Transforming our payments infrastructure
Speech given by
Victoria Cleland
Executive Director, Banking, Payments and Financial Resilience
Payments International, London
27 November 2018
I would like to thank Sam Leighton, Richard Lewis, and Cameron Penny for their contributions.
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All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
Transforming our payments infrastructure
Payments are an essential part of our lives, and of the UK economy. Last year UK payment systems
processed more than 26 billion transactions worth over £91 trillion, covering everything from small scale card
payments and cash withdrawals to major corporate transactions.
The UK payments landscape has undergone considerable change in recent years. Increased take-up of
new types of payment technology in retail and wholesale markets has been facilitated by factors including
increased ease of use, the growth in e-commerce, and increased confidence in their reliability and
security. Looking to the future, we expect this transformation to continue, driven by incumbents but also the
growth of new Fintech firms who will continue to find innovative ways of meeting demand for faster, simpler,
cheaper and more flexible payments. This wave of innovation could deliver positive outcomes ranging from
better choice for consumers, to improved access to finance for businesses, to lower transaction costs,
enhanced resilience and greater capital efficiency.
The Bank of England is actively researching both how technology is changing financial services today
(through our Fintech Hub1) and how financial services might evolve over the next decade.2 We are
assessing what technological change means for users, businesses, and the financial sector, as well as the
risks that this might pose to the Bank's mission. In the context of this rapid change in payments, an area of
critical importance to the UK economy, the Bank is undertaking two major initiatives to strengthen core
payments architecture, and to enable it to better meet the needs of the industry and the public. These
initiatives are closely linked: renewing the RTGS service and bringing the operation of CHAPS into the Bank.
Before I go any further, I will define these two acronyms that might sound unfamiliar, but whose role is crucial
to everyone in this room - indeed to everyone in the country.
The RTGS (Real Time Gross Settlement) service is the core payments infrastructure in the UK, providing the
ultimate settlement for a number of payment systems and other financial market infrastructures, including
retail systems such as Bacs. As part of this, it provides accounts for banks, building societies, and, from very
recently, to non-bank payment service providers (PSPs),3 which use it to settle payment obligations. It is also
the platform through which monetary policy decisions to change Bank Rate are implemented. Settlement
takes place across the books of the Bank, in central bank money and in real-time. This is efficient, settlement
risk free and irrevocable. The Bank has recently commenced a multi-year Renewal Programme of the RTGS
service, to enhance resilience and drive innovation.4
1
https://www.bankofengland.co.uk/research/fintech
2
https://www.bankofengland.co.uk/research/future-finance
3
https://www.bankofengland.co.uk/news/2018/april/non-bank-psp-access-to-the-payments-system-announcement
4
See https://www.bankofengland.co.uk/payment-and-settlement/rtgs-renewal-programme and
https://www.bankofengland.co.uk//media/boe/files/speech/2018/real-time-gross-settlement-rtgs-renewal-enabling-the-next-generation-ofpayments.pdf?la=en&hash=49E47B8951F6FD8D24E6307B36EDAFB7D214B4F5 for further details
2
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
CHAPS (Clearing House Automated Payment System) is one of the payment systems which settles over
RTGS. It is the UK's high-value payment system, used for wholesale payments and known to many of you
for making house purchases, but also for a range of time-sensitive or cross-border corporate payments.
Origins and use of CHAPS
This month marks the first anniversary of the operation of the CHAPS payment scheme being brought into
the Bank. But CHAPS is rooted in centuries of payments history. Payments systems in the UK grew out of
the 1770s arrangement of clerks meeting at a tavern in the City of London and exchanging paper cheques
over lunch. This was more efficient than each clerk walking around the city visiting other banks. By the end
of the 19th century, around 200 years after the creation of the Bank, the operation of payment systems was
formalised, with the establishment of the Bankers' Clearing House, which was owned and controlled by the
major retail banks. In 1985 following a series of reviews the Association of Payments Clearing Services
(APACS) was created as an umbrella organisation for three clearing companies, including the CHAPS &
Town Clearing Company. It had responsibility for the CHAPS system, providing high-value, same-day
settlement with a minimum value of £10,000 (equivalent to around £29,000 in today's prices).5
Today there is no minimum value, but CHAPS settles around £330 billion every working day, representing
93% of non-cash payments in the UK. Around 40% of CHAPS payments originate from organisations based
overseas, reflecting the UK's strong links to the global economy.
Bringing CHAPS into the Bank
When RTGS was established in 1996, it became the settlement infrastructure for CHAPS, increasing
financial stability by ensuring the highest value payments were settled real time in central bank money. The
CHAPS Co Clearing Company Ltd (CHAPS Co) continued to operate the CHAPS scheme from a member
perspective until last year. Bringing CHAPS in-house marked an important milestone in our ongoing work to
make CHAPS and RTGS safer, more secure, more accessible, and in line with international best practice.
