Guest Articles / Learning brief
Domestic Payment Schemes in the UK – Part 2
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In simple terms / 01
What this means in plain language
Builds the case for central-bank real-time gross settlement as a way to achieve payment finality while limiting counterparty risk.
Real-time gross settlement processes eligible interbank obligations individually in central-bank money rather than waiting to combine them into a later net position. Once settlement is final under the applicable rules, receiving participants can rely on the completed transfer without taking ongoing settlement exposure to the sending bank. This reduces counterparty risk but requires participants to manage liquidity carefully, because each payment needs funding when processed. Queues, prioritization, collateral, and liquidity-saving features can help institutions balance timely settlement with the cost of holding available funds.
Complete lesson / 02
Understand the full idea, step by step
Part 1 introduced the UK's schemes from the customer's side — Faster Payments arriving in seconds, Bacs carrying salaries and Direct Debits, CHAPS for the house purchase. This second part turns the picture around and asks the interbank question: after all those customer credits, when and where do the banks themselves actually get paid?
How Faster Payments settles
The Faster Payments Service (FPS) is instant for customers and deferred net between banks. As payments flow all day and night, the scheme's central infrastructure keeps a running multilateral net position for every participant. Several times each working day, those positions settle across the participants' settlement accounts at the Bank of England — the UK's real-time gross settlement service is the book on which the scheme's net movements land. Between settlements, each participant's net debit position is capped, and the cap is fully backed by funds the participant has set aside at the Bank of England. If a member failed mid-cycle, its obligations up to the cap could still be settled from that prefunded money — which is what makes it safe for Nordbank to give Arjun the money before Bank Alfa has paid.
How Bacs settles
Bacs, the scheme behind Direct Debit and Bacs Direct Credit, runs on a multi-day cycle: files are submitted, processed, and delivered ahead of the day the money moves. On that day, the scheme's multilateral net positions settle across the same settlement accounts at the Bank of England, and the customer entries — the salary credits, the collected Direct Debits — take effect. The pattern is the same as FPS in slow motion: customer legs on the banks' own books, one net interbank movement per participant on the central bank's book.
| Bank Alfa, FPS payments sent this cycle | GBP 4,210,000.00 |
|---|---|
| Bank Alfa, FPS payments received this cycle | GBP 3,950,000.00 |
| Bank Alfa's net position — pays | GBP 260,000.00 |
Thousands of individual payments in both directions collapse into one number per participant per cycle. At settlement, the Bank of England debits Bank Alfa's settlement account GBP 260,000.00 and credits the participants on the other side of the netting. The customers were paid hours ago; this is the banks squaring up.
Riya's GBP 850.00, the interbank view
- INSTRUCTION
Riya instructs Bank Alfa; it validates, screens, and debits her account GBP 850.00.
- MESSAGE
Bank Alfa sends the payment message through the FPS central infrastructure, which passes it to Nordbank and collects Nordbank's accept-or-reject answer within seconds.
- LEDGER
Nordbank credits Arjun's account. Arjun can spend the money — even though, between the banks, nothing has settled yet.
- CLEARING
The GBP 850.00 joins the running multilateral net positions the scheme tracks for every participant, secured within each participant's prefunded cap.
- SETTLEMENT
At the next settlement cycle, the net positions move across the participants' settlement accounts at the Bank of England. Only now is Bank Alfa's debt to Nordbank discharged.
- NOTIFICATION
Settlement confirmations flow back to the scheme and the participants, whose reconciliation teams match positions against the entries on their Bank of England accounts.
How can Nordbank afford to credit Arjun before it has been paid?
Because the exposure it takes is measured and secured. Between settlement cycles, Nordbank is trusting Bank Alfa for the net amount owed — but the scheme caps that net position, and the cap is fully covered by money Bank Alfa has already set aside at the Bank of England. If Bank Alfa failed at the worst possible moment, the prefunded amount would settle its obligations up to the cap. Nordbank is not relying on hope; it is relying on collateralised arithmetic.
COMMON CONFUSION
“Faster Payments is instant, so the money moves between the banks instantly too.”
Only the customer legs are instant. Between banks, FPS is a deferred net scheme: obligations accumulate and settle in cycles across the Bank of England. This is a genuinely different design from CHAPS, where each payment settles individually and finally at the moment it is made — and it is why the same GBP 850.00 is final for Arjun long before it is final between Bank Alfa and Nordbank.
| FPS | Bacs | CHAPS | |
|---|---|---|---|
| Payee sees money | Within seconds, any day | On the final day of the cycle | On settlement, same day |
| Interbank model | Deferred multilateral net | Deferred multilateral net | Gross, payment by payment |
| Settlement at the Bank of England | In cycles through the working day | Once, on the day the money moves | Continuously, as each payment settles |
| Between settlements | Positions capped and prefunded | Scheme membership and settlement arrangements | Nothing pending — already final |
STRICTLY SPEAKING
Strictly speaking, the number of daily settlement cycles, the sizing of net position caps, and the mechanics of the prefunded collateral are set by the schemes and the Bank of England's settlement arrangements, and they have changed as the Bank renews its RTGS service — so this lesson describes the design and deliberately quotes no timetable. Scheme operation itself has also been consolidated under a single retail operator; the settlement anchor at the Bank of England is the stable part of the picture.
