What can the Bank of England learn from SWIFT?
Last month I was invited at the Bank of England to consult members of the RTGS Review committee on their efforts to rethink and redesign the Bank’s settlement system. Earlier this year the Bank
announced [1] plans to reevaluate its high-value RTGS infrastructure in light of the recent developments in the payments landscape, and so, a consultation process has been initiated to agree on a blueprint that will be implemented in 2017.
The Bank’s Real-Time Gross Settlement (RTGS) system was firstly introduced 20 years ago and regularly upgraded since then, however, the emergence of alternative payment providers (PSPs), the introduction of new technologies, and the recent changes in regulation
have created an unprecedented need to further evolve in order to address current and future demands. This exercise is of immense importance as it reconsiders a variety of factors such as fundamental policy objectives, functionality of the new platform, the
future role of the Bank, and access to settlement accounts. While all parameters are equally significant,
access to RTGS has attracted most of the attention since it is a hot issue for smaller and challenger banks that currently settle (or will have to settle) indirectly through a correspondent bank.
At the moment the Bank’s RTGS platform holds accounts for a number of financial institutions that settle their transactions either in real-time (via CHAPS and CREST) or on a deferred net-basis (via Bacs, Cheque & Credit, Faster Payments, LINK and Visa).
Having said that, only 10% of the banks in the UK enjoy this direct access. The rest 90% connect to the Bank’s settlement facility mainly via larger banks that offer settlement services. This limited direct access is mostly due to the rigorous measures – both
in terms of systems and financial (e.g. liquidity and reserve) requirements – that the Bank demands from RTGS members in order to safeguard its resilience and financial and monetary stability in the economy. So the question that arises is,
should the Bank alter its access arrangements and allow more banks and non-bank PSPs to open settlement accounts and have the potential to become direct members on various payment schemes? The answer to this problem is quite crucial as it could shape
payment trends in the near future and impact innovation in the sector.
Having spent a number of years researching the
history, economics and
diffusion of SWIFT [2] I think there are a number of lessons that the Bank of England can learn by looking at the development of the Society’s network, technology and business strategy
over the years.
Benefits from greater access
Access onto the SWIFT network has also been some sort of a ‘hot topic’ on a few occasions during its history that shaped the Society’s identity up to this day. When SWIFT started its operations in 1977, it was clear that it was “founded by banks for banks”
and letting more institutions onto the network was pretty much unthinkable as it could jeopardize the stability of the system and threaten the banks’ position as intermediaries. The network soon became immensely successful and even struggled to cope with the
amount of traffic that grew beyond any expectation. Some technical issues were soon resolved and it wasn’t long before the potential benefits of the private network were spread across the sector attracting the attention of securities firms that were keen to
join and transmit trade-related messages. After some resistance they were finally admitted onto the platform in 1987. The same story occurred during the early 1990s when fund managers demanded access and again, a decade later, when large corporates wanted
to link their treasury operations.
Overall, the aftermath of the expanded SWIFT user-base has been greatly positive and the community embraced the diversity of members. The increase in membership led to
further innovation both in terms of open standards as well as products and services provided onto the platform. A genuine dialogue was facilitated through SIBOS which still remains an effective stage to discuss industry issues and debate future
developments in payments, banking, and financial services generally. This form of collaboration between competing institutions – some times referred to as ‘co-optetition’ – has been at the heart of the SWIFT community since the beginning. In case BoE decides
on greater access, it will most likely result into banks and other payment providers competing over more meaningful things and encourage them to innovate for better products and services that will benefit the end customer.
Tiered membership and pricing
One of the key benefits of SWIFT’s growing membership has also been the ability to
lower messaging charges as the increased usage of the network reduced dramatically the marginal costs mainly due to the effect of the economies of scale [3]. This allowed SWIFT to also remain profitable and invest in new products and services
while upgrading regularly its technological infrastructure.
A similar picture could be drawn if the Bank of England allows greater access to settlement accounts. A fair pricing strategy can also be developed to benefit both high/low-volume and low/high-value users based on their usage and transactional value profile.
Furthermore, just like in the case of SWIFT, not all network users need to maintain the same status or membership type.
A tiered membership structure can allow for different user-requirements but also rights when it comes to voting or having a say on the way the system works. A similar arrangement could be worked out and account for a diverse user-base. This could also
be helpful in taking measures against money-laundering through enhanced reporting and other similar requirements that relate to data access which could also be useful in minimizing liquidity and operational risks.
Variety of connectivity solutions
Cost of ownership has traditionally been an issue for smaller financial institutions that sought access onto the SWIFT network, especially after the move to the SWIFTNet IP platform in 2002. To tackle this issue SWIFT introduced a variety of
standardized connectivity solutions that allowed members to safely access the network without investing in the full suit of communication, messaging, and security software that larger institutions with high volumes retained. Avoiding high implementation
and maintenance costs whilst upholding the security standards is something that BoE could potentially consider. A series of standardized connectivity solutions aimed at different groups of users that require access to the Bank’s settlement system could be
offered to accommodate various needs including that of the smallest and newest PSPs as well as the alternative challenger banks and payments-related Fintechs. In accordance to the SWIFT Partner Programme, the implementation of these gateway technologies could
be executed by certified technology partners who would ensure the quality criteria and standards or act as shared infrastructure providers and service bureaux that guarantee secure connectivity and messaging interfaces.
There is no doubt that by granting greater access onto the BoE’s RTGS system and settlement accounts it will have profound implications for a number of stakeholders and other digital infrastructures that interface with the Bank’s systems. It will also affect
other banks’ position and could challenge their business model as intermediaries in this process, giving more legitimacy to challenger banks and non-bank payment providers and change the ‘rules’ of the competition. Nonetheless, these developments may be inevitable
in the short term as regulators and payment systems representative bodies are also pushing for more access to established payment infrastructures. For example, in an attempt to enhance competition and encourage innovation in the payments sector, the Payment
Systems Regulator has called for wider participation in one of the UK’s payments infrastructures (VocaLink) which signifies a direction in the market towards further ‘openness’. While open platforms and broader access to digital payment infrastructures may
come with certain benefits, the Bank of England’s critical role demands a closer look to delivering change and requires steps to guarantee the system’s resilience and security.
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[1] Speech by Minouche Shafik given at the Bank of England, 27th January 2016.
[2] This was research conducted mainly at the London School of Economics & Political Science between 2006-2014.
[3] Image from "SWIFT Traffic and Pricing update" presentation, Moscow Business Forum, April 2015.
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Dr. Markos Zachariadis is Assistant Professor of Information Systems & Management at
Warwick Business School and a FinTech Research Fellow at the
Cambridge Centre for Digital Innovation (CDI), University of Cambridge. His research sits at the cross section of economics of digital innovation, financial technology studies, and network economics and
has studied extensively the economic impact of ICT adoption on bank performance, the diffusion of payment networks, and the role of data & standards in payments infrastructures and financial markets.