Faster Payments, the UK’s 24/7 real-time payments service, is launching what it describes as “a new simpler way to guarantee settlement between banks of payments”.
Parent company Faster Payments Scheme Limited (FPSL), which originally launched the scheme in 2008, announced that the new ‘pre-funding’ settlement system “has levelled the playing field” for participating payment service providers (PSPs) by guaranteeing settlement between all participants without any shared risk.
The new system opens the door for wider access and enhanced integrity, by removing 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.
Under pre-funding, 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 (BoE).
These deposits underpin the net flows of payments between each participant, and will only be used to settle the obligations of participants if they encounter financial difficulties.
Faster Payments currently has 10 direct settling participants: Barclays, Citi, Co-operative Bank, Clydesdale and Yorkshire Banks (National Australia Group), HSBC (including First Direct and M&S Bank), Lloyds Banking Group, Nationwide Building Society, Northern Bank (Danske Bank), Royal Bank of Scotland Group (including NatWest and Ulster Bank) and Santander UK. PayPal connect to Faster Payments on a direct agency basis, whilst a further 400 PSPs access the service indirectly through a sponsor bank.
FPSL says that pre-funding paves the way for more challenger banks and other non-traditional players to benefit from direct access to Faster Payments via its New Access Model (NAM) programme by removing the potential barrier to entry created by shared credit and settlement risks.
Three challenger banks have already committed to take advantage of pre-funding and join the Faster Payments Scheme in 2016, with further PSPs in advanced discussions to join through the NAM in due course. The identity of each of these PSPs is subject to commercial confidentiality until their respective launch plans are finalised.
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