FOR NOW, REMEMBER
- FPS is instant for customers and deferred net between banks: positions accumulate and settle in cycles across settlement accounts at the Bank of England.
- Between cycles, each participant's net position is capped and fully prefunded, so a member failure cannot strand the payments already made.
- Bacs follows the same net-settlement pattern on a multi-day cycle, settling at the Bank of England on the day the money moves.
- CHAPS is the contrast: gross, payment-by-payment settlement, final the moment each payment is made.
TRY IT YOURSELF
Mid-morning, an FPS participant fails, holding a net debit position from payments its customers sent since the last settlement cycle. Arjun received one of those payments an hour ago. What happens?
FPS and CHAPS are one country's answer to the same question every system faces: settle each payment alone, or net and defer? The topic behind this lesson takes that trade-off apart in full.
KEEP GOINGKey takeaways / 03
Three things to remember
- 01
Gross settlement handles obligations one by one.
- 02
Central-bank settlement supports strong payment finality.
- 03
Lower counterparty exposure creates greater intraday liquidity needs.
Practical use cases / 04
Where you would use this
A treasury desk monitors liquidity for high-value payment activity.
A risk analyst compares gross and net settlement exposure.
An operations team prioritizes urgent payments when available liquidity is constrained.
Worked example / 05
Put the idea into a real situation
Illustrative example: Bank A must send a high-value payment to Bank B. The settlement system checks whether Bank A has enough available funds or permitted liquidity support. If funded, the accounts at the settlement institution are updated individually and the transfer becomes final according to system rules. If not, the instruction may queue. Bank A's treasury team can add liquidity or reprioritize payments to release it.
Operational sequence / 06
Follow the message and decision path
This compact sequence is a learning model. Exact routing and rulebook behavior can vary by scheme, participant, and implementation.
Read the steps as text
- 01MessageBank Alfa submits the CHAPS paymentBank Alfa (sending bank) → CHAPS · pacs.008
Bank Alfa must pay a high-value sterling obligation — the completion monies on a property purchase — to Nordbank, so it sends an interbank payment (a pacs.008) into CHAPS. Since the ISO 20022 migration on 19 June 2023 the message carries richer structured data, including the Purpose Code and Legal Entity Identifier (LEI). Nothing has moved yet — it is an instruction.
- 02ProcessingCHAPS checks Bank Alfa's available liquidityCHAPS → Bank of England (RTGS)
Before it settles anything, CHAPS checks whether Bank Alfa's settlement account in the Bank of England's RTGS infrastructure holds enough available liquidity to cover the full GBP 850,000.00 amount.
- 03SettlementThe Bank of England settles the payment in central-bank moneyBank Alfa (sending bank) → Nordbank (receiving bank)
With liquidity confirmed, the Bank of England debits Bank Alfa's settlement account and credits Nordbank's, one payment at a time. CHAPS settles each payment individually in central-bank money, without any prior netting, and the transfer is final the instant it settles.
- DR Bank Alfa's settlement account at the Bank of England — GBP 850,000.00
- CR Nordbank's settlement account at the Bank of England — GBP 850,000.00
- 04MessageNordbank is confirmed of the settled paymentCHAPS → Nordbank (receiving bank)
CHAPS tells the receiving bank that the funds are on its settlement account at the Bank of England and are final, with the payment details — including the Purpose Code and LEI — it needs to apply.
- 05PostingNordbank books the incoming fundsNordbank (receiving bank)
Because the interbank leg already settled with immediate finality, Nordbank records the credit on its own ledger without waiting for anything else. The property completion is paid, end to end.
- CR Incoming settlement account at Nordbank — GBP 850,000.00
Evidence & review / 07
Evidence & review
United Kingdom: Faster Payments Service, Bacs, and CHAPS settling across the Bank of England; cycle counts, caps, and collateral mechanics per current scheme and Bank of England arrangements
What this brief simplifies: Settlement cycle timetables, cap sizing, and collateral mechanics are described qualitatively rather than quoted, since they change with scheme rules and the Bank's RTGS renewal. Fictional cast banks stand in for UK participants.
Sources for this brief4
- Market practice
CHAPS ↗ — Bank of England · Bank of England RTGS and CHAPS — settlement for UK payment schemes
The Bank of England has operated CHAPS directly since November 2017; participant-facing reference documents are published separately.
- Market practiceMarch 2003 edition
A glossary of terms used in payments and settlement systems ↗ — CPSS (now CPMI), Bank for International Settlements · Deferred net settlement, prefunding, settlement finality
Terminology has evolved since this edition; newer CPMI publications refine some definitions.
- Official requirement
Principles for financial market infrastructures ↗ — CPMI and IOSCO (Bank for International Settlements) · Credit and liquidity risk management in deferred net settlement systems
Published by the CPSS (now CPMI) and IOSCO; contains 24 principles plus responsibilities for authorities. This site uses it only for high-level concepts such as settlement finality.
- Simplified educational illustration
Payments Signal editorial teaching models — Payments Signal · Fictional participant positions and worked netting example
Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.