Bank of England anticipates ‘wider access’ to RTGS Settlement Accounts will increase competition and innovation in payments, and promote financial stability
Early step in Bank of England’s RTGS Renewal Programme, designed to improve strength, resiliency, flexibility and promote innovation in RTGS
UK and Australian regimes both supporting smaller entities to enter banking and payments market
Source: Bank of England
Point of View
On 13 April 2018, the Bank of England (BoE) granted TransferWise a Settlement Account, making it the first non-bank payment service provider (NBPSP) to gain access to central bank money in the UK. The BoE anticipates that broader access will increase competition and innovation in the market for payment services, and over the longer term, promote financial stability.
Opening up access to the BoE’s payment settlement infrastructure, RTGS, has been in the works for some time now. The BoE revealed its intentions to allow NBPSPs to open Settlement Accounts, in mid-2016. Changes to legislation, a strengthened supervisory regime, and modified RTGS account arrangements followed. And then in July 2017, the BoE announced that NBPSPs had become eligible to hold Settlement Accounts.
Along with access to RTGS, TransferWise is now a direct participant in the Faster Payments system. Direct participation in any of the UK payment systems – e.g. CHAPS, Bacs, Faster Payments, and LINK – requires an entity to hold a Settlement Account with the BoE, because ultimately all payments settle through RTGS. (Faster Payments does so on a deferred net settlement basis, in three batches per day.)
The initiative is an early step in the BoE’s RTGS Renewal Programme to deliver a ‘future proofed’ new settlement system in response to rapidly changing customer needs, technology and the evolving regulatory landscape. The BoE published a ‘blueprint’ for the Programme in May 2017.
Renewing RTGS is a comprehensive, multifaceted project, designed to meet strength, resiliency, flexibility and innovation objectives. The BoE’s first initiative under the Programme, concluded in November 2017, was to take over ‘direct delivery’ of CHAPS, which processes and clears high-value payments. Previously it was run privately. Further, in late-March 2018, the BoE began working on a DLT settlement model ‘proof of concept’, as part of its goal to “build [RTGS’s] capacity to interface with new payment technologies”.
Regulatory developments in both Australia and the UK are wideranging and evolving rapidly in response to fundamental changes in the market for financial services. Overarching objectives are to increase competition and innovation, typically by supporting new entrants. For example, by reducing regulatory requirements to be commensurate with the risks newcomers pose to the system.
Similarities and differences exist in the approach and timeframes of reforms in each jurisdiction. The UK has been an ‘early adopter’ of graduated licensing and open banking, while Australia has recently begun this journey.
On the other hand, ‘wider access’ to central bank money, has been in place in Australia for nearly two decades. Specifically, eligibility for an Exchange Settlement Account (ESA) at the Reserve Bank extends beyond just ADIs. Any “provider of third-party (customer) payment services with a need to settle clearing obligations” is, in principle, eligible. Non-ADIs are, however, subject to ‘special conditions’ (e.g. collateral requirements), while ADIs are not.
Moreover, the Reserve Bank changed its ESA policy, on 20 March 2018, so that “…smaller financial institutions that choose to become banks will not be obliged to go through the process of obtaining an ESA which then sits dormant while they use a settlement agent for their RTGS transactions.”
This change, along with APRA’s forthcoming restricted-licensing framework and Treasury’s open banking initiative, could support ‘neobanks’ entering the payments market, thus promoting competition, innovation and choice.