Transforming the financial system’s plumbing


The way we pay has changed over the centuries, from shells, to coins, to banknotes, to cheques, to cards, to smartwatches and much in between. Technology has played a major role in this transformation and the pace of change has never been faster. It is important that the core payment systems – often thought of as the financial plumbing – are able to adapt and provide a strong platform for competition and innovation. The Bank of England is playing a pivotal role in this. 

In June 2023, CHAPS, the UK’s high value payment system, migrated to ISO 20022 – the latest global financial messaging standard. This marks the successful completion of the first major milestone in our ambitious programme to renew our Real Time Gross Settlement (RTGS) service, through which banks and other financial institutions settle money owed to one another.

RTGS settles on average £768 billion of payments each working day. This represents a variety of economic activity from money markets to house purchases to online shopping, all with settlement in central bank money, the ultimate risk-free asset.  Roughly half of the values relate to CHAPS, where the main users are financial institutions sending payments, often on behalf of their customers, within the UK or globally.  But the reach of RTGS is far wider: ultimately RTGS has a role in every electronic payment in the UK.    

RTGS renewal is significant to not only the UK economy, but also the evolution of the global payments landscape. Across the world, authorities, regulators and industry are responding to rapid growth in new technology, increasing expectations from customers and the ever-changing risk landscape. Our multiyear transformational programme aims to enhance payments through increased resilience, greater access, wider interoperability, and improved user functionality. 

We have already achieved our first big milestone with the successful migration of CHAPS to ISO 20022 messaging. The ISO 20022 financial message standard facilitates the sending of enhanced data in a richer, more structured format than currently and will deliver a wide range of benefits. It is an open international standard, which has the potential to create a single common language for most payments globally.

We have joined the club of many major jurisdictions are also implementing ISO 20022. This global movement has the potential to promote higher levels of interoperability for cross border payments. Harmonised ISO 20022 data standards could result in the greater volumes of straight-through-processing of payments reducing the need for manual reconciliation, reducing costs and increasing the speed of transactions.

Further benefits from utilising ISO 20022 in payments arise in the richer, more structured format of the data. For example, extra remittance data helps automation of invoice reconciliation, and the inclusion of a unique payment reference identifier allows payments to be tracked. Purpose codes can identify key priority payments such as property transactions and those to vulnerable customers. Structured addresses can drive improvements in anti money laundering (AML) and sanctions processes and lead to faster straight through processing.

We have made the first move, and in the coming years all end users of CHAPS, such as corporates, can send, receive and benefit from ISO 20022 messaging. To speed this up, we are mandating key fields of enhanced data such as purpose codes, Legal Entity Identifiers and the use of structured remittance when included in the payment.  Making sure corporations and financial institutions can send and receive ISO 20022 data is key to realising the benefits of the new messaging standard. With this in mind, we’re encouraging CHAPS users to work with their banking providers to help realise these benefits for businesses and consumers.

Following the successful transition to ISO 20022 messaging, we are now looking forward to the second phase of the RTGS Renewal Programme. In summer 2024 we will introduce a new core settlement engine.  As well as supporting broadened access for more and different types of participants, this is a move designed to increase technological resiliency and ensure prompt and secure settlement. The new settlement engine will have increased cyber security and additional layers of resilience to allow for quicker and smoother recovery, minimising the impact of even the most major incident.

Key technology upgrades provide the capability to introduce settlement near 24 hours a day, 7 days a week, as opposed to 12 hours a day, 5 days a week currently. The Bank is working with industry to consider what extensions could be appropriate.  This raises important questions such as how industry will modernise their own systems to support these longer settlement hours while still retaining the capability to apply critical patches and upgrades once there is no “out of hours” window.

The renewed RTGS service will also provide improved user functionality and more modern and functionality-rich systems to make user interactions with RTGS easier. For example, Application Programming Interfaces (APIs) will provide richer access to payment and liquidity data, which can enable smoother payments processing and more automated liquidity management.

The modular architecture of the renewed RTGS will help keep pace with a quickened drumbeat of change and enable future changes to be more efficient and less resource intensive.  We certainly plan to make the most of this.

Beyond 2024, we will continue to enhance the RTGS service to make sure it meets the changing needs of the payments sector. The Bank is working closely with industry to consider which further changes to introduce and in what order. The priority features currently being explored will achieve further benefits of ever higher degrees of resilience whilst fostering more innovation and competition.

We have already made progress towards promoting innovation and competition. The Bank has completed a proof of concept to understand how a test RTGS service could be capable of supporting settlement in systems operating on innovative technologies such as distributed ledger technology (DLT). We have also been introducing further functionalities to support innovation such as synchronisation – the enablement of movements of funds in RTGS to be synchronised with movements of assets on other ledgers (including those using DLT) to eliminate settlement risk. We have collaborated with the BIS Innovation Hub London Centre to develop a technical prototype of synchronisation using housing transactions as an exploratory use case.

The financial plumbing is now getting the attention it deserves. 

Victoria Cleland is the executive director for payments at the Bank of England. She leads the teams responsible for the operation and strategic development of the regulator’s payment systems.

 



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