Until last year, the UK was unusual in that a private sector company (CHAPS Co) was responsible for the
governance and rulebook6 of the high-value payment system, while the Bank provided the underlying
settlement infrastructure. In 2017 the Bank's analysis concluded that there were structural constraints in this
model. Given the status of RTGS as critical national infrastructure, CHAPS Co could not be given the full
range of information on RTGS that it would need to identify and manage risks across the whole payment
system. These constraints meant that, while CHAPS Co had made important enhancements to its existing
model, it was unable to fully meet regulatory expectations to act as an effective end-to-end systemic risk
5
https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
6
The rulebook (or 'CHAPS Reference Manual') sets out the requirements that a member needs to adhere to as a participant in CHAPS.
The rules are designed to deliver a safe, secure, and resilient CHAPS payment system.
3
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
manager for the CHAPS payment system. Put another way, the Bank understood and mitigated the risks
within RTGS, and CHAPS Co looked at risks in its participants but it was hard to join the two views together.
Bringing these two views together could benefit financial stability.
This is not to say that the Bank and CHAPS Co stood still in their joint operation of the service. Two key
improvements to the resilience of CHAPS in recent years were the implementation of a Liquidity Saving
Mechanism (LSM) and establishing a third site for RTGS to ensure settlement could continue to operate in
the very unlikely event that the Bank's data centres suffered a simultaneous outage. And CHAPS Co took
important steps to streamline its governance arrangements, strengthen its rulebook, and improve how it
sought assurance of compliance.
The resilience of the CHAPS system is about more than just the central RTGS infrastructure or management
of its Direct Participants7 in isolation. Weaknesses in security or operations at any point in the payment chain
could threaten stability and trust in the whole system. It is vital to have a holistic view of CHAPS as a
network, through which financial or operational risk can be transmitted. Addressing this was particularly
important given the increased sophistication of risks faced by the payments system including, for example,
cyber-attack.
It was therefore agreed to bring the operation of CHAPS in-house. The transfer took place on 13 November
2017, and was smooth with no disruption to the availability of CHAPS for the banks or their customers. I'd
like to thank the staff across the Bank, CHAPS Co, the participating banks and other organisations who
made it possible.
Effective risk management for CHAPS
But that was just the first step and the Bank continues to enhance its approach to managing risks in CHAPS.
As the systemic risk manager for CHAPS, we seek to ensure that end-to-end flow of payments is safe,
secure and stable.
We are now increasingly able to draw on the broader set of tools and resources available to the Bank to:
identify, assess, mitigate, and respond to the full range of risks to the delivery of the CHAPS system. Our
approach is to assign responsibilities for these risks according to where they can be most effectively
managed and to coordinate with the owners of these risks (such as Direct Participants and Critical Service
Providers) in order to seek assurance that the payment system is operating within our risk tolerance.
We also work closely with colleagues in the Prudential Regulation Authority (PRA),
Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR), who have relationships with
4
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
CHAPS participants and a shared interest in the operation of the payments chain. A recent example is the
July 2018 Discussion Paper, 'Building the UK Financial Sector's Operational Resilience', which the Bank,
PRA and FCA published together. We are increasingly working with supervisory colleagues to:
 Identify and manage risks to and from the payments function for the Direct and Indirect Participants
that they supervise; and
 Deploy expert cyber resources in order to manage the threats posed to the CHAPS system.
It goes without saying that, the RTGS Renewal Programme is also putting resilience at the heart of its design
and scope.
Widening access to CHAPS and RTGS
In addition we are working to improve access to CHAPS and to RTGS.
In 1987, CHAPS only had 14 direct participants - a number which remained broadly unchanged twenty years
later in 2007. This created increased risk to financial stability through operational reliance on a small number
of banks, creating credit exposures between Direct and Indirect Participants (who could only access CHAPS
via a Direct Participant). In response, the Bank took three steps to facilitate direct access to CHAPS:
De-tiering. In 2011 the Bank identified the six largest indirect participants8 who presented a systemic risk
through indirect access. We engaged with them to discuss these risks and how "de-tiering" could alleviate
them. Each of these banks now accesses CHAPS directly. Over the last year, they accounted for 17% of
total CHAPS values, demonstrating a clear and measurable reduction in risk, which in turn, benefits the
wider payments ecosystem and all of its participants and end users. In April 2012, after consultation with all
CHAPS participants, formal tiering criteria were introduced to CHAPS based on a presumption that Indirect
Participants that breach the criteria should transition to direct access. The Bank will continue to analyse the
financial stability risks presented by indirect access and further refine if we consider there is an unacceptable
level of risk.
Expanding eligibility to non-banks. Where it can be done safely without compromising our mission to
maintain monetary and financial stability, we also seek to promote efficiency, innovation and competition
through our operation of RTGS and CHAPS. We have therefore recently widened the access criteria for
RTGS and CHAPS to enable non-bank PSPs to join. Key to this was working closely with the FCA, HM
Treasury and the PSR to develop a supervisory regime that would allow non-bank PSPs to access
settlement in RTGS and participation in the CHAPS payment system without increased risks. In April 2018
Transferwise was the first non-bank PSP to join RTGS and was followed by iPagoo who in August 2018 was
8
i.e. those which the Bank's analysis identified as being systemically important to the CHAPS system in terms of the total value of
payments they send and receive.
