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With the recent release of the Bank of England’s consultation paper on its roadmap for real-time gross settlement service beyond 2024, Payments Review examines the potential new features in store and the challenges in implementing them.
The Bank of England (BoE) published its consultation paper in April (2022) on the roadmap for real-time gross settlement (RTGS) service beyond 2024, which seeks to gain industry input on what features should be implemented for the next stage of RTGS.
As part of its wider RTGS renewal work, the bank has prioritised key areas of increased resilience; greater access; wider interoperability; and improved user functionality. The highlighted focus areas come amid criticisms from the financial services industry that the BoE’s RTGS system can be archaic; have high barriers of entry, which discriminates against smaller payments and e-money firms; and lacks interoperability with other global RTGS systems.
Victoria Cleland, executive director for payments at the BoE tells Payments Review: “This year, we migrated to ISO 20022 for clearing house automated payment system (CHAPS). Next year, we will launch a new core settlement engine for RTGS – the beating heart of payments in the UK. But we are not stopping there.”
The BoE has decided to prioritise several features for future work that fall into two categories: resilient channels and innovation and global initiatives.
Resilient channels will examine how RTGS can connect with new networks beyond SWIFT to support greater resilience and allow more choice for firms. Currently, the new RTGS service will support the SWIFT GPI (global payments innovation) service, to allow track and trace of payments for CHAPS members.
The second category – global initiatives – the BoE is looking to prioritise beyond 2024, which look to support cross-border payments, extend operating hours and synchronisation. Specifically, synchronisation with third-party interfaces, which would allow outside operators to connect with RTGS and ease the movements of funds and assets in an external ledger.
Synchronisation is the label given to linking RTGS to other payment systems or other asset ledgers, such as the Land Registry, so that both ends of the transaction happen simultaneously.
The BoE and the Bank of International Settlements recently published the outcomes from a study specifically looking at housing transactions in its report: Project Meridian: innovating transactions with synchronisation.
There are also significant use cases in areas like cross-border payments and foreign exchange, for example, where liquidity demands could be significantly improved by synchronisation.
PEXA Pay, which is already in operation in the UK mortgage market, allows lenders to take direct control of settlements of the mortgage process rather than relying on conveyancers. In 2022, Hinckley & Rugby Building Society became the first mortgage lender in the UK to utilise PEXA, which currently settles in RTGS on a net basis.
“Synchronisation could see this process combined with a simultaneous change of title on the Land Registry,” says Rob Thickett, digital policy manager at the Building Societies Association.
High barriers to entry
One of the criticisms that has been levied against the BoE’s RTGS system is the high barriers of entry for becoming a direct participant. The BoE’s renewed RTGS systems aim to provide greater access to such settlement accounts to non-bank payment service providers, but some smaller payment firms feel that the requirements for participation remain too burdensome.
“The BoE’s RTGS initiatives’ new features and capabilities have little to no effect on the overwhelming majority of the non-bank payments and e-money institutions,” says Dmitrijus Apockinas, designated partners at PSP Labs, a UK-based fintech consulting firm.
According to Apockinas, there are only two non-bank payments and e-money institutions members of Bacs, which are PayrNet and Modulr, with PayrNet on the brink of collapse.There are only 12 non-bank payments and e-money institutions are members of Faster Payments (FP). Collectively this is less than 1% of all non-bank payments and e-money firms in the UK.
“Therefore, there are no new RTGS preparation challenges for 99% of the market participants, as they have no access to the payment schemes anyway,” adds Apockinas.
In contrast, over 80% of non-bank payments and e-money institutions in Lithuania are within the Single Euro Payments Area (SEPA) adherent and connected to SEPA via the Bank of Lithuania’s CentroLink.
“Until BoE reviews access and criteria for admission to Bacs and FP, most non-bank payments and e-money institutions will be left without access to payment schemes in the UK,” says Apockinas.
However, other major financial services firms argue that opening up the system to too many players could create unnecessary risk as it becomes too difficult to monitor the greater number of participants.
“While it’s not written in black and white, the Bank of England doesn’t want to dilute resources too much as if you have fewer participants they are very visible and easier to monitor,” says Christophe Uzureau, research vice president of banking and investment services at Gartner.
“It could reach a stage where it becomes too difficult to monitor all the related risks of having too many participants.”
There are discussions surrounding how to create alternative routes of access for smaller players. For example, smaller players still could benefit from accessing the BoE system via external ledgers.
“One could argue that some of the smaller players could benefit from greater access as they could bring more innovations, but increased access may not be direct access,” adds Uzureau.
Larger clearing houses and financial services firms have also expressed concern regarding allowing small players to participate in the BoE’s RTGS system.
“The possible impact of massively increasing direct participation is that it could reach a point where it could undermine the business models of a big clearing bank,” says an executive at a large European financial services firm.
“Big commercial clearing banks like Barclays, Lloyds or HSBC, may just end up with millions of really low-valued retail clients,” they added. “So this policy question about what the appetite is on direct access is more of an ideological debate.”
