Central Bank of Iceland's Journey in Instant Payments and Cannibalization of RTGS Payments

Introduction

Iceland's journey in the realm of instant payments is historic, dating back to 2002 with the initiation of the Central Bank of Iceland's large value payment system, SG, followed by the introduction of the instant payment system, JK, in 2003. These systems, collectively referred to as the Central Bank´s interbank payment systems, offered participants secure settlement in central bank money. They were developed and maintained by Reiknistofa bankanna (RB), a key technical service provider in Iceland who at the time also provided deposit systems for domestic banks. Housed on RB's mainframe, these systems enabled real-time payment processing, a feature relatively rare globally at that time.

Historic Instant Payments

Originally, JK was owned by Fjölgreiðslumiðlun (FGM), a company jointly owned by the Central Bank, commercial banks, savings banks and other payment intermediaries. In 2010, the Central Bank acquired all capital in FGM and sold its share in RB. Subsequently, FGM was rebranded to Greiðsluveitan (GV), acquiring several systems including the JK system and rights to the Central Bank's SG system. Thus, complete ownership of the systems transferred to the Central Bank, either directly or indirectly, though operated by GV.

Around the same time, in 2012, the Central Bank adopted a new system to take on the role as central settlement agent for Visa and Mastercard for domestic debit and credit card transactions in the Icelandic krona, thus increasing domestic security of settlement finality.

SG catered to high-value transactions (≥ 10 million ISK) during standard banking hours from 09:00 to 16:30, while JK handled lower-value transactions (< 10 million ISK) accessible around the clock. This limit has since been referred to as the high-value payment limit in Iceland. This operational distinction, combined with value-based routing of payments, marked a significant advancement in Iceland’s payment infrastructure, fostering the development of value-added services in the payment industry built upon instant payments.

Furthermore, these instant transfers have been free to end users from inception. This, along with Iceland‘s advanced access to internet and mobile phones, has contributed to near 100% financial inclusion. As Figure 1 shows, payment methods such as cheques quickly became obsolete with the introduction of instant payments.

Significantly, market participants’ communication with the SG and JK systems was designed as proprietary instant credit transfers (PICT), irrespective of whether the payment’s destination was to SG or JK and irrespective of the use case. This approach was necessitated by developments before the international standardization of instant payment protocols and was made possible by ...

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