Governmental Bodies - The Treasury, Central Banks, and payment operators.

Welcome back dear listeners to Bitesize Payments.  Today, we're going to explore a topic that's at the heart of every country's economy: our governmental bodies – The Treasury, Central Banks, and payment operators. 

Their roles are pivotal to any nation, but they are probably the least understood by Payment’s folk – generally the stakeholders and their ecosystems are best known in terms of corporate or retail payments and these Government bodies well let’s say not so much. 

You will know of many of their names, but may not know their history, how they work together and their responsibilities.   

I am very pleased to be joined today by Mark Hoban ex of the His Royal Majesties Treasury and the current Chair of the Pay.uk.

What do they do? How do they operate and who does what? And why are they so crucial? Let's find out!

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:01

Welcome back, dear listeners, to Bite Size Payments, where we try and go through the history of payments, how they work, and of course, who does what. Today, we're going to explore a topic that's at the heart of every country's economy, our governmental bodies, our treasuries, our central banks, and of course, the payment operators. The roles are pivotal to any nation, but they're probably the least understood by payments folk. Generally, we know about the ecosystems and the stakeholders of the corporate side or the retail side. Well, these governmental bodies, well, let's just say not so much. You'll know many of their names. You may not know how they work or what the responsibilities are. You may not even know what they do. How do they operate and who does what? Why are they so crucial to us? Buckle up. Let's find out. Here we go. Very pleased to today be joined by Mark Hoburn, ex of his Royal Magistries Treasury and the current chair of Pay.UK. Welcome, Mark. Hello, Paul. Good to see you. Good to see you too. So look, let's go through a little bit of the history of these bodies, as we always do. The first treasury was in fact the Treasury of England, which came into existence by 1126 in the reign of King Henry I. The treasury emerged as the royal household. It was literally where the king kept all his treasures, which is the same as me. Well, not really. The treasury was originally responsible for managing the king's finances, including his income from taxes, his expenditure on goods and services. It also oversaw the minting of coins, and we'll talk more about that in a minute. So many bodies in the past have collected taxes, and we've talked about that in previous episodes, that and the role of the knight's temple, etc., But as for central banks per se, we need to fast forward to 1668, where the Riksbank of Sweden was established, effectively marking the birth of central banks. Inspired by its success, the Bank of England was founded in 1694, followed by the Bank of France in 1800, and then the Federal Reserve in the United States in 1913. The original role of the Bank of England was to act as the bank for the government, helping the government raise money, and it was granted a monopoly on the issuance of banknotes in England and Wales. Today, there are over 100 central banks in the world. They play a pivotal role in the global economy by managing the supply of money, setting interest rates, and providing liquidity to their financial systems. The first payments operator was the Bankers' Clearinghouse, which was founded in London in 1775. This private association of banks met daily to settle payments among themselves. It was the pioneer in developing a standardized method for clearing payments between banks, making transactions easier and reducing the risk of fraud. The success of the Bankers' Clearinghouse led to its adoption in other countries. In the United States, the New York Clearinghouse was established in 1853, modeling itself on the London Institution. It quickly became the dominant payments operator in the US. Today, there are approximately 200 such operators around the world. The US has its treasury, the Fed as the central bank, the Fed and TCH as operators, While the EU's member states have their central banks alongside the ECB, but effectively it's the same type of model around the world. Many of you will not know much about treasuries in other countries, how they work and what they do, other than perhaps what you hear on the TV. So let's dive in a little more and let's start at the top. As an ex-treasury person, Mark, can you just help us how they work and what they do? So in the

