Payment Systems Glossary

Payment Systems Glossary

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Decentralised real-time gross settlement system for the euro, made up of national real-time gross settlement systems, the European Central Bank payment mechanism and the interlinking mechanism.


A system for making large payments in euros, belonging to the European System of Central Banks. Conforming to the principle of subsidiarity as established in the Treaty of the European Union (EU), it is a decentralised system based on the interconnection of the payment systems in each country. It is a real-time gross settlement system, as a result of which payments are settled one by one, without prior clearing (gross settlement), as payment orders are received (in real time) and with immediate finality, once they have been settled. For the system to work, paying institutions must have a previous balance in their account with the corresponding central bank, or that the latter must grant it the necessary credit, backed by the appropriate guarantees. The TARGET system was developed with the triple objective of: Providing a safe and reliable mechanism for the real-time gross settlement of euro transactions, increasing the efficiency of cross-border payments within the euro area, and, above all, to provide a safe and dynamic vehicle for the implementation of the single monetary policy. As such, all monetary policy operations carried out by the central banks of the states that form the Economic and Monetary Union (EMU) are channelled through TARGET. On the other hand, this system is open to any type of payment made in euros, whether relating to the money markets or trading operations, also including the euro leg of currency transactions, basically euro/dollar and euro/yen. It is important to add that, in principle, all EU central banks and not only those that are part of the EMU, can connect to the TARGET system in order to settle euro transactions. Under the decentralised TARGET system, participants, who as a general rule have to be credit institutions, continue to hold their accounts in national central banks. Domestic operations continue to be settled in the relevant central bank. In terms of cross-border payments between EU countries, these are channelled through the central banks corresponding to the paying institution to the institution receiving the payment. To do this, all central banks are connected with each other and with the European Central Bank, forming what is called the interlinking mechanism or network (interlinking being a term which designates both the infrastructure and the connection procedures). On 24 October 2002, the Governing Council approved the development of TARGET2, which became operational in November 2007. The system's basic services are broader and more homogeneous, and there is a single pricing structure for both domestic and cross-border services. The objectives of TARGET2 are: To better satisfy the needs of users by providing a broadly harmonised service, improving cost efficiency and being able to adapt to future developments, including the enlargement of the EU and the Eurosystem.


This entails the possibility of replacing original documents with electronic records in order for collection to be made through payment systems. In particular, it is a procedure by which the institution holding a document sends the relevant information in this regard to the drawee bank, without it being necessary to send the "truncated" original document in order to carry out the transaction. Documents such as cheques, current-account promissory notes and direct debits can be truncated, where these are issued for an amount equal to or less than the designated "truncation limit".