Extended operating hours
As part of the BoE’s review of the RTGS system for 2024 and beyond, extending operating hours has become a key consideration. Currently, it’s renewed RTGS will be capable of supporting 22×5 operation (a 22 hours a day 5 days a week schedule), with settlement windows on weekends as the systems eventually aims to provide a 24/7 service.
The roadmap for 2024 and beyond implies the bank will work towards achieving a near 24/7 operation in the future depending on industry demand.
“Extended operating hours can make a real difference,” says James Turner, knowledge counsel in the financial services and markets department at Travers Smith.
“The BoE’s plans on operating hours are not fully determined, but their aspiration is that there wouldn’t be any technical obstacles to the system operating near to 24/7.”
However, payment service providers that are mainly focused on domestic payments, such as smaller building societies, gave the feedback to Turner at Travers Smith that they weren’t wholly persuaded by the business case for extended operating hours.
Direct participants and generally bigger players have also expressed that they do not see a business case for extended operating hours, according to The Payments Association’s consultation response to the BoE RTGS road map 2024.
Smaller electronic money institutions (EMIs) and some indirect participants stated that the increased business hours could help increase business, but it varies greatly depending on the nature of the business.
“The whole of the UK banking system has got some fairly historic processes about what time it shuts down,” says an executive at a large European financial services firm. “The one thing that a lot of people seem to want to get is more contingency time at the end of the day. So having the ability to stay open later as a contingency against technical problems or shocks that may occur in the market is quite a wise thing to do.”
RTGS is going global
While not all firms agree that there is a clear business case for extended operating hours, there is a much more united opinion from payment industry players that interoperability with other RTGS systems would be greatly beneficial.
“The Bank of England is also preparing the ground for the development of a Central Bank Digital Currency (CBDC) and far greater interoperability with other central banks,” says Imran Ali, director at KPMG UK’s payments consulting team. “This will open the door to greater efficiencies in international clearing and settlement as well as introduce a new digital currency in the UK.”
The implementation of the ISO 20022 standard was the first step into making BoE’s system more interoperable with other RTGS systems as it increases transparency and aligns with global standards.
“ISO 20022 is often described as the new global language of payments,” says Turner at Travers Smith. “The UK is now well up the curve having adopted this standard already, and it will ultimately help payment systems in different jurisdictions talk to each other in a much more streamlined way.”
However, the work being done to make the BoE’s RTGS system interoperable with other central banks is still in its infantile stages with working groups for the new features only created in the last few months.
“I am quite surprised to see that everybody talks about interoperability of RTGS across the globe, but nobody’s offering concrete solutions,” says Apockinas at PSP Labs. “Cross-border transactions remain one of the highest issues in terms of costs, fees and speed of execution of payments.”
Some experts have argued that interoperability, alongside other innovative features, between settlements and clearing systems would be more easily achieved when there isn’t a reliance on Swift.
“From what I have observed in some Latin American and Asian countries, is that since they have their own clearing systems, which don’t rely on Swift, they can more easily implement new features.”
The BoE has initiated some work to examine how to improve cross-border payments. Canada, Singapore and the UK collaborated on a study to assess the existing challenges and frictions that arise when undertaking cross-border payments in 2018.
One of the key issues identified is that RTGS systems in most jurisdictions are based on proprietary standards and protocols and built on legacy infrastructure. The mismatches in time zones and operating hours also posed a problem.
One of the models proposed for a future interoperable RTGS system is based on an expanded role for in-country operators that act as “super correspondents” for settling cross-border payments instead of relying on intermediary banks as correspondent banks.
“For cross-border payments, creating greater periods of overlap – that is, multiple payment systems being open at the same time – has been identified as a priority at a global level,” says Turner.
While the BoE’s renewed RTGS system is a welcomed upgrade, there are challenges firms face when transitioning to the new system including tricky technical documentation and core systems changes.
“It is important that banks don’t adopt a tactical implementation approach to the proposed changes, which we have seen with instances of ISO 20022 adoption; and consider longer-term strategic investment that enables benefits to be realised as opposed to just compliance,” says Ali at KMPG.
With the slew of required changes, some firms have also expressed concerns regarding the amount of work needed to make the transition within the required deadline. “One challenge that the BoE recognises is bandwidth, given that there are so many critical change programmes in the payments ecosystem at the moment,” says Turner.
“Respondents to the BoE’s consultation were most worried about the BoE’s plans to require positive confirmations of reconciliation and more frequent reconciliations,” he adds. “It’s not clear where the BoE will land on that subject.”
Consultation between the BoE and industry players for the future of RTGS beyond 2024 is still underway.
Cleland at the BoE tells Payments Review: “We are working closely with the payments industry as part of a co-creation process to shape the future of RTGS.”
The bank has placed a significant emphasis on collaboration with industry. “Together we can realise the significant benefits that the RTGS can deliver including enhanced resilience and greater innovation, and ultimately support the evolution of the payments landscape,” she says.