Challenger banks line up to join Faster Payments through new access model
Three challenger banks have committed to take advantage of a new way to guarantee settlement between banks of payments made through Faster Payments, the UK’s 24/7 real-time payments service, when it becomes available next year. Other Payment Service Providers are in negotiations to join.
The new ‘pre-funding’ settlement system is part of Faster Payments’ New Access Model programme intended to level the playing field for participating PSPs by guaranteeing settlement between all participants without any shared risk. Previously there was an 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.
Faster Payments currently has 11 participants that connect directly to the service, while a further 400 PSPs access the service indirectly through sponsor banks. Pre-funding paves the way for more challenger banks and other non-traditional players to benefit from direct access.
In the traditional ‘sponsor’ model for indirect access to Faster Payments, sponsor banks provide their PSP customers with two distinct services: technical access to Faster Payments, and settlement/ liquidity support. Aggregators under the New Access Model offer the technical services needed for access, with settlement/ liquidity support unbundled as a separate service offering.
Under pre-funding, all Faster Payments participants leave a cash deposit sufficient to cover their net transactions in a segregated, interest-bearing account at the Bank of England. These deposits underpin the net flows of payments between each participant, and will only ever be used to settle the obligations of participants if they get in to financial difficulties.
Payments between end customers using the Faster Payments have always been irrevocable and guaranteed by each customer’s PSP at the time the payment is initiated by the customer. Participants settle with each other three times each business day – pre-funding prevents the receiving bank from facing any risk of unpaid liabilities caused by another participant failing between settlements.
Craig Tillotson, chief executive of Faster Payments, said: “Today’s customers expect their payments to be made in real-time, 24 hours a day seven days a week. 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.”
A detailed description of the New Access Model is available in the Faster Payments: A Vision for a New Access Model, whitepaper, published in December 2014.
The Economics of the New Access Model is available to download from the Faster Payments website.