Innovating Payments

Summary

Project Meridian is a collaborative initiative between the BIS Innovation Hub London Centre and the Bank of England. This project explores how advancements in financial technology can enhance real-time gross settlement (RTGS) systems, which are essential to the functioning of modern electronic payment systems.

Project Aim

The goal is to achieve synchronized settlements by connecting RTGS systems with other asset ledgers through Distributed Ledger Technology (DLT). A key innovation of this project is the introduction of a “synchronization operator,” tasked with facilitating the interaction among various stakeholders during the settlement phase of transactions.

My Contribution
I was tasked with designing user interfaces for conveyancers and developing a separate front-end to display the project’s individual API calls. This role involved translating complex system functionalities into user-friendly interfaces that enhance stakeholder interactions and system transparency.

Project Results

"The Project contributes to the international community of central banks who are considering modernisation of their payments infrastructures to improve wholesale settlement. From the Bank of England’s perspective, the project will inform their further work on delivering the synchronisation feature as part of their future roadmap for RTGS beyond 2024"

"Project Meridian has successfully demonstrated that synchronised settlement could be achieved in RTGS systems that have synchronisation functionality. In considering how to implement synchronisation in RTGS systems, the assumptions in the prototype need to be assessed."

"Central banks review RTGS functionality on an ongoing basis. Project Meridian will inform how synchronised settlement functionality could be incorporated in to RTGS systems. In the United Kingdom, the Bank of England is currently modernising its RTGS infrastructure."

- Bank of International Settlements 2023

Design & Test Phase

Prototype Development:

Construct the initial prototype and conduct testing with key stakeholders including commercial banks and conveyancers. Collect and incorporate feedback from various financial institutions such as MAB Law, Talbots, Lloyds, and NatWest to refine the prototype.

Final Design and Handover

Project Completion:

Finalise the design based on feedback and testing results. Officially hand over the completed project to the Bank of England and the Bank of International Settlements, ensuring a smooth transition and operational integration.

Timeline

Discovery Phase

Goal Definition:

Establish clear project objectives. Engage in extensive learning about CHAPS payments and the RTGS system. Conduct knowledge transfer sessions with the Bank of England and the Bank of International Settlements to ensure alignment and comprehensive understanding.

Pain Points

Challenges with Current Processes

Current settlement processes often require repetitive manual tasks and frequent data reconciliation among multiple parties. This not only consumes time and incurs costs but also introduces a high risk of errors, creating uncertainty for all involved.

Automation could significantly reduce these costs and enhance transparency throughout the process.

Impact of Non-Synchronized Settlements

In the absence of synchronized settlements, escrow arrangements are typically used to mitigate settlement risk. Funds are transferred to and held temporarily by a trusted third party until the settlement is complete. This practice prevents the funds from being used elsewhere or earning interest, imposing a liquidity cost on the participants. This cost becomes even more substantial in cross-border payments, where funds may be held for extended periods due to varied international processes.

The lack of synchronization functionality restricts market participation, limiting it to established entities. Introducing synchronization allows for the inclusion of new entrants, broadening market access and enhancing competitive dynamics.

Context:

What is Real Time Gross Settlement?

The Bank’s RTGS infrastructure is an accounting system. It is the infrastructure that underpins settlement of sterling payments, rather than being a payment system itself.

What happens today?

Most payments are now made electronically, with banks and other financial institutions using accounts in RTGS to settle money owed to one another from the payment systems.

What is a payment on Hold?

A hold is a temporary delay in making funds available.

What is a Earmakring?

Earmarking is the practice of setting particular money aside for a specific purpose.

Wireframes

During Project Meridian I had to create wireframes with cross functional teams; below is an image establishing how chain identifying could work, it consists of new component designs to accompany the new payment system.

Initial designs were too complex to build for the project due to the API priority and project time scales. Here were some of my design components before I understood the full design brief. Now it must be simple.

I collaborated with cross-functional teams to develop wireframes that explore innovative approaches to payment identification.

These wireframes represent new component designs intended to enhance the functionality of the evolving payment system.

Initially, the designs I conceived were intricate, reflecting a comprehensive approach to system functionality.

However, these were streamlined to align better with the project's priorities concerning API integration and the defined timelines.

The initial design components, while detailed, provided valuable insights that helped refine the understanding of the project's scope. The focus has now shifted towards simplicity and efficiency, ensuring the final designs are both practical and scalable.

Prototype

In response to the project's focus on API integration and adherence to set timelines, we tailored our approach to deliver designs that were both streamlined and strategically oriented. Below, the initial prototypes are presented:

The prototypes showcase how a Distributed Ledger Technology (DLT) network can seamlessly connect with the robust and secure centralized systems of transaction participants, including the RTGS operator, through open-standard application programming interfaces (APIs). When a digital representation is absent, a new one is introduced within the prototype to evaluate the feasibility of this approach.

User Personas

The user personas considered in Project Meridian prototype are those typically involved in a housing transaction: the operator of an RTGS system, the asset ledger and the commercial banks and legal representatives of the buyer and seller.

Synchronisation Operator

This operator would interlink RTGS systems with other financial market infrastructures (FMIs) and ledgers, automatically orchestrating the exchange in ownership of funds and assets.

RTGS System

RTGS stands for Real Time Gross Settlement. It is a money transfer system that allows the transfer of funds from one bank account to another in real-time and on a gross settlement basis.

HM Land Registry

The digital deed is sent from the synchronisation operator to HM Land Registry to update asset ownership.

Commercial Banks

Commercial Banks will put funds on hold

Conveyancing Solicitors

Conveyancer registers the transaction on the synchronisation network by inputting sources and destinations (and chain details).

Project API Journey

End of project prototype recording 2023

01

Synchronisation operator views asset details and requests transaction to be put on hold.

04

Synchronisation operator requests settlement. RTGS Settles.

02

Commercial Banks confirm hold. Conveyancer can check off client proof of funds and deposit from client.

05

Conveyancer can download digital deed with updated register.

03

Synchronisation operator requests earmark authorisation. RTGS Approves.

06

HMLR can acknowledge the updated register proposal. Lastly, HMLR can raise requisition or update register.

Future considerations

Policy

The roles and responsibilities of synchronisation operators and granting non-residents access to RTGS systems need further consideration.

RTGS operating hours

Synchronisation services would be restricted by existing RTGS operating hours. In some cases using synchronisation for cross-border transactions would be restricted to the overlapping operating hours of the two RTGS systems.

Control points

The synchronisation operator is responsible for holding, earmarking and releasing funds on an RTGS account holder’s behalf. To provide the owner of the funds with assurance over the synchronisation operator’s actions, a control point has been introduced before placing a hold or earmark.

Digital representation of asset ownership

We do not know that the timestamp of a digital deed, as implemented in the Meridian prototype for the housing market, would be legally deemed as a change of property ownership.

Security

A trust model for synchronisation services needs to be considered.

what are the regulatory and legal implications of commercial banks holding funds in clients’ accounts to prevent them from being used for other purposes in advance of a transaction date?

Settlement finality

At what point does the movement of cash in an RTGS system and the movement of the asset become final and irrevocable?