SPEAKER_01: 4:22

UK, the treasury is... probably the most powerful government department because of the centrality it plays in spending decisions tax and setting economic policy so the treasury uses that power to influence whitehall to influence the broader economy and in its role as sponsor the financial services sector is also closely involved in setting the regulatory perimeter regulatory structures and being the sponsor for our sector So perhaps I could break that down a bit, Paul. I think there are three roles the treasury plays. So it's a finance ministry, it's an economics ministry, and it sponsors financial services. So let me take each of those in turn. So as the finance ministry, you talked, Paul, in your introduction about the treasury's origins as the keeper of the king's treasure. As the power to tax shifted from the king to parliament, parliament and particularly the treasury took a much more central role in decisions about how much the government should spend and how much it should tax. And so we see this in a very sort of public way when the chancellor stands outside number 10. with the red box in his hand. And I've been in that queue of ministers alongside George Osborne, who was a treasury minister. That's a very visible representation of the role of the treasury as a finance ministry. And if you think about that budget, what it sets out is the spending priorities of the government for that year, and how it is seeking to raise taxes to fund those spending priorities. And so the budget, again, is that very public manifestation of those roles. But it's not that George Osborne or now Jeremy Hunt sit there and say, there's a long leading process to get to that point. Tax policy is set by the Treasury. Treasury ministers will work closely with HMRC to work out what's the best way to raise that revenue. to think about some of the pressures taxes are under. So taxes can be used in lots of different ways. It can be used to incentivise behaviour, it can be used to penalise behaviour, so-called sin taxes, the taxes on cigarettes, alcohol, gambling, etc. So there's quite a long process of thinking through the tax options for a budget. On spending, this is where the Treasury exerts influence across Whitehall. because every spending request, including those from the prime minister, needs to be signed off by the treasury. And there are teams within the treasury who's a man mark government spending departments and challenge them on their spending. And I have to say, having spent time as a treasury minister and then moving to the Department of Work and Pensions as a minister there, I sort of felt the long arm of the treasury reaching into DWP where treasury officials had a great deal of knowledge of the work of the department. and their own ideas about how that department could work. And so it is those decisions around tax and spend that give Treasury a great deal of its power. So that's the manifestation of its role as a Ministry of Finance. It's tax and spend. Inevitably, Paul, those spending decisions and tax decisions have an economic impact. And that perhaps is a neat segue into the role of the Treasury as an economy ministry, that the treasury will have a view about the direction it wants the economy to take. It will have a view about areas that they want to see grow. So to give you a couple of examples, we talk quite often now about the success of the UK production of films. Many of these ideas may come from Hollywood, but they're executed in Elstree. And that's a consequence of the government positively favouring, through tax incentives, film production in the UK. There's a video games tax support for the industry in Scotland. The Treasury can have a view about how it supports the housing sector so you know when i was uh in the treasury uh when mortgages uh were expensive and then relatively short supply particularly for first-time buyers you know the treasury introduced the help to buy scheme to help stimulate uh the housing sector so that's good social policy, we wanted more people to own a home of their own, but also act as a stimulus to the house building sector. So you can see that the decisions the treasury takes in its role as finance ministry also has an economic impact. Now, the treasury is not the only economic department in Whitehall. The Department of Business and Trade will have a role in that. The new Department of Science, Innovation, Technology. But the Treasury is very much the guiding and motivating force in that role of driving the UK's economy in terms of what the government can do to drive that economy. And then I think the third role, Paul, is its sponsorship of the financial services sector. So when I was in the Treasury, I was the financial secretary to the Treasury, and my role was to effectively be the sponsor of the financial services sector within the Treasury and the UK government. And that role had several different aspects to it so it is the treasury that appoints the uh government bank of england or rather it recommends the queen or the king the government the appointment of the government bank of england we appointed the chair and ceo of the fca for example uh and when i was at the treasury i led the work that created the pra and the fca because prior to uh 2012, when these changes impacted, the regulation of all financial service activities sat within the FSA, as it was then called. But as we responded to the impact of the global financial crisis, we decided to separate out, so the PRA and the FCA became two separate regulators. The PRA sitting with the bank, looking after the prudential regulation of insurers and banks, and the FCA being predominantly a conduct regulator. So the Treasury sets the structure of the regulatory framework. It sets the perimeter. And as financial innovation continues, there's that debate about where the perimeter should be set. So you think about the debate about crypto. Are they regulated? Aren't they regulated? That's a decision the Treasury will take in conjunction with the regulators, but it's the Treasury that sets the legal framework. framework. So you've got that regulatory role the Treasury plays, but also as a city minister, I was interested in how we supported the UK's financial services sector, how we ensured it was globally competitive. At that stage, of course, we were in the EU, so we go to Brussels to champion the sector, we go to the States, because it's an important generator of employment and wealth and prosperity and tax revenue in the UK. So we had an interest in making sure it's successful, successful and safe, because at that point we're still living with the consequences of the global financial crisis. So the treasury has a really key role at the heart of government and at the heart of the economy. And that's why I go back, Paul, to my earlier comment about its dominance that's where its dominance springs from uh and of course what we what we've seen is the historically the relationship between prime ministers and chancellors exchequer are the most powerful relationships uh within government and can either be highly functional or as we have seen in the past very dysfunctional

