Bank of England to develop blueprint for overhaul of UK payments system

Bank of England to develop blueprint for overhaul of UK payments system

The Bank of England is developing a blueprint to modernise the UK's 20-year old real-time gross settlement system to deal with changing payment habits and the emergence of distributed ledger technology.

In a speech to payment stakeholders, Minouche Shafik, deputy governor for markets and banking, says that as the range of cashless, real-time and mobile payments options continue to increase it is "time to ask fundamental questions about the shape of the Bank’s settlement operations”.

The current system settles almost a third of the UK’s annual GDP - or about £500bn - every single day, covering everything “from salaries to company invoices, from car purchases to coffee sales, from pensions to investment flows”.

Shafik was put in charge of a reconstituted RTGS board after the UK's high value payment system Chaps suffered a ten-hour breakdown in October 2014. In a review of the incident, conducted by Deloitte, the root cause was identified as the "introduction of defects as part of functionality changes made to the RTGS system in April 2013 and May 2014".

In its analysis, Deloitte says that the while the complexity of Chaps has increased over time, the extent and nature of testing has not evolved to match this.

Describing RTGS as the 'beating heart' of the UK's payment system, Shafik acknowledges that the importance of resilience cannot be overstated - "a persistent disruption to people’s ability to make and receive payments would cause great damage to the UK economy” - but also emphasises the importance of future-proofing the system to meet changing demands.

As an example, she points to the emergence of distributed ledger technology (DLT), which enables verification of payments to be decentralised, removing the need for a trusted third party.

The Bank is currently undertaking work to understand the implications of new digital or e-monies and new methods of payments and financial intermediation as part of its One Bank Research initiative

"The emergence of various forms of distributed ledger technology...may reshape the mechanisms for making secured payments", says Shafik. "Instead of settlement occurring across the books of a single central authority (such as a central bank, clearing house or custodian), strong cryptographic and verification algorithms allow everyone in a DLT network to have a copy of the ledger, and give distributed authority for managing and updating that ledger to a much wider group of agents".

Other technology challenges arise from the arrival of application programming interfaces and machine learning tools, while the demand for real-time retail payments can make it harder to implement effective defences against money laundering, terrorist financing, identity theft or other forms of fraud.

Shafik sets out the four overarching questions which the blueprint for sterling settlement will seek to answer. First, what should the Bank’s policy objectives be in the delivery of sterling settlement in central bank money? Second, what functions should the UK High Value Payments System have? Third, who should be able to access it, and how? And, fourth, what should the role of the Bank of England be in the delivery of that service?

Shafik emphasises that “when we make investment decisions in systems that will last for a decade or more, they need to enable the kinds of changes that users will demand. So we need to make sure that we have ‘optionality’ built in so that we can cope with different states of the world".

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 29 January, 2016, 13:49Be the first to give this comment the thumbs up 0 likes

I totally agree that downtime in electronic payment systems causes pathetic Customer Experience. But to claim that it causes "great damage to an economy" is a major exaggeration. Take India for example: It has a relatively high rate of failed electronic payments and it also the highest growth rate among the world's large economies. When a card payment fails, people switch to cash; when an NEFT payment fails, people switch to card. There's no major damage to the economy. IMO, it's a very fragile economy in the first place if people give up economic activity just because one mode of payment is not available for a few hours. Not for a second am I advocating downtime but it's just that, in my experience, over spec'cing uptime % - Three 9s / Five 9s etc. - on the basis of doomsday predictions of consequences of downtime often multiplies project cost. This in turn renders many projects unviable or, worse, to diversion of part of testing budgets to infrastructure.