Understanding TARGET2 payments: Europe’s centralized payment system

SEPA transfers are not be-all-and-all when it comes to payments in euros. After all, you have another option – TARGET2. But what are these transfers exactly, and how do they work?

Genome’s here to help you figure this out! Learn how TARGET2 payment transactions work and what their benefits are in the article below!

What is TARGET2?

Trans-European Automated Real-Time Gross Settlement Express Transfer, or the short and sweet TARGET2, is a payment system used by some of the EU banks to make cross-border payments in euros. It was implemented as a part of Eurosystem’s monetary policy to enhance the functionality of financial markets. 

TARGET2 is common among central banks and commercial banks that need to deal with large-value payments. This payment system is owned and managed by the Eurosystem, which has different direct and indirect participants.

Such transfers are executed between banks thanks to real-time gross settlement (RTGS). It means that each payment is handled one at a time and completed right away as soon as it’s started.

It is also important to note that, in 2023, TARGET2 has evolved into T2, which is basically the same payment system owned by the Eurosystem. The T2 allowed to enhance TARGET2 by integrating the RTGS system with the Central Liquidity Management (CLM) platform.

How TARGET2 payments work

To better understand how a central bank can process payments via the TARGET2 payment system, let’s first take a look at the real-time gross settlement (RTGS) system.

The main characteristic of RTGS is that it allows processing payments as soon as they are initiated during TARGET2 hours of operation. Such transfers are settled in central bank accounts. 

Additionally, payments made via the real-time gross settlement (RTGS) system are not grouped, each transfer is settled individually. 

Let’s review how the TARGET2 transfer works within the payments market using the following example:

1. Bob wants to transfer money from his bank account in Bank A to a friend’s account in Bank B. His European central bank is a direct participant in the TARGET system, the same as his beneficiary’s bank. 
2. Bob fills out the details and sends a euro payment to bank B’s account. His central bank sends payment instructions to the TARGET2 financial system. 
3. The money is taken from Bob’s account and settled into Bank B’s account. 
4. The operation is successful as TARGET2 sends the payment instructions to the beneficiary’s account. 

The benefits of TARGET2

Let’s take a look at some of the advantages of using TARGET2 for your interbank payments. 

Real-time settlement

Our team has previously mentioned RTGS, which allows payment orders to be settled in real-time. As for payment priorities, the transfers are settled individually. Needless to say, fast payments are a priority for any business and its operational management.

Security and reliability

As in the case of any other transfer system, TARGET2 has all the tools in place to ensure that your payments are safe. Central bank money settlement system eliminates counterparty risk, and advanced encryption safeguards sensitive data, minimizing systemic risk.

Connectivity across Europe

One of the key goals of TARGET2 is to make payments across the EU simpler and more convenient. To achieve this, it integrates national central banks and financial institutions across the Eurozone into a unified payment network so that clients can initiate transactions with ease.

Participants in TARGET2

Currently, more than 1000 banks have access to T2 (enhanced TARGET2), allowing them to make interbank payments to over 43,000 banks around the world. But who are the participants of TARGET2 exactly?

National central banks

First and foremost, every central bank within the Eurozone is a direct participant in the scheme. Even those EU central banks that have not yet adopted the euro payments can use it. 

Commercial banks

Some commercial banks (banks that are used by the general population to make commercial payments) can also be participants of TARGET2. The scheme is highly beneficial to them, as they can handle large value payments through it. 

Other banks

Central and commercial banks are not the only ones who can benefit from TARGET2. Other financial providers (i.e., not as big as a commercial/central bank) use it directly or indirectly.  

Speaking of the latter, when it comes to financial institutions that use TARGET2, those can also be classified into three groups:

Direct participants. A direct participant (a central bank, for instance) can handle its transfers independently, as it is directly connected to TARGET2. 

Indirect participants. Such banks connect to TARGET2 through a direct participant. Usually, the indirect participants operating are smaller financial institutions. 

Financial institutions with addressable BICs. Such banks can receive TARGET2 euro payments through a direct participant. They, however, aren’t classified as either direct or indirect participants. 

As for how a financial institution can apply to become a part of the TARGET2 scheme – a non-Eurozone national central bank can become a participant under specific agreements. The same goes for commercial banks and other institutions. 

There’s no question that the potential participants must be technically equipped to handle euro payments and have the tools for processing large-value payments. They also must adhere to regulations imposed by the EU and European Central Bank, particularly TARGET2 use regulations. 

TARGET2 and cross-border transactions

TARGET2 is one of the crucial tools for the financial development of the EU, as it provides a centralized platform for quick and safe transfers. Central banks across the Eurozone ensure that payments are processed seamlessly without upper or lower limit constraints, supporting financial stability. 

For businesses operating in multiple EU countries, TARGET2 is a reliable and efficient solution for efficiently transferring large-value payments. By connecting central banks and financial institutions within the payment market, the system reduces complexities and operational costs, enabling businesses to focus on growth and trade.

Businesses can access TARGET2 payments inside Genome as well by using our international money transfer feature. Just make sure that your business is eligible to use them and gain access to SWIFT (Society for Worldwide Interbank Financial Telecommunications), TARGET2, CHAPS, and Faster Payments. 

This is how it works:

1. All Genome’s outgoing international transfers go through the Intelligent Routing System. The system evaluates other transfer options for a specific payment, potentially offering faster or cheaper alternatives.

2. Payers can use their preferred transfer systems, such as SWIFT, Faster Payments, BACS, CHAPS, or TARGET2, to send money to Genome clients.

3. Once you initiate transactions, the system determines the most efficient and cost-effective payment route (SWIFT, TARGET2, Faster Payments, or CHAPS). 

Genome’s international money transfers are available in 11 currencies: EUR, USD, GBP, PLN, CHF, JPY, CAD, CZK, HUF, SEK, or AUD, and can be sent and received from over 40 countries! All these currencies are also available when you start multi-currency accounts on our platform. 

Additionally, if you require more options for payments in euros and domestic transactions in the EU, Genome offers both SEPA Instant and Credit Transfers to all its users! The Single Euro Payments Area is perfect for these types of payments, and Genome enables you to make these transfers within seconds; no bank identifier code is needed!

Moreover, our business wallet holders can use both SEPA Instant and Credit Transfers to make batch transfers to make payments in bulk! 

Conclusion

TARGET2 is an important component of the euro money market, as it enables users to process payments on a unified platform for efficient cross-border transactions. Its integration with the participating central banks strengthens the European financial ecosystem. 

If you need to make payments across the EU and Europe, you can access the TARGET2 transfers with a business account within Genome. You can also make payments in seconds with SEPA Instant Transfers, which are available for all Genome’s clients. 

FAQs

What is the purpose of TARGET2?

TARGET2 is a payment system owned by Eurosystem and is used for processing large value payments. Its primary purpose is to facilitate cross-border payments, support monetary policy implementation, and ensure financial stability across the Eurozone by settling transactions in central bank money.

Who can participate in TARGET2?

Eligible participants include Eurozone central banks, commercial banks, financial institutions, and some non-Eurozone entities. Institutions can participate directly or indirectly. 

Are TARGET2 payments secure?

Yes, TARGET2 payments are highly secure. They are settled in central bank money, eliminating counterparty risk, and the system uses robust technical infrastructure, encryption, and strict compliance protocols to protect transactions and participant data.

What are the key benefits of TARGET2 for businesses?

TARGET2 offers real-time processing, cross-border payment efficiency, reduced counterparty risk, and access to central bank money.