Faster Payments eases access for challengers with new settlement model

"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"

1) Don't know what the contractual obligations agencies (PSPs)had with settlement members but even with the new scheme the PSPs still have to maintain enough liquidity at BoE.

2) Why would settlement members incur loss on transactions so don't understand what loss sharing model is talked about here.

Overall it looks like a good intiative but the point I am trying to make is that the PSPs do have an option already as direct or indirect agencies . I am wondering why there was not much of adoption in last 7 yrs of FPS existence. 

Maybe I do not understand this. The big banks still need to fund estimated clearings on a daily basis, but the little guys do not. Something sound fishy here.

@Chetan

The new arrangements for pre-funding mean that in the (hopefully unlikely) event of a member bank failing, 100% of any liabilities they could have incurred would be covered by the funds they have deposited. Previously the scheme rules meant that any shortfall (as there was no pre-funding) was shared between all other scheme members, hence the term loss sharing.

I would disagree that there was not much adoption of Faster Payments in the last 7 years. The 10 member banks between probably represent 70% or more of UK current accounts. Transaction volumes are increasing significantly YoY. The major issue has been, until now, that for banks unable to invest in the infrastructure to be a direct member, the only real option has been use the indirect agency route which is far slower, and on a per-transaction basis, more expensive. The direct agency route in theory was an ideal compromise but again, historically, the cost of the infrastructure has been an issue for smaller players. I believe there is only one direct agency member of Faster Payments currently.

I am hopeful that when the new access model arrangements are finally published, smaller banks and other PSPs can take advantage of the direct agency route due to the lower cost of access via aggregator services.   

Will pre-funding eliminate the lead time required for settlement and hence enable a real time settlement of the payment transaction? Will it be on net / gross basis? How is this different from Ripple as that also works on pre-funding logic (as per my understanding)?

The settlement process is not really changing...there is still a deferred net settlement of transactions based on several settlement cycles per day. From the beneficiaries perspective, the funds are available immediately as always, however, now the beneficiary bank knows that although they might wait several hours (or days even at Christmas, Easter) for settlement, in the event of a default or failure by the sending bank, they will bare no loss. For payments with immediate finality and settlement, CHAPS is still the only route. I believe this is acceptable - do most low-value retail payments really need real-time settlement?

To me Ripple is a very different animal that seems currently best placed to play in the cross-border payment space to provide a compelling alternative to the current process of using SWIFT to transmit instructions.