Andrew Hauser: A new RTGS service for the United Kingdom - a
platform 93⁄4 for sterling payments?
Remarks by Mr Andrew Hauser, Executive Director for Banking, Payments and Financial
Resilience of the Bank of England, on the panel "Towards a single platform for all payments",
at SWIFT's SIBOS conference, Geneva, 28 September 2016.
* * *
People wanting to travel north out of London by train are spoiled for choice. Spread along a
half-mile stretch of the city's Euston Road are no less than three major stations: Euston, King's
Cross and St Pancras. Each provides slightly different facilities, with trains ferrying passengers
at different speeds to different locations. But the basic service - train travel - is much the same
in all three cases, and many of the destinations served by different stations are within a few
miles of each other. Indeed some are identical. There are for example nearly 100 trains a day
to Newark Northgate, split equally between King's Cross and St Pancras!
The reasons for such an apparently complex system are of course historic, dating back to the
period of intense competition between train lines in Victorian times. Euston was built in 1837
for the London and Birmingham Railway, King's Cross in 1852 for the Great Northern Railway,
and St Pancras in 1868 for the Midland Railway. Given a free hand, it is inconceivable that
anyone would design such arrangements from scratch today. Yet tens of millions of
passengers use each station every year: business is booming.
The situation in UK payments today is rather similar. Customers wishing to make a domestic
retail payment can choose between physical cash (drawn from their bank, or via the LINK
system of ATMs), a paper cheque, a credit or debit card via the Visa or Mastercard systems,
a real-time payment over FPS, or a batch payment across Bacs. Wholesale payments may be
made through the CHAPS high-value scheme, operated on the Bank of England's Real-Time
Gross Settlement System (RTGS) or through the embedded payment schemes of CREST or
LCH. Those making cross-border payments may use their correspondent bank, a direct link to
an overseas RTGS system or CLS the foreign exchange settlement service. Taken together,
one can easily list 10 or 15 payments pathways without even trying.
Each of these systems is devoted to meeting the needs of their customers, which vary
materially. Yet at their most basic level, all involve a simple transfer of value. The fragmented
way in which that core service is delivered poses at least three types of economic challenge.
First, those having to make different types of payment over time must bear the direct costs of
meeting multiple different payments protocols, technological requirements, fees and
governance standards. Second, those costs create potential barriers to entry for would-be
payments providers, holding back innovation and competition. And, third, it is a potential
challenge for system-wide resilience, if payments meant for one system cannot easily be
rerouted through another in the event of a system outage.
Those challenges have been with us for some time. But the pressure for change is intensifying
from a number of directions. First, consumers are increasingly demanding a more seamless
payments experience - in real time, and indifferent to time zone, country or currency. That
pressure has been most evident in retail markets - but is spreading to corporate and
largervalue markets too. Second, intense cost pressures on traditional business models since the
financial crisis have pushed banks and other financial institutions to look for more radical ways
to find efficiency savings, particularly in back office and ancillary services such as payments.
Third, advances in technology have made it much easier to deliver or contemplate genuinely
mobile payments platforms and distributed payments and database systems. Fourth, new
regulation - building on the painful lessons of the financial crisis - has increased the need for
financial firms to be able to mobilise significant stocks of highly liquid assets quickly and
seamlessly across systems. And, fifth, the growing threat of cyber-attack and reduced
tolerance for operational outages driven by the move to real-time payments has made users
ever more demanding in terms of the resilience of payment ecosystems.
All of these forces are pushing towards greater convergence in payments systems. But that
convergence could take a number of different forms. At its most radical, it could imply a single
universal payments system, run on a single platform, and handing all payment types. Or it
could mean retaining separate systems, but with a common "backbone", including a shared
language, operating standards and access protocols.
