The project, which is due to be completed by 2005, will also see Bacs migrate to an IP-based network in a drive to handle growing demand for electronic payments and provide more flexible services for its customers.
Customers of Bacs, which processes direct debits and direct credits, will be able to track the progress of their payments online under the new system, rather than having to rely on paper-based receipts for confirmation.
Computer Weekly first revealed early plans for the technology revamp last February. Bacs has been considering detailed recommendations for introducing PKI technology since 1996.
Five suppliers, including management consultancy Accenture and software giant Oracle, have been awarded contracts for the project, dubbed Newbacs.
Martin Wilson, Newbacs' programme director, said, "I cannot point to any other PKI solution that is being used by any other organisation [in the UK] to the sort of scale we are using it."
Wilson added that the IP network, due to be introduced next year, will give it the flexibility to provide new services, if there is sufficient demand among banks and Bacs customers.
Wilson refused to comment on what these new services might be but Bacs has previously suggested that the IP network could help to slash the three-day cycle for clearing payments.
Bacs will hope that the announcement of the project will draw a line under a difficult year, which has seen it forced to defend the security of its clearing network.
Last year Computer Weekly revealed that the multibillion-pound clearing network was vulnerable to hacking attacks because the Bacs board had failed to implement recommendations from its IT department to introduce a PKI security system and services.
Millions of direct debits and direct credits are sent to Bacs over the Bacstel private network without being encrypted. After the revelations were published in Computer Weekly Bacs came under mounting pressure from industry groups to modernise its security.
An industry insider predicted that the new Web-based clearing service would face increasing competition from overseas as the UK payment market opens up.
"Web-based payment services could mean that geography is no longer a factor in choosing the service. The US, or even European payment systems could begin to take Bacs' business," he said.