Payments and market infrastructure development – wholesale: Reserve Bank of New Zealand

NZ central bank has embraced major payments infrastructure changes to reduce risk and future-proof country’s payments landscape


Wholesale payments and settlement infrastructure is crucial to the effective functioning of the financial system and ensuring it fulfils its social and economic role. But by 2014, New Zealand’s first-generation real-time gross settlement (RTGS) and central security depository systems were, as in many countries, becoming dated. As a result, most of the time, money and efforts channelled into the systems were related to maintenance and patchwork, preventing the Reserve Bank of New Zealand and industry from advancing the country’s payments landscape.

“It was basically a treadmill, and we weren’t really adding any functionality. We could see the writing on the wall that either we upgrade the existing systems or we take the plunge and go to market for a new system,” Mike Wolyncewicz, assistant governor and chief financial officer, tells Central Banking.

February 26, 2020, marked the end of a five-year-long project to modernise New Zealand’s wholesale payments infrastructure. The launch of the new RTGS system, Exchange Settlement Account System (ESAS) 2.0, and Central Security Depository (CSD), NZClear 2.0, has provided the central bank with a secure platform to look towards a future of round-the-clock banking innovations.

Equally important to the central bank’s ambitions to exploit payment innovations, however, was a need to de-risk its infrastructure. The two ageing systems shared the same database, dramatically increasing operational and cyber risks. New Zealand has experienced denial of service acts on other key services in the recent past, such as the August cyber attack on the New Zealand Stock Exchange.

“The payment systems’ risk was right up there with the highest risks in the bank at the time,” Steve Gordon, head of payments services and previously head of risk, tells Central Banking. “This whole journey has been a massive exercise of good risk management and future-proofing the payment environment in New Zealand.”

Quality and resilience

The RTGS and CSD systems are both supplied by Perago, which is owned by European technology and banking infrastructure provider SIA. The off-the-shelf RTGS system reduced the complexity present in the bespoke legacy system, and ensured greater quality, Wolyncewicz says, adding that the systems also no longer share the same database.

“We can get the benefit of what SIA do for all their customers, and we know the quality will be higher because it would have been tested so thoroughly in other jurisdictions,” he tells Central Banking.

“Separating the databases should give us a real step-up regarding cyber security and diversification.”

SIA also provided an additional layer of protection in the form of its contingency solution. As well as the RBNZ’s usual backup sites, SIA has provided the RTGS Extreme Contingency Service (RECS), based in Milan. The facility is comparable to Swift’s Market Infrastructure Resiliency Service.

RECS provides us with a higher level of resilience than we have ever had,” says Gordon.

Effective communication

Reserve Bank of New Zealand
Photo: Phillip Capper/Flickr

The joint introduction of two new core pieces of infrastructure was not only a technology challenge, but a major communication feat. While the motivations of de-risking and modernisation were well understood by the industry, persuading institutions to part with years of customisation in legacy systems and dozens of connections with back-office systems required extensive co-operation and support from the central bank.

The RBNZ had to “win the hearts and minds” of not only the users, but also their IT, risk, and network and security departments, says Shiree Hart, the change manager at the RBNZ responsible for looking after industry during this project. The testing of process and code changes, new methodologies and rollback protocols required close communication with all levels at the relevant institutions.

“From a purely technical perspective, it wasn’t just our eight applications going live: we had 60 members who all had new systems going online on the same day with full contingency plans to roll back – it was a big bang,” Liesle Venter-Wagner, programme manager for the payment replacement systems, tells Central Banking.

Effective communication throughout the project was “extremely important”, given the “enormous” impact on bank’s own systems and the risks of failure to the industry, says Paul Grant, senior markets and payments operations manager at Australia-based bank ANZ.

“The Reserve Bank did particularly well in engaging with not only the smaller members, but it also made particular effort to get the larger members on board and to collaborate with us through the whole process. And it started this very early on. It was really fantastic.”

