08 September 2015

Near Real-time Retail Payment and Settlement Systems Mechanism Design

Faster payments systems: A hybrid approach of deferred net settlement and real-time gross settlement systems.

Rapid expansion of e-commerce, along with rising domestic and cross-border payments, has fuelled the demand among financial institutions for a cost-effective means to expedite clearing and settlement of low value retail payments. These are called faster payments settlement systems. Traditionally, retail payments have made extensive use of interbank netting systems, in which payments are accumulated for end-of-day settlement. This approach, known as deferred net settlement (DNS), reduces the liquidity needs of the payment system, but bears inherent operational and financial risks for unsettled intraday payments. As large dollar volumes of retail payments accumulate, real-time gross settlement (RTGS) has been recognised as an attractive option, especially for high-value payments. It permits immediate settlement of transactions during the day, but it brings up other risks and incentives issues that require consideration.

This research, “Near Real-Time Retail Payment and Settlement Systems Mechanism Design”, proposes a hybrid faster payments settlement system involving elements of both DNS and RTGS. In particular, a mechanism is explored that supports centralised queuing, permits payment prioritisation, reduces payment delays, enhances liquidity, and optimises the settlement process, along with a modelling framework and experimental simulations to evaluate the proposed approach.

by Dan Ma, Mei Lin, Robert Kauffman, Zhiling Guo

  • Singapore Management University