Before discussing these alternative models in greater detail, I should say a word about why
central banks like the Bank of England have such a central interest in the outcome. Our primary
role is to maintain stability in sterling payments arrangements - and we do that in two key
ways. First, by ensuring that as many payments as possible settle in (or are backed by) central
bank money, we aim to minimise so-called "settlement risk": the risk that a payment fails to
reach its destination because the intermediary fails, or confidence is undermined in the
payments medium. Central bank money, whether physical (banknotes) or electronic (reserves)
in form, is the ultimate risk-free means of final payment. And, second, central banks seek to
maximise the operational resilience of core payments systems, by operating high-value
payment systems directly and supervising the other systems through our regulatory powers.
Although public debate about operational resilience has, rightly, intensified in recent years,
payments systems have a generally good track record: for instance, most operated flawlessly
throughout during the financial crisis, unlike some other key bits of the financial system.
It is sometimes claimed that central banks' focus on stability stands in the way of innovation or
consumer interests. But neither needs to be true. Efficiency-enhancing innovation and
competition has an important part to play in promoting financial stability, through reducing
market concentration, identifying new risk-reducing technologies, and increasing the scope for
electronic settlement in central bank money. And surveys regularly identify resilience and
safety as being at the very top of consumers' demands for payments services. So we do want
to enable innovation, but only where that can be done without impairing stability.
What do we make, then, of those two alternative models for payments convergence I
mentioned a moment ago? An all-encompassing payments platform hosted on a single IT
system has clear appeal from the point of view of simplicity and clarity of purpose. And there
are some important case studies globally - including in Mexico, whose central bank is
represented on the panel today. But it would be a big change from the model we have in the
United Kingdom today, and poses at least three significant risks. First, it would involve putting
all our eggs in one basket operationally: if the system and its backups were to go down, for
any reason, all payments in the UK would stop. So, just as it would be unwise to try to channel
all 100m passengers a year to Euston, King's Cross and St Pancras through a single train
platform, diversity has some operational merits! Second, it would be potentially very complex
to ensure that all of the different functions currently offered by the various payment systems
were replicated on the single system. In all probability this would end up being impossible, and
compromises would be made - what started as being everything to everyone could end up
being much less. Third, someone would need to pay - and there is a good chance that such a
large project might fall to the public authorities. That is not the model that has developed for
UK retail payments - and such a single dominant infrastructure could well have negative
implications for innovation and competition.
Over the medium- to long-term, it is possible that some of these challenges may be overcome
as new technologies - including the distributed ledger - mature. Central banks could
themselves have a role to play in the operation or underpinning of any such system, through
the issuance of a Central Bank Digital Currency or otherwise. But there are so many big
questions around such a scheme - policy, legal, technological, even social - that this is still
very much in the realm of research rather than implementation1.
In the nearer term, the UK is therefore embracing the second convergence concept - that of
joining separate systems together around a common backbone, embracing so-called
"interoperability". Underpinning that, I would pick out two key drivers - the first in wholesale
payments, and the second in retail.
The first driver is the Bank of England's consultation on a new medium-term vision for its
highvalue RTGS service, which we published just a few days ago2. RTGS has delivered an
extended period of stability in sterling payments, has a range of risk-mitigation features that is
at least the equal of other systems globally, and is generally well thought of by its users. But,
after two decades of operation, its capacity to deal with the accelerating pace of change in
payments that I described earlier is limited. That poses three risks to the achievement of the
Bank's mission over the medium term. First, we could see a reversal in the proportion of
payments settled in central bank money if systems develop outside the RTGS net, harming
financial stability. "Ubering" for central banks, if you like. Second, we may end up impeding
stability-enhancing innovation and competition. And, third, we risk a future diminution in service
quality, whether in terms of meeting user needs or operational continuity.
