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Europe's banks Target payments upgrade

Changing the way they move money around

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When the Euro was created, the European banks had to create a real-time payments settlement system to handle it. Not unnaturally, this was built on top of the existing systems. Now, however, they're upgrading it to a new system that turns those decentralised systems into a single centralised one.

Leading the way is Target2, an upgrade to Target, the present real-time gross settlement system (RTGS) used by the European banks. Target2 is due for completion in November 2007. Target2, like its predecessor, is being built by the central banks of Germany, France, and Italy.

Target dates back to the 1999 creation of the Euro, when, for the first time, the European banks all shared a currency. In the interests of making the deadline, Target was designed to fit on top of all 25 national payment systems. In 2005, it handled an average of 6.3 million payments with an aggregate value of €40.7 trillion per month, about a third of those payments cross-border. So far in 2006, those numbers are up by an average of five per cent.

Target2, first proposed in 2002, is intended to improve upon Target by creating a single IT platform that will, in the long term, lower IT costs and therefore the cost to the banks of transferring payments by allowing organisations to use the same system for both cross-border and domestic payments. The new system is also intended to give faster settlement times and better real-time visibility. Banks should, for example, be able to view all incoming and outgoing payments on a screen in real-time, something that has not been possible before now. In addition, the system will enable group pricing, so a company can pool all its transactions in all countries to qualify for stepped discounts.

Target2 is also intended to enable pooled liquidity, a feature users of the present system have been asking for. Under the present system, a multinational company might have pockets of liquidity in different locations that cannot be deployed elsewhere. With Target2, these pockets can be merged.

The new system will require enhanced disaster recovery; it will have a secret second site where all transactions will be mirrored in real-time.

The schedule calls for internal testing to begin with central banks in February 2007. Testing for commercial banks and other participating systems is due to start in May 2007, with migration to follow beginning in November 2007. Migration will be in three groups of countries; the November 2007 tranche include Germany and Austria. The second group, including Belgium and France, will follow in February 2008; and the third and final group, including Italy and the European Central Bank, will finish in May 2008. ®

Wendy M Grossman can be found on the web here.

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