5
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the first non-bank PSP to join CHAPS directly. Direct access allows non-bank PSPs to reduce their
operational dependence on the banks they are trying to compete with. Over the longer term, this should also
create a more diverse payments sector with fewer single points of failure.
Reducing the cost of access. We continue to seek to avoid the costs of direct access being prohibitive to
prospective and existing participants. We have enabled third-party aggregators to provide technical
connectivity to RTGS for smaller CHAPS direct participants, reducing the upfront costs of direct access
without reducing overall resilience.
The RTGS Renewal Programme will further reduce the barriers to direct access. Its technical architecture will
be designed to support several hundred Direct Participants in CHAPS; allowing for a significant increase
from the current 33. We also intend to introduce automated testing to streamline the joining process. We will
build simulators to help new joiners better familiarise themselves with CHAPS and provide broader RTGS
functionality before going live. The renewed RTGS will also feature enhanced functionality (e.g. enhanced
liquidity management and the capability to extend opening hours), facilitating innovation by both established
participants and new joiners. This should, in time, ultimately lead to a situation where it is simple and cost
effective for any eligible participant to become a direct participant in CHAPS.
Improved governance
In bringing CHAPS in-house it has been important to develop a strong and robust governance framework
and retain the strong 'user voice' that CHAPS Co facilitated. At the heart of this was the establishment of
the RTGS/CHAPS Board (the Board) chaired by the Bank's Deputy Governor for Markets & Banking and
comprising four non-executive members selected for their experience and expertise, together with a number
of the executive, myself included.9 The Board provides a strategic focus with particular attention to the
Bank's role as a systemic risk manager to the CHAPS system, broader financial stability remit and other
public interests. The Bank's operation of CHAPS is subject to the Bank's full 'three lines of defence' risk
management model and close engagement and oversight on relevant matters from the Governors, the
Bank's Court of Directors and the Financial Policy Committee.
In its capacity as Payment System Operator, the Bank's delivery of CHAPS is supervised by the Bank's
Financial Market Infrastructure Directorate10 to the same standards as other systemically important payment
systems.
It is also essential to understand the views of industry, and we have established forums to facilitate an open
dialogue with a variety of key stakeholders. This includes the CHAPS Strategic Advisory Forum (SAF) and
the RTGS Renewal Programme's External Advisory Body (EAB). Both forums involve attendees from a
9
Information on members of the RTGS/CHAPS Board can be found at https://www.bankofengland.co.uk/payment-and-settlement
10
https://www.bankofengland.co.uk/financial-stability/financial-market-infrastructure-supervision
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All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx
range of organisations to ensure input and challenge from a diverse range of stakeholders across the
payments landscape, from the major, established banks through to innovative Fintechs and end-users.
Looking ahead to RTGS Renewal
This is an important time for the UK payments industry. In addition to the RTGS Renewal Programme,
Pay.UK11 is working to build a New Payments Architecture for retail payments. There are synergies between
these programmes and while we operate independently we are working closely to ensure that we co-ordinate
where there are benefits to doing so, and where this will best support the payments industry.
An example of our close cooperation is planning the introduction of messaging standards based on ISO
20022. The Bank and Pay.UK are working together on the introduction of a Common Credit Message (CCM)
for CHAPS, Faster Payments Service (FPS) and Bacs. The Bank published a joint consultation with Pay.UK
and the Payment Systems Regulator (PSR) in June.12 This set out how we propose to develop the new
messaging standards to create a harmonised language for retail and wholesale payments in the UK. We will
shortly be publishing our response to that consultation, which will set out our next steps. We have also
created the Standards Advisory Panel (SAP)13. We are seeking participants from beyond payments and
financial services but also from the companies who initiate and receive payments, and software providers
and others who may want to take an active role in shaping the technical standards which will underpin
elements of that project.
Conclusion
The Bank is committed to strengthening the UK's payments services, and we will continue to work closely
with the industry to ensure we create services not just for existing users but for prospective participants too,
including those with innovative business models such as Distributed Ledger Technology. Our vision is to
develop an RTGS service which is fit for the future, increasing resilience and access, and offering wider
interoperability, improved user functionality and strengthened end-to-end risk management. Our changes will
help to increase competition and innovation in the wider banking and payments markets. The upcoming
enhancements will benefit from a two-way dialogue between the Bank and the payments industry. As we
continue this exciting journey I look forward to working with all of you as we innovate and strengthen the
UK's payment services for the future.
11
https://www.wearepay.uk/
12
https://www.bankofengland.co.uk/news/2018/june/iso-20022-consultation-paper-a-global-standard-to-modernise-uk-payments
13
https://www.bankofengland.co.uk/-/media/boe/files/payments/sap-terms-ofreference.pdf?la=en&hash=104B67B7AF846BF7837BF6762BDB7000C6B06A6F
7
All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx