SPEECH
SVERIGES RIKSBANK
DATE:
12/06/2019
SE-103 37 Stockholm
SPEAKER: (Brunkebergstorg 11)
Deputy Governor Martin Flodén
VENUE:
The Riksbank
Tel +46 8 787 00 00
Fax +46 8 21 05 31
registratorn@riksbank.se
www.riksbank.se
TION:
Should the Riksbank's payment system
be open 24/365?*
The central bank's role in the Swedish payment infrastructure has increasingly
come into focus at the Riksbank.1 I am aware that this is an area that may not
perhaps interest the general public as much as negative interest rates, housing prices,
cash-free shops, the krona exchange rate and other things normally associated
with the Riksbank. Most people are not - to be honest - very interested in how
the "plumbing" works that enables millions of payments to be made every day, to
a total value of hundreds of billions of krona. This is not really surprising.
Payments are not an objective in themselves, but a means of making our day-to-day
life work; getting our wages, paying our bills, buying food, giving the children
pocket money, saving for our retirement and so on. But, like other central banks,
the Riksbank has been given the task of promoting a safe and efficient payment
system. We at the Riksbank therefore need to understand how the payment
system is put together and to consider what measures and investments are needed
to ensure it remains safe and efficient.
The Swedish payment market has changed rapidly over the past decade.
Households are to a greater extent choosing electronic means of payment instead of
cash, and there are increasing requirements that payments should be made easier
and should reach the recipient faster.
This development also means that the Riksbank's role in the payment market is
changing. As the use of cash has declined, the Riksbank is wondering whether it is
desirable and possible to issue electronic central bank money to the general
public, so-called e-krona. But today I don't intend to discuss the e-krona. Instead I
would like to focus on the role of the Riksbank in the payment infrastructure that
banks and other financial institutions use to pay one another. This infrastructure
is used in the background when most of the payments in Sweden are executed, or
settled, as it is also called.
Central banks play an important role in enabling households and companies to
make payments to one another by using financial institutions as an intermediary.
The Riksbank functions as a hub and supplies a payment system with accounts
where financial institutions can hold money ("central bank money"). The
institutions that take part in the Riksbank's payment system can then pay by moving
money, on behalf of themselves or their clients, between the participants'
accounts.
When central bank money is used in a transaction, an asset with counterparty risk
is converted into a safe and liquid claim on the central bank. Central bank money
is safer than other money, as a central bank can always meet its obligations in
domestic currency. It is important for financial institutions to be able to pay in
central bank money, as they would otherwise be burdened with counterparty
exposures when paying.2 Central bank money and the possibility to make safe
payments are thus closely linked.
The Riksbank needs to adapt its payment system so that the infrastructure
remains safe and cost-efficient as technology develops and the payment market is
changing. A growing trend both in Sweden and abroad is that households and
companies expect to make payments at any time they like. The payment system
we offer today therefore needs to be supplemented with a new system that is
open 24 hours a day and adapted to the instant settlement of large volumes of
payments. My assessment is that the best way for the Riksbank to attain this
target is to make the Swedish krona available on the same technical platform as the
European Central Bank (ECB) and the Eurosystem use.3 By taking advantage of the
economies of scale that arise here, the right conditions are created for cutting
transaction costs for Swedish households and companies. It would also mean that
the Swedish payment infrastructure is to a greater extent harmonised with the
rest of the EU, which can increase competition and the quality of the payment
services offered to Swedish customers.
RIX plays a central role in the Swedish payment system
The payment system the Riksbank currently supplies to financial institutions is
called RIX. Institutions wishing to become participants in RIX enter into an
agreement with the Riksbank. The Riksbank is a public institution, which means that
entry to the RIX system is given on competitively neutral terms to institutions
meeting the conditions that are set.
It is difficult to overestimate the importance of RIX for the Swedish economy.
From the time that RIX opens at 0700 hours on a typical working day until it closes
at 1700 hours, a good 20,000 payments are settled to a total value of more than
SEK 600 billion.4 RIX is the hub of the Swedish payment system and it is therefore
also logical that the functions and accessibility of RIX will be in focus when the
Riksbank upgrades its capacity to meet the challenges of the future payment
market. The Riksbank is not in any unique situation in this respect. Many other central
banks are now considering upgrading their payment systems.
