Access to payment systems is high on the priority list of regulators in the UK and the EU. Faster Payments were proactive on this issue, and in December last year they published a ‘Vision for a New Access Model’. How far does this go to addressing the obstacles
that challenger banks and non-bank PSPs encounter in accessing Faster Payments?
Obstacles To Access
There are several types of obstacles to be overcome, including:
- Costs of connecting and operating
- Technical complexity of connecting
- Settlement and liability arrangements
- Qualifying for scheme membership
- Finding a sponsoring bank
The New Access Model addresses some of these, and indicates approaches for others.
Aggregators Address Cost And Technical Challenges
For Real Time services, the main proposal is the introduction of ‘aggregators’. These are gateways into the scheme, operated as a managed service by technology vendors and used by multiple PSPs. This model is similar to SWIFT and Bacs bureaux. The benefits
for PSPs using such as service might include:
- Reduced capital expenditure. Aggregators are likely to bear the costs of setting up the technology and charge PSPs on a per-transaction or subscription basis.
- Reduced network costs. Connectivity to the central infrastructure is shared by all PSPs using the aggregator, allowing the fixed costs to be shared across multiple organisations.
- Technically simpler. Instead of connecting directly to the central infrastructure, PSPs can connect to simpler interfaces defined by aggregators, who might offer commonly used standards such as http, REST and SOAP.
These are significant benefits here that help to address both cost and technology challenges, though the cost savings will be partially offset by the aggregator’s service charges.
Nothing New Under The Sun?
The proposal to use aggregators contains nothing new – companies could have set up aggregation services at any time following the launch of Faster Payments. The real new proposal in this area is for easier onboarding. Currently each joining organisation
has to go through a heavyweight assurance process.
The paper suggests two modifications to this process; first, that an aggregator can provide the technical accreditation once only thereby reducing the assurance effort for each PSP, which in turn will reduce the overall on-boarding time line; and secondly
that the level of assurance will be proportionate to the systemic risk a user brings to the service. For example, while it would damage the service as a whole if one of the high volume members suffered a 30 minute outage, it would have little impact if a small
agency bank suffered the same outage, so a relaxation of the recovery time requirement can be tailored to reflect the systemic risk the Member/PSP introduces to the Scheme.
Scheme Membership, Settlement And Sponsors
The aggregation proposals only address cost and connectivity issues. The other issues around scheme membership, settlement and sponsorship need a different approach. The key requirement for Faster Payments membership is that the organisation must be an authorised
Payment Services Provider and hold a reserve account at the Bank of England.
This in itself is a major barrier for many organisations who are purely Non-Bank payment service providers and not deposit taking institutions. Even if an organisation can overcome this hurdle, they must also provide collateral that can be called on to meet
their financial obligations in case they are unable to settle. Currently, they must also participate in a Liquidity Loss Sharing Agreement (LLSA) as a backstop measure in case another member fails to settle and that member’s pledged collateral is unable to
cover the loss. This requirement is particularly onerous for smaller organisations who would potentially have to help cover losses of one of another member bank.
However, the Faster Payments Scheme and Bank of England are already collaborating on a ‘new’ settlement model that removes the mutualised risk as described further below.
In principle, any organisation that cannot meet the requirements for full membership can participate as a direct agency. A direct agency must find a sponsor, and in practice that can be difficult for two reasons. Technically, only a couple of member banks
are able to support the message flows needed to act as a sponsor for direct agencies, so competition in this area is lacking. Commercially, even those that can support direct agencies may decide not to do so due to risk appetite or other considerations, or
would do so only at a cost that the aspiring direct agency finds unacceptable, albeit this is a commercial decision for those Sponsor Members
If neither full membership nor direct agency options are available to an organisation, the only remaining possibility is to become an indirect agency, which means the agency must connect via their bank’s supported channels (online or batch) and accept the
lower service levels associated with this indirect connection.
Follow The Money
The New Access model does contain proposals to address some of these settlement and sponsorship issues, but they are yet to become concrete solutions with defined delivery dates. The onerous requirements around Loss Sharing and collateralisation are to be
addressed by Prefunded Settlement, which the paper describes as an arrangement “whereby each settling participant will deposit with the Bank of England a cash amount equal to the maximum debit position they can have in the Faster Payment system”. Each member
must make cash available to settle their own obligations if they default, which will eliminate the need for Loss Sharing. The paper says this will be introduced during 2015.
The paper mentions solutions to the challenges around sponsorship, involving two new concepts:
- sub-caps, to simplify the technical relationship between sponsor banks and direct agencies; and
- a new settlement model for non-bank PSPs.
The idea of sub-caps is easy to visualise. The central infrastructure could be enhanced to support daily limits on the amount that a sponsored organisation could pay away, agreed by their sponsoring member bank. The sponsored organisation would submit payments
directly (using an aggregator if appropriate) to the central infrastructure, which would ensure that the sponsored organisation does not exceed their daily limit, but settlement would still be the responsibility of the sponsoring member.
What the new settlement model might look like is more speculative. It is possible to imagine a member organisation that specializes in providing settlement facilities to non-member organisations. The settling member would need a strong capability in risk
assessment and monitoring, and would charge an appropriate risk premium to its users. Whether such a model could be made financially attractive for both the settling member and its users remains to be seen.
Same Day V Real Time
One declared limitation of the model is that it only deals with Real Time payments. It does not address the needs of PSPs who only require Same Day payments. This ‘fast batch’ level of service is technically available via the FIM or DCA services, but only
a couple of member banks currently offer the sponsorship that PSPs need to access these services. More competition is needed in this area. This is a lower priority compared with access to Real Time payments.
Watch This Space
The core proposal of the Faster Payments Vision for a New Access Model – the use of aggregators – helps to address some of the current perceived issues with access to Faster Payments, but other challenges remain. While the paper suggests possible solutions
for these, they are still at the conceptual stage. Until they are implemented, real-time access to Faster Payments for non-bank and challenger organisations remains a challenge.
Take a look at a recent interview I did with Business Reporter for more on how organisations need to prepare for the New Access Model.
Icon Solutions will also be hosting a breakfast briefing with Finextra to discuss these issues on 7th May. If you would like to join the discussion please contact saara.day@iconsolutions. Places are strictly limited, so an early registration of interest