enough liquidity, and reserves the funds on the payer TIPS DCA, so the money cannot be used for another payment while this one is in flight. Third, TIPS forwards the payment to the payee bank, which checks the payee account and decides whether to accept. Fourth, the payee bank sends a pacs.002 back to TIPS with its acceptance or rejection. Fifth, TIPS either settles the payment by debiting the reserved funds and crediting the payee TIPS DCA, or it releases the reservation if the payment was rejected. The reservation step is the heart of the flow, and it deserves special attention. When TIPS reserves EUR 2,000 on the payer bank TIPS DCA, that EUR 2,000 is set aside and cannot be used for any other payment, even though it has not yet left the account. That guarantee means the payee bank can accept the payment knowing the funds are there, and the payer bank cannot spend the same money twice. If the payee bank accepts, the reservation becomes a settlement, and the funds move. If the payee bank rejects, or if the ten second deadline expires, the reservation is released, and the payer bank can use the EUR 2,000 again. Reservation is what makes instant settlement safe at high speed.