The journey to best in class payments
Speech given by
David Bailey, Executive Director for Financial Market Infrastructure, Bank of England
At the Westminster Business Forum Keynote Seminar: The future for payments regulation
-
in the UK competition, innovation and end-user priorities
28 June 2018
I would like to thank Rachel James, Joanna Bibby-Scullion and Philippa Cohen for their contributions.
Good morning. I would first like to thank the Westminster Business Forum for inviting me to speak at today's
seminar on the future for payments regulation in the UK.
When I first spoke at the Forum, three years ago, I highlighted the potential for considerable change in the
payments industry in the UK. There was a sense that payments, a sometimes overlooked but vital sector of
financial market infrastructure, was no longer going to be so quiet, and an unprecedented amount of
innovation and change was on the horizon.
Consumer expectations around payments were evolving in response to the proliferation of mobile devices,
range of services available through 'apps'. Contactless
smart phone technology and the ever-expanding
The term 'FinTech' was
payment, using a card or mobile device, was becoming a daily reality for many.
entering the mainstream.
Regulatory change was also underway. The Payment Systems Regulator was gearing up for launch with a
mandate to promote innovation, competition and the interests of service-users. And at the Bank of England,
we had recently created a directorate dedicated to ensuring financial market infrastructure, including
payment systems, meet the necessary standards of robustness and resilience. Overall the pace of technical,
structural and regulatory change in payments was poised to pick up.
And I have not been disappointed with the level of ambition and innovation we have seen in the past three
years. Collectively, we have been on a journey; inching and in some cases taking great strides towards a
payments landscape that is competitive, resilient and ready for the future. But, while considerable progress
has been made, the journey to best in class payments is far from complete.
Whilst important milestones have been reached, many more lie ahead.
For example, one catalyst for change in UK retail payments was the creation of the Payments Strategy
Forum (PSF) in March of 2015. And, with the formal consolidation of the Bacs and Faster Payments systems
into the New Payment System Operator (NPSO) just last month, we can say that a key recommendation of
the PSF has been delivered. But the NPSO now needs to turn its attention to developing and implementing
the remaining critical recommendations which I will come on to discuss. We now need, collectively, to
refocus our energies for the next leg of this journey towards best in class payments.
In line with this, today I would like to share how we at the Bank of England are looking to the future to ensure
our systemically important payment systems are robust and resilient, their underlying infrastructure is best in
class, and our regulatory toolkit remains fit for purpose and future-proof.
NPSO: A mandate to be greater than the sum of its parts
Payment systems, by their very nature, bring together participants that would otherwise transact bilaterally.
Crucially, by doing so, they promote increased efficiency and resiliency that is enjoyed by all. They manage
risks, eliminate intermediate arrangements and related costs at the back-end of the payments value chain,
and provide functionality that enables innovation to proliferate at the front-end. As described in our Annual
Report this year1, financial market infrastructure, including payment systems, exist to reduce the risks and
costs involved when participants make payments.
And this leads me to the NPSO and its creation. The PSF, established by the Payment Systems Regulator
(PSR) in March 2015, proposed the consolidation of the UK retail interbank payment system operators: Bacs
and Faster Payments, as well as the Cheque and Credit Clearing Company2. The Bank was engaged closely
with the work of the Forum and was supportive of this change as we could see the potential for the
consolidated scheme to be greater than the sum of its constituent parts. The consolidated entity is expected
to deliver a range of benefits, including:

Strategic leadership that is forward looking and proactive, with an enhanced ability to identify the
challenges and risks of tomorrow and prepare for them today;

Higher standards of governance and risk management, with an improved ability to leverage best
practices across the schemes. As an example, a variety of access models have evolved in schemes
over the years, and the NPSO is now in a great position to look across the schemes and consider
which models deliver the best outcomes and risk management; and