Payment flows now...
Historically there has been a differentiation between large-value and smaller
payment, also known as retail payments. The large-value payments include payments
between the banks' major customers, international payments, payments to and
from financial infrastructures and the Riksbank's own transactions. This type of
payment is often large, time-critical and settled one by one in RIX according to the
principle of "first in, first out".5 Retail payments are the millions of smaller
everyday payments made between households, companies and authorities, for instance
card payments in the retail trade, wage payments, pensions and normal payment
of invoices.
Retail payments that are not settled directly are normally first compiled and
aggregated by a clearing house (in Sweden by Bankgirot) and then settled in RIX
according to a predetermined timetable, this is also known as batch clearing.
However, this regime is now being disrupted as technology has reached such a level of
maturity that it is possible to send small payments without clearing to reach the
recipient in the space of seconds. At the Riksbank we call this type of payment an
instant payment.6 This is often called "swishing" in popular speech, after the
mobile app used to make the payment. Swish has really taken Sweden by storm and
is one reason why the use of cash is declining here.7 Today around 70 per cent of
the Swedish population has access to the app and in 2018 almost 400 million
instant payments were made with it.
The settlement of a payment by Swish takes place on a platform known as
"Betalningar i Realtid, BiR" (payments in real time), which is owned by Bankgirot.
Swish payments are thus settled in money issued by a commercial institution and
therefore differ from other payments that are settled in central bank money.
Another difference between BiR and RIX is that BiR is accessible 24 hours a day,
every day of the year, "24/365". The average transaction in BiR is much smaller
than the average transaction in RIX, which is a natural consequence of the
payments made with the Swish app being small. However, there are no technological
limitations preventing larger payments being settled instantly. But there will then
be high demands on the safety of the settlement procedure, and settlement
should then be in central bank money.
... and in the future?
It is of course impossible to know how the payment market will look in 5-10 years'
time, but a qualified guess is that instant payments will become increasingly
important. New payment products that are introduced can be settled immediately if
the client so desires, for instance, through online banks, "point of sale" or
e-commerce platforms. Many payments that are now cleared by batch clearing will
probably move to instant settlement. For instance, since 2018 it has been possible
to make payments by Swish to the Swedish Tax Agency.
It is also conceivable that a mixture of batch-based and instant settlement may
arise, where payments are settled individually but at predetermined points in
time. In the long run, it is not improbable that some of the payments now made
separately in RIX will move to other platforms that enable instant payments. It is
clear at any rate that the taxonomy used for payments (large-value/retail, instant
settlement/batch settlement and time-critical/not time-critical) will become more
blurred.
The Riksbank is standing at a crossroads here. Should the Riksbank continue to
supply solely an infrastructure equivalent to RIX that is primarily suitable for
largevalue, time-critical payments during office hours on weekdays and leave the other
settlement of payments between financial institutions to the private sector? Or
should the Riksbank also supply an infrastructure that enables settlement in
central bank money in seconds 24/365? Or to put it a different way: Should the
Riksbank's payment system be open all the time?
Do we need a settlement service 24/365?
The answer is not entirely clear, but much indicates that the Riksbank will find it
more difficult to carry out its task of promoting a safe and efficient payment
system in the future if we don't raise our level of ambition regarding the services
now offered to RIX participants. I see two main reasons for this.
First, settlement in central bank money is the safest means of settling payments.
Private settlement platforms can, with the aid of the central bank, imitate part of
the security offered by settlement in central bank money. In Sweden, this is done
by the institutions that are participants in BiR allocating money in a special client
funds account in RIX that acts as collateral for the payments settled in BiR.
This hybrid system has enabled instant payments in Sweden without the
Riksbank's payment system having to be rebuilt from scratch. As long as the volumes
are relatively small, this type of system is fully adequate, but financial stability will
become increasingly dependent on the reliability of these hybrid systems if the
volumes increase substantially. Sooner or later one therefore reaches a point
where it is difficult to see the value of a hybrid system that tries to copy the safety
offered by central bank money if the central bank could just as well offer this
settlement itself. The Riksbank would in addition be able to offer participants better
and more cost-efficient liquidity management than is possible in a private system.
