To what extent can the development of real time retail payment systems make use of existing infrastructure so as to keep costs down? Anna Milne speaks to SWIFT’s Carlo Palmers about its guidelines for adopting and implementing such a system and examines the Bank of England’s musings on blockchain technology
Real time payments (RTPs) not only benefit customers, they also help accelerate overall economic growth," says SWIFT’s information paper. Business RTPs can speed up cash conversion cycles, generate necessary working capital and reduce the need for short-term financing.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
A number of factors have driven the need for RTPs, not least of which is the advancement and adoption of mobile technology. But what else is driving banks to change the way they manage payments?
- Increased competition
- Increased regulation
- Changing payments technologies- blockchain/distributed ledgers
The Central Bank of Australia pledged to build a real time ledger system- fast settlement service on top of their real time gross settlement system (RTGS) and SWIFT was enlisted to build it around the infrastructure already in place. SWIFT integrated the intelligence that would typically be seen in a central hub- including message signing and validation to ensure compliance with the agreed standards and orchestration. "This is a distributed model and we call it ‘on the edge’," says Carlo Palmers, market infrastructures market manager at SWIFT.
"This design gives more resilience to the system as there is no central point of failure. If any bank drops out, the others can continue working due to the banks communicating directly with each other, not through a central component. Even if the central bank is down, the RTP system can continue."
By re-using the SWIFT infrastructure that all participating banks have in place already, costs were kept to a minimum- no separate operating centre had to be set up and it was just a matter of integrating an interface to communicate with RTP systems.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataThe Clearing House is looking at a system for the US market, and SWIFT is closely involved with participating banks to set up the opportunities. The size of the US market makes it a significantly different project. For a start "in Australia there are 12 direct participants, and in total a community of a few hundred banks- in the US we are talking potentially up to 14,000 participating banks. We use the population to get a size of such a system in a country. In Australia 22 million people are banked; in the US it’s close to 300 million; in Europe, 400 million.
The ECB wants to instigate a pan-European solution: "It’s pretty well known the Dutch solution is the most advanced. If this was used, they would have to ensure it was interoperable with anything else to be created in the European market," says Palmers.
SWIFT’s design guidelines
What are the key components of a 24/7/365 real time service?
- Low latency and high transaction volumes- transactions processed individually rather than in batches
- All payment types supported- high/ low value, attended/unattended, originating from all devices and across all types such as P2P, B2B, P2B or B2P
- Resilient rails to allow for business continuity, disaster recovery, high levels of operational support, customer support and trouble shooting
- Efficiently managed interbank settlement risk via deferred net settlement or pre-funded/gross settlement model
- Convenience and confidence for end-users: the ability to send payments using a mobile number
- Certainty of execution/non-execution in seconds
- Easy integration of overlay/value added services, via an open Application Program Interface (API)
- Cater for richer data- specify the use of ISO 20022 message standard, which caters for data such as extended/structured remittance information and non-Latin character sets
Furthermore, banks should be cost efficient (of course), cater for ubiquity (as always) and leverage industry standards.
Blockchain- threat or promise?
So what of blockchain and distributed ledgers, do they not pose stiff competition to this decentralised system? Palmers says not necessarily in terms of speed but to put the question to a central bank. So we did.
The Bank of England is monitoring the development of distributed ledgers and blockchain to ascertain the potential to reshape mechanisms for secure payments. Here is a snapshot of what was written in September 2014’s quarterly bulletin:
Achieving consensus– a central bank’s perspective
The defining feature of a distributed payment system is the manner by which consensus is reached about any proposed changes to the ledger. How to achieve consensus between people in a network when nobody can be completely sure who can be trusted has long been recognised as a problem in the field of computer science (This is known as the ‘Byzantine Generals Problem’, see Lamport, Shostak and Pease (1982)).
It is not sufficient to offer blanket acceptance to all statements, for example, because this creates an incentive to lie in order to gain an advantage. It is also not sufficient to have users vote on whether to accept a proposed change. This is because it is generally very easy for a single person to create many nodes on a computer network in order to distort the vote.
Future potential
The potential impact of the distributed ledger may be much broader than on payment systems alone. It may be possible in the future- in theory, at least- for the existing infrastructure of the financial system to be gradually replaced by a variety of distributed systems (although this article makes no prediction in this regard).
Some developers have already implemented so-called ‘coloured coins’ which means using digital currencies as tokens for other assets by attaching additional information. This development could allow any type of financial asset, for example shares in a company, to be recorded on a distributed ledger. Distributed ledger technology could also be applied to physical assets where no centralised register exists, such as gold or silver.
