(13 October 2015 – United Kingdom) Challenger banks and smaller providers are set to end the tight grip big banks have on payment systems in the UK.
Access to the UK's Faster Payments system to Payments Service Providers (PSP) and challenger banks are in its final stages 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 says it currently has 11 participants that connect directly to the service, while a further 400 PSPs are connected indirectly via sponsor banks.
Those PSPs participating in the Faster Payments Scheme will be required to set aside sufficient cash deposits to cover their transactions in a seperate, interest-bearing account at the Bank of England. The aim is for the deposits to cover overdrafts incurred by participants in the periods between settlement windows, hence 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.
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.
“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.” Faster Payments chief executive Craig Tillotson said.
He added that three challenger banks have thus far committed to take advantage of pre-funding and join the scheme next year.