SPEAKER_00: 13:15

yes i shan't comment on that um but um wow it's um That's a fantastic walkthrough of how they work and they really are the top of the house. So let's switch gear and talk a little bit about central banks. So in my mind's eye, I have the image of Gringotts Bank in the Harry Potter films as the image of a central bank. You know, it's kind of like the old fashioned image that there is people that are literally moving piles of gold from one account to another account. And at some time way back in the past, I'm sure that was true. But that's not been true for literally hundreds of years. In fact, I think the Bank of England stopped using gold as a standard in 1931. So just as a quick run through, and I'll use the Bank of England as an example. But in truth, most of the central banks around the world, they do very much the similar thing. So this is, I'm just going to use the Bank of England as an example. Bank of England is actually responsible for implementing all the points that Mark's just made. The Treasury makes the decisions and the Bank of England implements them. They issue currency. They have the sole authority to issue banknotes and coins. They actually create fiat money. And we've talked about what fiat money is before. They're also responsible for the UK's payment systems, which include the real-time gross settlement system and the CHAPS payment system and their clearing and settlement, of course. They provide liquidity to the UK's financial system and oversee commercial banks and other financial institutions for that matter. But effectively, they are the commercial bank's bank. They're also the lender of last resort. They provide emergency funds to financial institutions in times of a crisis. And we saw that not long ago in the UK. But of course, they also provide regulation and supervision, ensuring the safety and soundness of the banking system. And Mark, I know you want to expand a little on that.

SPEAKER_01: 15:24

Yeah, I do. And you talk about green guts there. I always think when I walk past the Bank of England, right in the heart of the city, this solid stone building, very traditional, but you go through the doors and I go and occasionally have meetings there and it's just like any other office. And I guess that reflects that central banks are very traditional, very historic, play some key role in the functioning of the banking system, but they also evolve. As you said, Paul, they're not moving you know, piles of gold around people's accounts, although they do hold the gold reserves. But, you know, they have modernized the time. And I think there's a aspect of their activities which is a constant. So the way in which, for example, they provide services to the banking sector, they act as lender as last resort, as you said, the creation of fiat money, very traditional. very longstanding roles for central banks. I think what's interesting is just where the boundaries between government and central banks shift. So, you know, I talked earlier on about the reforms I sort of led when I was in government, moving the regulation, the prudential regulation of banks and insurers into the Bank of England. Of course, prior to 1997, that was, they would regulate banks. And what had happened in 1997 was the then Chancellor, Gordon Brown, gave the Bank of England the independence to set interest rates. That had previously been the responsibility of the Chancellor of the Exchequer in the government of the day. But the other aspect of that package was to transfer the prudential regulation of banks from the Bank of England into the FSA. And fast forward to when I was in the treasury, we moved not just the potential regulation of banks, but also insurers back into the Bank of England. So you've got that fluidity there and the role of central banks and independent institutions vis-a-vis government changes over time. I think the second thing I just want to draw out is the expansion of the bank's regulatory power. So you said we've got the PRA is a division within the bank that supervises banks and insurers. One of the gaps that was recognized in the regulatory regime post-crisis was there are other payment mechanisms that needed the bank to supervise. And so you had the creation of the financial market. Infrastructure Division, FMID. And FMID is one of our two regulators here at Pay.UK. So we're regulated by FMID and also by the PSR, which looks more at the economic and competition aspects of payments regulation. So, you know, I think that the... the role of the Bank of England and the central bank was as much that a governor from the Victorian era would recognize, would also say that actually here we are in the early part of the 21st century. And there are things that he does not, would not recognize as part of the role of a central bank. So it is both traditional and it's also evolutionary.

SPEAKER_00: 19:27

Yes, indeed. And while we think about these things as and I have done in the series talked about the history. Actually, it's a very modern world and we're in the middle of a lot of change here in the UK. So let's kind of switch gears to the payment operations. Pay.UK, as you know, is the UK payments operator and Mark, you're the chair. Can you walk us through how they work, because that's another level of this that needs to operate for a country to be successful.