Second, the payment system is one of the economy's critical infrastructures. The
institution that is responsible for the settlement of payments between financial
institutions gains a considerable influence over the payment system as a whole. If
the settlement of payments had been a branch characterised by substantial
competition and low entry barriers, it would not have been problem. But as payment
settlement is instead characterised by economies of scale and network effects,
Sweden actually has to choose between a public monopoly and some form of
private monopoly. Even a privately-owned infrastructure can be supplied in a
competitively neutral way without creating monopoly profits, but it must in that case
be accompanied by regulations, supervision and oversight which is once again an
unnecessary detour if the infrastructure could just as easily be directly supplied by
a central bank.
I therefore believe that both financial stability and competition on the payment
market would benefit from the Riksbank supplying a payment system that is
available whenever the participants wish to use it.
Platform sharing with other central banks is
cost-effective
Platforms for settling instant payments must be able to process a large number of
payments, be accessible 24/365 and offer first-class continuity solutions. The
systems are therefore expensive and complex to develop. We have not calculated in
detail how much it would cost for the Riksbank to develop or procure a system for
the settlement of instant payments, but simple business economics speak against
this type of project.
Payment infrastructures entail substantial fixed costs. In addition to development
costs, there are operating costs for personnel and IT and communications
systems. Moreover, the payment system must be protected against various forms of
threat, for instance, cyber attacks and large-scale frauds.8
The Swedish market is not sufficiently large to carry such a platform on its own
shoulders cost-effectively. If the Riksbank is to supply a settlement service for
instant payments, it is therefore preferable if it can do so by sharing a technical
platform with other central banks. The more who share the cost of running the
platform, the cheaper it will be and the more attractive to use.
Platform sharing with the Eurosystem
As I mentioned earlier, the Riksbank is not the only central bank thinking about
how its payment system needs modernisation to meet the demands of tomorrow,
not least with regard to instant payments. The Eurosystem therefore decided in
2017 to add a new technical platform to its payment system TARGET2 (the
Eurosystem's equivalent to RIX). This platform is called the Target Instant Payment
Settlement (TIPS). It has been developed and run by the Italian central bank since
November 2018.
During the spring the Riksbank has investigated the potential for using TIPS to
settle instant payments in Swedish krona. The platform was initially built with the
function of being able to settle payments even in other currencies than the euro,
and our assessment is that there is no technical obstacle to settling payments in
Swedish krona there. Moreover, it doesn't cost anything to join TIPS over and
above the adaptations the Riksbank and the market need to make to their IT and
communication systems. Joining the platform involves the central bank wishing to
participate entering into an agreement with the ECB and the Eurosystem.
If the Riksbank decides to use TIPS, the settlement of instant payments in Swedish
krona will thus take place in Italy, where the platform is located. As the Riksbank
would then be outsourcing the operation of the system to an external party, the
TIPS operations must meet the requirements made by Swedish legislation. In
addition to these requirements, the outsourcing process would also raise a number
of broader issues regarding national self-determination.
It may be worth reminding you that the Swedish payment infrastructure is already
dependent on external parties. Let me give some examples: RIX has been
procured from a South African company, the settlement of Swedish securities takes
place in Euroclear's technical system in France, Swedish banknotes are printed in
the United Kingdom, the communication network used to send payment orders
between Swedish financial institutions, which is required for instance when
customers make normal cash withdrawals, is owned by an international cooperative
society with its headquarters in Belgium (SWIFT) and card transactions in Sweden
are cleared through two American corporations.
The idea of a Swedish payment mechanism that can function without links to
other countries has long been outpaced by reality and it would be just as
unrealistic to imagine, for instance, that the Swedish pharmaceuticals industry could meet
all the needs of the Swedish health service. The challenge for a small country like
Sweden lies instead in being able to benefit from international cooperation by
choosing counterparties that are reliable in the long term and with whom we have
good relations, such as the ECB. Although Sweden does not have the euro as its
currency, the Riksbank has long had a deep collaboration with the ECB on central
bank issues. Countries such as Finland, Denmark and our Baltic neighbours
consider that platform sharing with the Eurosystem is a secure solution. I believe it
would work well for Sweden, too.9
Another question someone might have is whether TIPS can in some way be
regarded as a first step towards introducing the euro in Sweden. The answer to that
question is "no". It is the Riksdag, the Swedish Parliament, that decides what
currency will be used in Sweden. TIPS is an IT system used to settle payments and it
does not affect the Riksbank's capacity to conduct monetary policy, foreign
exchange policy or to give emergency liquidity assistance in Swedish krona. Thus,
the question of whether to join TIPS has nothing to do with being for or against
introducing the euro as Sweden's currency.
