How is the UK electronic payments system underpinned?

In the United Kingdom, over 98% of sterling payments by value are made electronically and the ability to make electronic payments underpins the functioning of a modern economy. The Bank of England has a key role, along with other central banks, in keeping the UK electronic payments systems safe and reliable. Such payments are used by individuals to buy goods, by companies to pay salaries, by the government to pay for public services, and by banks to make transfers to one another.

In the United Kingdom, electronic payments can be made through a number of payment systems, such as CHAPS — the United Kingdom’s same-day, high-value payment system — or the Faster Payments Service, which allows retail payments to be made throughout the day, all year round. At their most basic level, all payment systems involve the transfer of funds from one entity to another.

The range of IT infrastructure that supports these payment systems must be highly resilient, since an infrastructure failure could greatly inhibit — or remove entirely — the ability of individuals and firms to make their payments. This would have severe consequences for economic activity. In the United Kingdom, the Bank of England provides a critical function through its role as a ‘settlement agent’ to allow direct participants in payment systems to settle their interbank payment obligations in central bank money. The Bank operates the Real-Time Gross Settlement (RTGS) infrastructure that acts as the accounting database for participants in the main sterling payment systems. The RTGS infrastructure also holds the central bank reserves balances for the banking sector. As of July 2014, the approximate value of reserves was £300 billion.

The Bank’s RTGS infrastructure accommodates two models of interbank settlement. The first is RTGS, where payment instructions are exchanged and settled in real time on a gross basis throughout the business day. CHAPS uses this model. The second is the periodic settlement of net obligations at the end of a ‘clearing cycle’, known as deferred net settlement (DNS). Retail payment systems, such as Bacs and Faster Payments, use this model.

The disadvantage of the DNS model is that it leaves obligations owed to the recipient bank unfulfilled until settlement occurs. This could result in a loss if the paying bank were to default before net settlement had been completed. This risk can be mitigated by, for example, requiring banks to collateralise these exposures as occurs in the Bacs and Faster Payments systems.

The Bank continuously seeks to improve the resilience of its infrastructure. Recently, enhancement of the resilience of payment infrastructure has become a higher priority for central banks. The Bank, together with other central banks, worked with SWIFT to develop a new RTGS contingency infrastructure with which to settle payments should the principal infrastructure become unavailable. The Bank is the first central bank to adopt this contingency solution, enhancing the resilience of the Bank of England’s Real-Time Gross Settlement infrastructure.

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