The RBNZ set up various communication channels for raising concerns and testing packages so that everyone experienced the change knowing exactly what was expected.

“There was really good communication all the way through,” Bishnu Ghoshal, head of operations and client services at Westpac, tells Central Banking.

“Shiree Hart did a marvellous job managing the project: she built up relationships really quickly with all of the change managers across the industry, and made sure that she was available at any point in time.”

‘Baptism of fire’

The RBNZ deployed strategies prior to the launch and during the testing phase to ensure the system settled quickly following the launch. One of these involved a prior functionality change in mid-2019, where the RBNZ phased out some of the old functionality to reduce complexity for the final systems change.

“Removing functionality from the old system well ahead of launch was a very clever decision,” says ANZ’s Grant.

“We had lots of time to adjust, so when we went live with the new system, we were already prepared. That was a very important part of their strategy.”

The efforts appear to have paid off. The new system had a “baptism of fire”, going live just weeks before the country went into full lockdown, Venter-Wagner tells Central Banking. Because of market volatility and central bank interventions during March and April, the volume and value of the transactions being processed spiked to three times the levels tested before going live.

“Infrastructure is volatile, and you increase the risk of failure when you introduce new infrastructure and exercise it early on,” says Venter-Wagner.

“We really touched on the outer limits of our performance testing in the real go-live environment, and the system held up so well.”

RBNZ officials suspect the old system “would not have been able to cope” with the volumes experienced in the early stages of the pandemic, Wolyncewicz says. The new systems have faced two minor glitches but no major issues since going online.

In addition to the transaction surges, the RBNZ was coping with the combined pressures of restructuring the business-as-usual team, requiring the recruitment of new staff, and the working-from-home regulations.

“Anything that could have been thrown at both our systems was being thrown at us,” says Gordon.

“Against that backdrop, it has gone remarkably well – the technology stood up to the test, and the people stood up to the test.”

New functionalities

New Zealand’s financial services industry is keen to make use of some of the new existing functionalities in the system to significantly reduce credit and liquidity risks. For example, the new RTGS system enables banks to send future-dated payments, which would reduce payments risk and improve efficiency.

“We don’t have to hold all these payments in our internal payments architecture: we can send it down to ESAS, where it can be held,” ANZ’s Grant tells Central Banking. “This removes some risk and speeds up the release of the payments first thing in the morning.”

Another feature ANZ is exploring is real-time securities settlement for CSD members that are not RTGS members. Currently, the Reserve Bank operates an end-of-day settlement process for intraday transactions with this group of members, which increases settlement risk at the end of day, Grant says.

“The real-time capabilities remove all of the intraday liquidity and credit risk you unnecessarily carry,” says Westpac’s Ghoshal.

Looking to the future

Following the successful implementation of the new infrastructure, the RBNZ has turned its attention to the future. The central bank is working with industry body Payments NZ on a seven-day banking strategy, which they hope will pave the way for 24/7 banking. The RBNZ is also assessing the adoption of the ISO 20022 messaging standard, which is quickly becoming the global benchmark for cross-border payments.

Adapting to these changes is now easier because of the system’s ability to support “iterative changes” and updates, says Westpac’s Ghoshal. Under a future seven-day banking regime – and particularly with a 24/7 system – maintenance windows are much smaller. The new system enables change managers to make adjustments without major re-engineering requiring long outages.

“In terms of the broad payments landscape, it also allows us to think more holistically around cash and hard currency, electronic payments mechanisms, and how best to position all of that offering in New Zealand,” says ANZ’s Gordon. He notes that the RBNZ will soon establish a new committee aiming to take this more holistic approach to the future of New Zealand payments.

Quickly evolving bank customer demands for faster and more intelligent services has meant these new systems could not have come at a more important time. A challenge the RBNZ, and the industry as a whole, was struggling with was the ability to adapt to industry changes and innovations in the market. As Ghoshal says: “We now have an infrastructure that is not only going to meet today’s requirements, but also helps meet future requirements.”

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, William Towning and Alice Shen

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