The way we pay has changed over the centuries, from seashells to coins, bills, cheques, cards to smartwatches and everything in between. Technology has played an important role in this transformation and the pace of change has never been faster. It is important that core payment systems – often viewed as financial assets – are able to adapt and provide a strong platform for competition and innovation. The Bank of England plays a central role in this.
In June 2023, CHAPS, the UK’s high-value payments system, migrated to ISO 20022 – the latest global standard for financial messaging. This marks the successful completion of the first major milestone in our ambitious program to renew our Real Time Gross Settlement (RTGS) service, through which banks and other financial institutions settle amounts owed to one another.
RTGS processes an average of £768 billion in payments per business day. This represents a wide variety of economic activities, from money markets to home buying to online shopping, all transacted in central bank money, the ultimate risk-free asset. About half of the values relate to CHAPS, with the main users being financial institutions sending payments, often on behalf of their customers, within the UK or globally. However, the reach of RTGS is far wider: Ultimately, RTGS plays a role in every electronic payment in the UK.
The RTGS renewal is not only important for the UK economy, but also for the development of the global payments landscape. Around the world, government agencies, regulators and industry are responding to the rapid growth of new technologies, rising customer expectations and the ever-changing risk landscape. Our multi-year transformation program aims to improve payments through increased resilience, better access, broader interoperability and improved user experiences.
With the successful migration from CHAPS to ISO 20022 messaging, we have already reached our first major milestone. The ISO 20022 financial messaging standard makes it easier to send extended data in a richer, more structured format than is currently the case and offers numerous benefits. It is an open international standard that has the potential to create a single common language for most payments worldwide.
We have joined the club of many major jurisdictions also implementing ISO 20022. This global movement has the potential to drive higher levels of interoperability for cross-border payments. Harmonized ISO 20022 data standards could result in larger volumes of straight-through processing payments being processed, reducing the need for manual reconciliation, lowering costs and increasing transaction speed.
Other benefits of using ISO 20022 in payment transactions come from the richer, more structured format of the data. For example, additional remittance data supports invoice reconciliation automation, and the inclusion of a unique payment reference identifier enables payments to be tracked. Purpose codes can identify important priority payments such as real estate transactions and those to vulnerable customers. Structured addresses can lead to improvements in anti-money laundering (AML) and sanctions and lead to faster direct processing.
We took the first step and in the years to come all end users of CHAPS, such as B. Businesses sending, receiving and benefiting from ISO 20022 messages. To expedite this, we require key fields of extended data such as purpose codes, legal entity identifiers and the use of a structured transfer when included in the payment. In order to be able to take advantage of the new messaging standard, it is necessary to ensure that companies and financial institutions can send and receive ISO 20022 data. With this in mind, we encourage CHAPS users to work with their banking providers to realize these business and consumer benefits.
After the successful transition to ISO 20022 messaging, we now look forward to the second phase of the RTGS renewal program. In summer 2024 we will introduce a new core billing engine. This move is intended not only to support expanded access for more and different types of participants, but also to increase technological resilience and ensure fast and secure processing. The new settlement engine will feature increased cybersecurity and additional layers of resilience to enable faster and smoother recovery, minimizing the impact of even the largest incident.
Major technology upgrades provide the ability to introduce near 24 hour, 7 day processing, as opposed to the current 12 hour, 5 day processing. The Bank is working with industry to consider what extensions may be appropriate. This raises important questions, such as how the industry will modernize its own systems to support these longer turnaround times while maintaining the ability to apply critical patches and upgrades when there is no off-hours window.
The renewed RTGS service will also offer improved user features and more modern and feature-rich systems to simplify user interactions with RTGS. For example, application programming interfaces (APIs) will allow broader access to payment and liquidity data, which can enable smoother payment processing and more automated liquidity management.
The modular architecture of the renewed RTGS will help keep pace with the accelerated drumbeat of change, making future changes more efficient and less resource-intensive. We definitely intend to make the best of it.
Beyond 2024, we will continue to improve the RTGS service to ensure it meets the changing needs of the payments sector. The Bank is working closely with industry to consider what further changes to introduce and in what order. The priority traits currently being explored will lead to further benefits of ever-increasing resilience while fostering greater innovation and competition.
We have already made progress in promoting innovation and competition. The bank has completed a proof of concept to understand how an RTGS test service could support settlement in systems based on innovative technologies such as distributed ledger technology (DLT). We also introduced other functionalities to support innovation, such as synchronization – the ability to synchronize money movements in RTGS with asset movements in other ledgers (including those using DLT) to eliminate settlement risk. We have worked with the BIS Innovation Hub London Center to develop a technical prototype of the synchronization using housing transactions as an exploratory use case.
Financial plumbing is now getting the attention it deserves.
Victoria Cleland is Managing Director for Payments at the Bank of England. She leads the teams responsible for the operations and strategic development of the regulator’s payment systems.
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