Looking for the best of all worlds in real-time payments
The Swift Institute provides research grants
Central banks need to play a greater role in the provision of infrastructure for low value payments and existing models revised to balance risk and rewards, according to new research published by the Swift Institute.
The research finds that a hybrid faster payments settlement system model, incorporating different elements of existing and proposed systems, would improve performance and lower the liquidity needs of banks.
Near Real-time Retail Payment and Settlement Systems Mechanism Design, co-authored by Zhiling Guo, Robert Kauffman, Mei Lin and Dan Ma of the School of Information Systems, Singapore Management University, reviews various faster payments implementation efforts around the world, exploring the design of mechanisms for faster settlement based on issues faced by participating banks,
The paper looks at different models for improving the speed of payments, mathematically modelling the effects of traffic volumes and other factors such as the way payments are queued
“We explore a mechanism that supports centralised queuing, permits payment prioritisation, reduces payment delays, enhances liquidity, and optimises the settlement process. We offer a modelling framework and experimental simulations to evaluate the proposed approach,” the authors say in their introduction.
Optimising the various models led the researchers to propose a “hybrid faster payments settlement system (supported by priority queuing systems such as existing in Switzerland and Mexico) incorporating elements of both delayed net settlement [such as end-of-day settlement] and real-time gross settlement”. This would be “digitally coordinated with the capacity to solve the computational problems to optimise performance”.
The paper says that such hybrid systems, on average, allow faster payments than end-of-day netting systems, while lowering the liquidity needs of participating banks to a greater extent than RTGS systems.
The research also suggests that the role central banks play will need to be revisited; they will increasingly need to provide the technical infrastructure for low-value payments. In the proposed mechanism elements of the RTGS model are reserved to reduce risk, particularly the central bank provision of liquidity.
Issues such as improved liquidity are important in bringing banks around to the idea of real-time payment systems. The paper cites the US Federal Reserve Bank as concluding that “although implementing a faster payments system may be only profit-neutral to banks, its strategic implications are strong, and that engaging stakeholders is instrumental”.
“It is not about near-term profit,” the paper says. “By adapting to the faster payments trend, banks can be innovators, influence the emerging industry solutions, and leverage their IT capabilities to create new products for their customers The alternative is unattractive: falling behind with legacy payment systems puts banks at a disadvantage, as new competition heats up with new, non-bank market entrants.”
Robert Kauffman will present this research at Sibos as part of the Swift Institute Lecture Series.
Download Near Real-time Retail Payment and Settlement Systems Mechanism Design
