How payment systems work

Types of payment systems

A payment system, also known as an interbank funds transfer system, is a multilateral exchange mechanism defined by the BIS Committee on Payments and Market Infrastructures (CPMI) as "a set of instruments, procedures and rules for the transfer of funds between or among participants". A payment system is the most efficient way to transfer funds between banks when flows are exchanged between more than two counterparties in the same currency under the same conditions. A payment system provides a common platform for centralising and streamlining flows exchanged between participants. This pooling of payment orders on a multilateral platform also optimises their settlement, which may either be executed in net mode (i.e. after offsetting) or in gross mode (without offsetting). In the absence of a common payment system, credit institutions must resort to bilateral exchanges.

Payment systems comprise two groups of systems:

• retail payment systems (RPS), which only process payments generated by bank retail and business customers
• large-value payment systems (LVPS), which process interbank flows linked to monetary policy, the settlement of interbank market transactions, and certain large-value and urgent customer payments

Payment system infrastructures have replaced correspondent banking models, where payment orders were placed between two credit institutions as part of bilateral agreements. The correspondent banking system continues to exist for international foreign exchange payments, but is no longer used for day-to-day transactions. For payments in the same currency, automated mass processing of flows by payment systems has made it possible to achieve a high level of efficiency together with significant economies of scale.

The smooth operation of payment systems is essential to economic and financial life in France and to maintaining financial stability throughout the financial system.

There are two main payment system models: Real Time Gross Settlement (RTGS) and Deferred Net Settlement (DNS) systems. 

French payment systems

Retail payment systems only process payments generated by bank retail and business customers. They process very high volumes of payments with relatively low unit amounts.

CORE (COmpensation REtail) (FR) is the French retail payment system designed and operated by STET, which is owned by six major French banks (BNP Paribas, BPCE, Crédit Agricole, Banque Fédérative du Crédit Mutuel, La Banque Postale and Société Générale). CORE(FR) processes domestic payment instruments (in MINOS format) as well as SEPA instruments: SEPA Direct Debits and SEPA Credit Transfers.

CORE(FR) uses an infrastructure that is underpinned by a multilateral clearing system, with a single deferred settlement cycle once a day in central bank currency on participants' accounts opened in the T2 system.

The system has been notified to the European Securities and Markets Authority and therefore benefits from the protective provisions of the “Finality” Directive: once they have been entered into the system, transactions become irrevocable, even in the event of bankruptcy.

CORE(FR) has been identified as a systemically important payment system by the Governing Council of the European Central Bank since 2014. Consequently, it must comply with all the provisions of ECB Regulation No 795/2017 on oversight requirements for systemically important payment systems. It is therefore subject to oversight by the Banque de France, which includes a system of assessments and sanctions.

SEPA(EU), also operated by STET, is the French system for immediate payments in the form of instant credit transfers (SCT Inst). It is also subject to oversight by the Banque de France. 

Large-value payment systems 

T2 is the real-time gross settlement system for euro payments, developed and managed by the Eurosystem. It has recently been integrated into the TARGET Services platform, consolidating the different modules available to participants, with T2S for securities and TIPS for instant payments.