The development and delivery of a best in class New Payments Architecture.
The NPSO is also set up to be a leader in the field of retail payments. And the Bank is now their counterpart
in the UK wholesale payments space, following the move to direct delivery of CHAPS, the UK's high value
payment system (HVPS)3 in November of last year. Collectively, these developments should lead to a
considerable step change in risk management expertise, standards, and capabilities across the entirety of
UK payments.
As an example of the two organisations working together to bring such change to the payments industry
across wholesale and retail, the NPSO and the Bank recently launched a joint consultation on ISO 20022.4
This move towards harmonised messaging standards will enable the transportation of richer payments data,
improved compatibility and therefore redirection across payment schemes, and new opportunities for
collaboration and product development. And parallel migration by both the Bank and the NPSO will
encourage widespread adoption of ISO 20022, a precondition for unlocking these benefits. We encourage
stakeholders to take this opportunity to feed into the process and help shape the future of payments in the
UK.
So, what has been achieved?
The consolidation and transition of Bacs and the Faster Payments Service (FPS) to the NPSO has been
delivered. On the 1st of May of this year, the NPSO formally took over responsibility for the operation of these
1
See: The Bank of England's supervision of financial market infrastructures - Annual Report 2018.
2
Which manages the paper processing system for cheques and the recently launched Image Clearing System.
3
See: public statement on the commencement of the Bank's direct delivery of CHAPS.
4
See: ISO 20022 consultation paper: a global standard to modernise UK payments.
two systemically important payment systems and was brought within the supervisory remit of the Bank. It has
been operational for almost two months now, and, with the Cheque and Credit Clearing Company to be
integrated shortly, another key milestone on this journey will soon be achieved. Between these retail
payment systems, the NPSO will be responsible for the processing of £6.4 trillion payments each year,
almost two and half times the UK's
GDP.
I think we would all agree that its continued resilience and smooth functioning is a matter of primary concern.
Our priority throughout this transition has been to ensure that it has been and continues to be managed in a
way that promotes the robustness and resilience of the payment systems, and of wider financial stability. And
a considerable amount of work was undertaken to achieve this - by the retail scheme operators, their
participants and the NPSO.
What we now expect to see:
Tangible progress has been made, and this should rightly be recognised. But, as with any journey, we
cannot lose sight of the work that lies ahead to deliver these benefits from consolidation.
The NPSO's primary focus should be on completing integration of the payment systems and embedding
robustness and resilience within all of its activities, including the New Payments Architecture (NPA)
programme. There is still much to do to complete the integration of these systems, from an organisational
perspective, but also at the system level; completion of which will allow the NPSO to begin realising the
ultimate goal of strategic leadership and higher standards of management and control.
For this to succeed, the NPSO's strategy will need to be realistic and consistent with its objectives and
capabilities. It will also need to include an appropriate focus on reviewing and enhancing the activities the
NPSO has inherited, to manage its own risk profile, its outsourced infrastructure partner, and risks to the
wider system emanating from participants.
For our part, the Bank's
long-term focus will be on ensuring that the Bacs and FPS systems are robust and
resilient and able to play their part in mitigating systemic risk, and that the NPA is developed to maintain and
enhance this. In the short term this means that we will focus our supervisory efforts on ensuring the NPSO
effectively manages its integration to deliver the benefits of consolidation. In particular, we expect the NPSO
to:

Establish itself as a credible payment system operator, setting out a clear strategy for both what it
will, and will not, do over the next three years;

Provide strategic leadership within the retail payments ecosystem that is forward-looking;