It is, however, important for the Swedish krona's status as an independent and
internationally viable currency that it is not perceived to be more complicated,
expensive or unsafe to make payments in Swedish krona than in other currencies.
This means that the settlement services offered by the Riksbank to financial
institutions must be at least as safe and efficient as those available abroad. From this
perspective, too, it would appear a good idea to share a technical platform with
the euro countries.
How will RIX and TIPS co-exist?
If the Riksbank begins using the TIPS platform to offer settlement of instant
payments, RIX needs to change its form and function. It is not appropriate to go into
all the details here and now, so let me just describe the arrangement on a general
level.
The current RIX system (hereafter referred to as RIXRTGS) will remain in place.
When RIXRTGS closes for settlement at the end of the working day, the Riksbank
will implement its monetary policy transactions, just as it does today. But RIXRTGS
will additionally be equipped with some new features. For instance, a participant
in RIXRTGS will have access to intraday credit almost 24 hours a day, compared with
today when it is only available during RIX's normal opening hours.
In addition to RIXRTGS, settlement will be available 24/365 via the TIPS platform
(hereafter referred to as RIXINST). To make it easier for the participants to manage
their liquidity, it will be possible to move liquidity within the RIX family from
RIXRTGS to RIXINST and vice versa around the clock, which guarantees smooth and
cheap settlement of payments.10 The aim is that an institution wishing to become
a member of RIXRTGS will not need to be a member of RIXINST or vice versa.
If we add the TIPS platform to RIX, it will thus be possible for financial institutions
to settle payments in central bank money around the clock.
How would TIPS affect the Swedish payment market?
If the Riksbank decides to use TIPS to provide a settlement service 24/365, most
private individuals and companies will not notice any difference in the short term.
However, the institutions participating in RIXINST will need to adapt their message
formats and processes to the regulatory framework applying for instant payments
in large parts of the rest of Europe.
As with all other harmonisation, there will be a balance between a possible need
for tailor-made national solutions and the profits that can be reaped from full
participation in the EU's single market. Of course there may be advantages if a
market "does its own thing", but in the long run I believe that Sweden has a lot to gain
in adapting to the rest of the EU in this respect. Sweden is ahead of its European
neighbours in the journey towards a cashless society, and Swedish banks and
FinTech companies are well-equipped to continue launching innovative payment
services.
Using the same technical platforms as most of the rest of Europe will, I believe,
make it easier for Swedish payment service providers to establish themselves in
Europe. And in the same way it will become simpler for foreign companies to
compete in Sweden. It is also probable that it will become easier to make instant
cross-currency payments in the future if the central banks use the same technical
platform to settle payments.
What happens next?
During the spring, my colleagues on the Executive Board and I have discussed the
Riksbank's future role in the payment infrastructure. My baseline in these
discussions was that Sweden - like most other countries - has long had a model where
the banks have settled payments in risk-free accounts in the central bank. This has
been important in preserving the stability and credibility of the payment system.
Now that the payment market is moving towards larger, more numerous and
more important payments outside of RIX normal opening hours, the Riksbank
needs to modernise the services it offers so that central bank money remains the
norm when financial institutions settle payments. My colleagues have essentially
expressed similar views.
Last week we therefore decided to contact the ECB to initiate discussions on an
agreement that would make the Swedish krona available for settlement on TIPS.
An absolute requirement that we have in these discussions is that the security
surrounding TIPS must correspond to the expectations in Swedish legislation.
It is still too early to say when TIPS could be available for the Swedish krona, but if
it all works out, I am hoping it will be in 2021. When the Riksbank supplies a
settlement service that is available 24/365 our expectation is that the RIX
participants settling instant payments will use the platform offered by the Riksbank. But
we will proceed with caution and support the private solution that is available,
BiR, until TIPS is introduced and all conditions for using it are in place. During the
implementation period the Riksbank will make sure to have a close dialogue with
the market and be responsive to views and wishes on how TIPS can be made
available to the Swedish krona. We will return to the exact forms for such a
consultation later in the autumn.