Our consultation paper sets out a vision for responding to that change - retaining the core
riskmitigating functions of the current generation of RTGS, but fundamentally refreshing the
technological base of the service and delivering strategic change in four key areas: broader
access (including for smaller banks, and non-banks); even greater resilience (in particular to
cyber-threats); stronger inter-operability (including through the adoption of ISO 20022); and
better user functionality (including true or near-24x7 operating capability, better liquidity
management tools and richer data provision). Further detail is given in Table A. Taken
together, these changes aim to safeguard stability in a rapidly-changing payments ecosystem
whilst enabling that innovation to take place: by putting a modern and responsive RTGS
service at its heart. We are seeking feedback on these proposals by 7 November, and will
publish a final blueprint in early 2017.
Alongside that change to RTGS, reform is also underway in the sterling retail payment
systems. In many respects, the UK starts from a good position: for instance, we have high
rates of mobile and internet banking access, and have had real time retail payments available
on a 24/7/365 basis since 2008, when Faster Payments was introduced. But, as I noted at the
start, the landscape is quite a fractured one, using different messaging standards and
technology platforms, with relatively high levels of tiering. Last year saw the establishment of
a Payments Strategy Forum, drawing together a wide range of industry and user participants
to plot a new vision for retail payments. The forum's own consultation on a future strategy has
just concluded, and includes a number of recommendations for the simplification and
streamlining of both the governance and technology underpinning retail payments. This
touches on some of the same themes as the Bank's proposals, including in particular a
recommendation to move to a common interoperable messaging standard.
An important and as yet not fully answered question is whether interoperability in retail
payments means just the adoption of common messaging standards, governance and access
criteria by otherwise-separate retail technologies - or whether it also means limited
technological convergence, for example with multiple "overlay" services using a common "pipe"
to receive and transmit payments. Such a model would be consistent with the increased use
of Application Programming Interfaces (or APIs) and regulation such as the Second Payments
Services Directive. But significantly further thought is required about the form any such pipe
might take, how it could be designed in a general enough way to accommodate multiple
different payment services, and who would pay and operate it. A high-volume retail payments
pipe would have a number of characteristics of a public utility - but, unlike in some other
countries, we would not envisage that the Bank of England would build or operate this type of
infrastructure.
These types of challenge are eminently solvable - and are in no way unique to payments. To
return to where I began, the UK railways have explored ways to combine common ownership
of the track network and timetable with competing rail service providers whilst making use of
those old, eccentrically-located stations. And energy and telecommunications have found their
own solutions to similar problems, including across national borders. But the history of those
industries suggests it will not be entirely plain sailing: and the stakes in payments are
particularly high. That is why the Bank of England and the Payment Systems Regulator are
working very closely together to ensure that their twin statutory objectives of systemic stability
and enhancing competition are met by whatever structure ends up being proposed.
I said earlier that I thought that a genuinely single technology platform for the UK was unlikely
to be feasible in the near term, drawing an analogy with having a single platform for those three
train stations. If a spread of platforms, drawn together through a common set of standards and
norms, is a more plausible target, how does RTGS fit in?
Those of you particularly familiar with London's King's Cross station will know that there is a
spot (ironically between platforms 8 and 9), where a half-submerged luggage trolley
commemorates the mythical "Platform 93⁄4" from Harry Potter. Platform 93⁄4 is of course the
gateway to the magical secrets of Hogwarts - but is invisible to "muggles" (ie normal human
beings), requiring travellers to fling themselves head first at a potentially unyielding wall to gain
entry. If there may have been some parallels between this fictional construct and the role of
RTGS in the past - both in the vital role it plays, and in its relative obscurity - it is our firm
intention that there should not be in the future. The vision we have just published is designed
to underscore and throw new light on the special role that RTGS has, of maintaining stability
by providing final settlement in central bank money for all payments, and on a real-time gross
basis for those that are most systemically important. But it also recognises the need to broaden
access to RTGS and improve its ability to communicate with a wide range of other systems
seamlessly and resiliently if it is to keep pace with a changing environment. We look forward
to hearing the responses to our consultation.
Thank you.
Source: "A new RTGS service for the United Kingdom: safeguarding stability, enabling innovation", available at:
http://www.bankofengland.co.uk/markets/Documents/paymentsystem/cp160916.pdf