Newer banks in the U.K. now have an easier method for participating in the Faster Payments System through a pre-funding settlement process.
Under the new process, all payments service providers participating in the Faster Payments System will leave a cash deposit sufficient to cover their net transactions in a segregated, interest-bearing account at the Bank of England.
In addition to creating a more open network, the process allows smaller banks to use Faster Payments without an obligation to underwrite a share of larger participants' transactions, a caveat that existed as part of a previous liquidity and loss-sharing model.
That obligation was significant for smaller banks because it operated as an "insurance fund" equivalent to the average of the two largest banks' daily transfers, said Gareth Lodge, a London-based industry analyst with Celent.
Banks funded their average net positions and used collateral to guarantee the rest. Under that setup, smaller banks felt they were "both underwriting the larger banks and providing proportionately more money than they would if they were just underwriting themselves," Lodge said.
The issue of creating open standards for all participants, no matter what the size of a bank, has also been part of the debate in the Australian and U.S. Federal Reserve initiatives to bring faster payments to their countries.
As the U.S. continues its push for a faster payments system it will continue to face tension between the larger and smaller banks involved in the process unless an open network is established that accommodates all players, said Charles Kahn, chair professor for the department of finance at the University of Illinois. Kahn made his comments at a recent Federal Reserve payments symposium.
It would make sense for the U.S. to have one common infrastructure with competition to gain access, rather than having competing networks like the Automated Clearing House operates today, Lodge said.
"Perhaps the Fed could play the role of 'access provider of the last resort' to ensure all financial service providers can access," Lodge said. "I also think access should be extended to include corporations, utilities and insurance companies."
Regardless of what happens in the U.S. or other countries developing faster business-to-business payment models, all eyes will be on the U.K.'s pre-funding service.
The new system in the U.K is important because the big banks own the payment systems, Lodge said. "All of the efforts around the access model are about trying to remove things that are perceived as a barrier to entry."
Three "challenger" banks have already committed to using the pre-funding model and joining the Faster Payments System in 2016, Craig Tillotson, chief executive of Faster Payments, stated in an Oct. 5 press release. Faster Payments did not name those banks.
Faster Payments currently has 11 participants that connect directly to the service with another 400 payment service providers that have indirect access through sponsor banks.
Participants have access to Faster Payments through direct membership, or through the New Access Model, established prior to the addition of the new pre-funding. New Access Model provides an option in which aggregators offer technical services needed for access, with settlement and liquidity support unbundled as a separate service.
The "jury is still out" on whether the pre-funding system is fair to smaller banks, Lodge said.
"For most, I think the overall cost may far outweigh the benefits of how they currently access the system by using a bigger bank as an agency bank," he added. "But it does still leave the question as to whether you should rely on your largest competitor for access."
In the U.K., Standard Chartered, RBS, Barclays, HSBC and Lloyds Group are considered the "Big Five" banks of which the Faster Payments System would serve. The newer, or "challenger," banks seeking to participate in Faster Payments are generally smaller banks seeking a banking license, such as Metro, Atom or Starling.
Banks established through retailers like Tesco or Sainsburys, or new entries from abroad or spin-off entities from large banks are also considered challenger banks to the Big Five, said Zil Bareisis, also a London-based senior analyst for research firm Celent.
"The U.K. banking market is heavily concentrated, so the government encourages competition and has relaxed the requirements to obtain a basic banking license," Bareisis said.
In the U.S., one could argue that there are too many banks, so the government hasn't had to intervene in a way to encourage a more competitive playing field, Bareisis said.
"In the U.S., the neobanks tend to build modern front end apps to attract customers, but they work with the back office banking partners to deliver the service," he added.