SPEAKER_01: 19:59

Absolutely. And you talked in your introduction, Paul, about the London Clearinghouse. You think about how banks settle transactions as money is moved from account to account. What Pay.UK does is it provides the infrastructure to enable the interbank retail rails to operate so the one that the two products that people are most familiar with with forpay.uk is backs and of course uh but backs is what we use to pay our electricity bills to get our salary or benefits payments into our accounts so direct debits direct credits very traditional part of the work that we do and you know the other um service we provide or principal service we provide is faster payments and so if you go into your bank app and make a payment from yes i've got a barclays account make a payment from my barclays account at my bank app it's it's it's fps that makes that transaction happen All your listeners would know that. I have to say, Paul, when I took on this role, I had to do a little spiel to tell friends and family and other contacts what Pay.UK does. So it's a multitude of really great products and services. Current account switching service. uh which were which were set up to enable competition uh between banks so that customers could be confident that if they move banks their uh standing orders and direct debits would follow them we operate that uh the check clearing system is again within our uh remiss so All those aspects of activity that are in the retail space, interbank payments, Pay.UK operates. We outsource the provision of the infrastructure itself to Vocalink. Our customers are the banks. And it's interesting, it's just worth just reflecting, Paul, just on the amount of change there's been in the system. When we launched Faster Payments, we had 10 customers. nine banks and one bill society now we have 42 and with a multitude of business models and that just demonstrates how uh pay.uk along with a broader ecosystem has facilitated competition and innovation uh in payments and that's an important part of what we do Yeah, absolutely. Core to everything that we do is the robust and resilient operation of our payment rails, because you want to know if you press the button on the payment, it's going to get to the right place at the right time with the right amount. So, you know, robustness and resilience is important. But alongside that, we support competition and innovation.

SPEAKER_00: 23:11

You know, it's interesting, Mark, I've actually used the current account switching twice. It's worked perfectly for me. And so I was a big advocate at the time when I was at the PSR. And I have to say, I've also done it in France and it didn't work so well. I don't want to get niggly here, but there were some differences there. But at least we forget a lot of the things that you talked about have led the world, the check clearing systems, faster payments, SPACs, what have you. These have been innovations that we brought. through the UK. And just about every country in the world now has some kind of immediate, real-time, faster payments methodology, and it's pretty much based upon the 2010 model. But anyway, so if I was just to summarize some of this, most countries have similar entities to the ones we just talked about here. They may come into the same houses, they may have different names, but the roles and responsibilities are very much the same. Effectively, treasury sets the policy, central bank manages the processes, and operators literally operate them for us. Mark, is there anything else you'd like to add here?

SPEAKER_01: 24:29

I think I'd go back to the point that you made, Paul, about innovation and competition. We have been world leaders, and we want to continue to be world leading. And I think there's a, you know, my reflection is there's been huge change in payments recently. over the last couple of decades. And I think there'll be huge changes to come. You know, and both we and the Bank of England are sort of digitizing our payment systems to improve the amount, increased amount of data that's transmitted along with payments. There's a story someone told me a few weeks ago, which I thought, it sort of to me sort of just demonstrates almost the unpredictability of the world in which we operate around payments. They went back to the iPhone and its creation and questioned whether Steve Jobs would have known when he developed the iPhone, the sort of range of apps that would be created off the back of that technology. So sometimes you make an advance and it is hard to predict the direction in which we'll go. because actually you're creating a platform or opportunity or technology that people will use. And I think that as we modernize the payments system, Increasingly, we will see people thinking innovatively, creatively about how do they use a modernised set of rails in order to improve the services they offer to their customers. And I think it's a very exciting sector to work in. So I'm really pleased to be able to chair pay.uk and be part of its journey as we work across the ecosystem to improve not just robust and resilient operation, but also competition and innovation.

SPEAKER_00: 26:22

Wow, Mark, thank you. Thank you for your insight and knowledge. I can't think of a better person to have helped us today. And I have to say the image of you being in the queue with the red bag will stay with me for a long time. Again, thank you so much indeed, Mark.

SPEAKER_01: 26:40

Thanks, Paul, and thanks for the opportunity. It's been good.

SPEAKER_00: 26:50

Well, there you go. A tour de force of governmental bodies. Great pleasure to speak with Mark today. His experience and insight of how treasuries work and of course his work now at Pay.UK has been invaluable. In my experience, as I've said a couple of times, I think one of the things that we see around payments is we tend to think about it from one particular vantage point, whether it's from the retail side or it's for the corporate side. But what I hope that Mark and I have shown today is that these central bodies are pivotal to what we need to get done. Treasury effectively makes the policies, the central bank implements them, and the operators operate them. My experience, not many people know much about them. But now, of course, you do, which is the most important thing. If, as ever, there are any questions, please do get in touch via bitesizepayments at gmail.com. And If you would be so kind, please do recommend the podcast to a friend. Cheers.