Demonstrate high quality governance across the systems it operates; and

Put robustness and resilience at the heart of design decisions of the NPA.
Now, the NPSO does not exist in a vacuum. For this programme to succeed, support is necessary from the
financial industry itself as well as the payments community and the authorities. The NPSO has a lot to deliver
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and a great many expectations upon it but it cannot deliver everything at once. It is vital that stakeholders
allow the NPSO the space and time to set out, and then ultimately deliver, a realistic but ambitious set of
the NPSO will need to manage stakeholder expectations carefully. As the NPSO's
goals. And, equally,
supervisor we will watch closely to ensure the underlying resilience of the payment systems is maintained.
NPA: Resilience at its core
As I have said on many previous occasions, resilience is key. This is true both for the current systems being
One of the NPSO's
run by the NPSO, but also as it thinks about its journey to a new payments architecture.
key priorities will be designing, developing and facilitating the safe and secure transition to this new
architecture that will underpin retail payments in the UK. The NPA is intended to replace the three separate
systems with an integrated framework which facilitates competition, innovation and interoperability.
When I last spoke to this Forum I discussed the PSF's vision for an NPA based on a Simplified Payments
Platform and highlighted several key themes from a financial stability perspective. The NPSO inherited this
blueprint for the NPA and it is now at the behest of the NPSO to decide how it will take these plans forward.
And this responsibility becomes even more demanding in the face of rapid change. Especially since the
design and build of the new architecture will pose its own challenges. The NPA design must be driven by a
into every step of the NPSO's process
strong business case; and resilience and security need to be built
from inception to any ultimate transition from one system to another. The smooth operation of payment
systems must remain a priority. Any change or upgrade of capability must be managed in a way which
minimises disruption or detriment to the important services provided and the wider financial system.
The Bank's role
Within this journey I've talked a lot about the important work that industry is driving, and I'm sure Hannah and
Melanie will also touch on this today. However, I also want to reflect on what the Bank is doing to prepare for
the changes we expect to see in the payments space. Not in the least to ensure that we, as a regulator, are
not left behind.
As I have just discussed, we have a role through our supervision of Bacs and FPS, and now the NPSO, to
maintain financial stability. We will continue to ensure that financial stability is at the heart of what the
payment system operators do and that risks are being appropriately managed, particularly during this time of
unprecedented change and innovation, and therefore heightened risk. However, we have also made wider
changes to ensure we are well equipped for what is to come. Three developments are of particular
importance.
1) A regulatory perimeter that is future-proof and appropriate for the innovations of tomorrow
When I spoke at last year's Forum, I highlighted two notable changes to the scope of our
regulatory regime
that were in-train. These have now been delivered to help ensure that the Bank is prepared for emerging
and future technologies, participants, and relationships across the payments value chain.
Firstly, our regulatory perimeter has recently been expanded to allow us to supervise critical service
providers to recognised payment systems and we have started supervision of our first service provider,
VocaLink, who provides critical services to the Bacs, Faster Payments and LINK systems.
It is important to be clear here that this change does not, in any way, replace the role of the scheme
operators in managing their risks. Indeed we do not expect scheme operators to change how they work as a
result. Instead, we see this supervision as a complementary corner stone supporting financial stability. We
published our supervisory approach to service providers in February, setting out how we will use
international principles that are specifically tailored for this type of firm.5
Secondly, we worked with HM Treasury to further widen our regulatory perimeter to include non-interbank
payment systems through the Digital Economy Act 2017. We are now in a position where a non-bank
payment system, for example a 'FinTech' payment system whose users are not banks, can be brought under
the Bank's supervision, should one become systemically important to the UK financial system.6
On both of these changes, the Bank has worked extensively with the other UK authorities to make sure our
regime is future-proof and well-equipped to keep pace with and respond quickly to a payments landscape
that continues to change shape. And we will continue to do so.
2) A renewed RTGS service
As the Bank, we not only need to ensure that the firms we supervise promote our broader financial stability
objective, but that we are also facilitating it through the work we do as operator of the wholesale payment
system.
The Bank has embarked on a programme of renewing its Real Time Gross Settlement (RTGS) service with a
view to safeguard financial stability whilst enabling innovation. This is a multi-year programme, led by my
colleagues in our Banking, Payments and Financial Resilience Directorate, to implement a world leading
RTGS system in the UK. Collaboration with the payment sector to deliver this RTGS renewal programme is
vital. To that end, the Bank has established an extensive industry engagement approach to gain views on
the scope and approach of the programme and I encourage you all to engage with it.
The Blueprint for the new RTGS service was published in May of last year and important milestones have
been, and continue to be, delivered along the way. At the end of last year, the Bank moved to a direct
5
providers to recognised payment systems and the Bank's approach to their supervision are set out in
The expectations around service
Annex 1 of the Bank's Annual Report.
6
In line with the recognition criteria laid out in the Banking Act 2009.
delivery model of the UK's high value payment
system. This was to enable a single entity to manage risks
right across the system, increasing resilience and positioning the UK at the leading edge of global best
practice in terms of technology, governance and risk management for payment systems.
Bank's
And from a regulatory perspective, the FMI Directorate continues to supervise the HVPS to the same
standards as other systemically important payment systems. Since the transition, the Bank has introduced
new mechanisms to maintain openness, accountability and challenge in the operation of the HVPS.7
As part of the wider renewal programme, the Bank has also broadened RTGS settlement account eligibility
to non-bank payment service providers, subject to appropriate safeguards.8 Non-bank payment service
providers are now eligible to apply for direct access to payment systems, with TransferWise and Ipagoo
becoming the first non-banks to join FPS and Bacs, respectively. Here, more diverse payment arrangements
with fewer single points of failure, and increased settlement grounded in central bank money, all contribute to
enhanced financial stability. And we cannot ignore the game changer that wider access represents for the
promotion of innovation and competition in the payment market.
Taken together, these examples illustrate the Bank's work to stay in touch with the evolving payments sector
and to facilitate innovation, wherever possible, in a thoughtful and proactive way.
Conclusion
To conclude, we in payments are working through a period of extensive change, on a journey to reinforce the
UK as world leading in delivering best in class payments. It is important after key milestones have been
reflect on how far we've come,
delivered to take the time to but it is equally, if not more, important that we do
not lose sight of the future, the benefits to be leveraged and the work that remains. Good progress has been
made so far, but there is much left to do. And of course there will be challenges for firms as we continue
along the course, navigating complexities around the implications of financial technology and EU withdrawal.
Seeing this journey through will require ongoing focus, care and attention from all involved. But I am
confident that collectively we will get there.
7
See: A blueprint for a new RTGS service for the United Kingdom.
8
This includes having the operational capacity to operate a settlement account, and demonstrating compliance with a comprehensive
risk management framework development with the Financial Conduct Authority, HM Treasury, HM Revenue & Customs, the PSR and
the payment system operators.