A wholesale payment system is a payment system that handles payments between financial institutions and other large market participants, rather than payments made by or to individual consumers. Its traffic includes interbank transfers, the cash legs of securities, money market and foreign exchange transactions, payments to and from central banks and other payment systems, and urgent high-value payments made on behalf of large corporate customers. Most countries have at least one wholesale system, usually operated by the central bank.
The term overlaps heavily with large-value transfer system, and in practice the two are often applied to the same systems. The emphasis differs: "wholesale" refers to the participants and markets served, while "large-value" refers to the size of payments. Wholesale systems are the counterpart of retail payment systems, which handle high volumes of lower-value payments between consumers, businesses and governments.
Wholesale payment systems in plain terms
Shops buy their stock from wholesalers, who deal only with businesses and sell in bulk, and then sell it on to customers one item at a time. Payments have a similar structure. When a customer pays a shop by card or transfer, that is a retail payment. Behind the scenes, banks have to settle what they owe each other because of millions of such payments, plus their own lending, trading and currency deals. Those big interbank transfers run on wholesale systems.
Ordinary people rarely see a wholesale payment system directly, but they depend on it. If it stopped, banks could not settle with each other, shares and bonds could not be paid for, and many retail payments would eventually stall, because the money behind them never finally moved.
How wholesale systems work
Most wholesale systems today are real-time gross settlement (RTGS) systems run by central banks. Participating banks hold accounts at the central bank, and each payment is settled individually and with immediate finality by debiting the paying bank's account and crediting the receiving bank's account. Settlement in central bank money means the receiving bank takes no credit risk on the sending bank once the payment is made.
Because RTGS needs a lot of liquidity, central banks provide intraday liquidity, usually through collateralised intraday credit, and many systems use queuing and offsetting to save funds. Some wholesale systems are privately operated and settle on a net or hybrid basis, with final settlement in central bank money at set times.
Examples
- United States. The Fedwire Funds Service, run by the Federal Reserve Banks, and the privately owned CHIPS.
- Euro area. The Eurosystem's T2 and the private EURO1 system operated by EBA CLEARING.
- United Kingdom. CHAPS, which settles in the Bank of England's RTGS service.
- Foreign exchange. CLS, which settles FX trades across many currencies through links to the relevant central bank systems.
- China. The China National Advanced Payment System for domestic renminbi payments, and CIPS for cross-border renminbi payments.
Links with financial markets
Wholesale payment systems are tightly linked to the rest of the financial system. Securities settlement systems rely on them for the cash leg of trades, often through delivery versus payment (DvP) arrangements. CLS relies on them for payment versus payment (PvP) settlement of currency trades. Central counterparties use them to collect margin and pay members, and central banks use them to carry out monetary policy operations. Because of these links, wholesale systems are usually treated as systemically important payment systems and are expected to meet the international Principles for Financial Market Infrastructures.
Wholesale compared with retail
| Feature | Wholesale systems | Retail systems |
|---|---|---|
| Participants | Banks, other financial institutions, FMIs, central bank | Banks and payment providers acting for consumers and businesses |
| Payment size | Mostly large | Mostly small |
| Volume | Low relative to value | Very high |
| Settlement | Mostly real-time gross in central bank money | Often deferred net, or instant with net settlement behind it |
| Main risks | Liquidity, operational, systemic | Fraud, operational, credit between settlements |
Developments
Wholesale systems have been changing in several ways. Many have migrated to ISO 20022 messaging, extended operating hours and widened access to non-bank payment providers. Central banks are also exploring wholesale central bank digital currency and ways of settling tokenised assets in central bank money, through projects coordinated by the BIS Innovation Hub and national experiments, while commercial banks are testing tokenised deposits for interbank and corporate transfers. These efforts aim to make wholesale settlement faster and available for longer hours while keeping the safety of central bank money.