In the second of our articles on real-time payments, we look at the implications of the move to real-time for clearing and settlement.
Real-time payments are a key talking point at this week's SIBOS conference in Singapore. As ISO 20022 standards for real-time payments messaging move forward, 18 countries currently already have real-time payments systems in place, 12 other countries are building out a system or exploring the use-case and 17 European countries are involved in a pan-European real-time payments initiative being driven by the European Payments Council, among other payments bodies.
Many of the country-by-country initiatives have some similar elements, including instant clearing confirmation; 24/7, 365-days-a-year operation and standardized data formats.
But, as SWIFT noted in a recent white paper:“The approach for clearing (the validation of all the payment instruction details between a payer's and payee's banks), the approach for posting (the debiting and crediting of payer's and payee's accounts) and the approach for settlement (the irrevocable debit and crediting of funds between bank accounts) varies from system to system.”
Emmanuel de Bouard, head of cash clearing, Global Transaction Banking, at French bank SG, explains that those systems that do not adequately address the issues of clearing and settlement could create problems for banks in a situation where liquidity is scarce.“Europe does not have a real-time clearing system and therefore payments aren't real time. The information about a payment may be sent in real-time, but the actual funds are not transferred in real time.”
As a result, the bank may not yet have received those funds when the beneficiary makes use of them.“If the initiators bank fails before the funds are moved, the beneficiary's bank faces a loss,”notes De Bouard.
For smaller banks, this could be a real concern, as a guarantee of payment is not always included.“The initiator's bank could insist that the beneficiary's bank pre-funds the payment, but this raises issues about the cost and availability of liquidity,” De Bouard says.“If there is a shortage of liquidity in the market, this becomes a major issue.”
One solution, according to De Bouard, may be to institute differentiated pricing for different payment speeds to account for the risk and cost of liquidity associated with faster payments.