Attempts to open up direct access to the UK's Faster Payments system to Payments Service Providers and challenger banks are reaching fruition with the implementation of a new 'pre-funding' settlement model, removing the potential barrier to entry created by shared credit and settlement risks.
Faster Payments currently has 11 participants that connect directly to the service, while a further 400 PSPs link up indirectly through sponsor banks. Easing access to the system for new entrants is viewed as a key prerequisite for leveling the playing field between the big banks and smaller challengers and boosting competition in the UK banking market.
Under the new pre-funding model, all PSPs participating in Faster Payments leave a cash deposit sufficient to cover their net transactions in a segregated, interest-bearing account at the Bank of England. These deposits effectively cover the daylight overdrafts incurred by participants in the periods between settlement windows, reducing the risks of financial contagion by ensuring the failure of a single participant cannot have a knock-on effect to other participants’ balance sheets through unpaid liabilities.
The new system has removed the implicit obligation for smaller participants to underwrite a share of larger participants’ transactions that existed as part of the previous liquidity and loss sharing model.
Craig Tillotson, chief executive of Faster Payments, comments: “Access to Faster Payments is a vital part of any challenger bank’s proposition - our introduction of a simpler settlement system is another big step forward in maintaining a stable financial system and supporting greater competition in banking.”
He says that three challenger banks have already committed to take advantage of pre-funding and join the Faster Payments Scheme in 2016.
The introduction of the new settlement arrangements coincides with the creation of a 'New Access Model' for Faster Payments, whereby PSPs can choose from a range of more flexible models and providers for technical support. Tilitson says a number of PSPs are in advanced discussions to join through the New Access Model.
"The identity of each of these PSPs is subject to commercial confidentiality until their respective launch plans are finalised," he says.