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Optimizing real-time payments

SWIFT researchers posit new hybrid model

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Optimizing real-time payments

A model that combines the benefits of a real-time gross settlement system (RTGS) with those of a deferred net settlement (DNS) system could lead to the development of a hybrid priority queuing mechanism for faster payment settlement systems, concludes research sponsored by the SWIFT Institute.

The report, Near Real-time Retail Payment and Settlement Mechanism Design, was written by Zhiling Guo, Robert J. Kauffman, Mei Lin, and Dan Ma from the School of Information Systems at Singapore Management University.

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. 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, the researchers say.

As large dollar volumes of retail payments accumulate, real-time gross settlement (RTGS) has been recognized 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, they continue.

This research proposes a mechanism that supports centralized queuing, permits payment prioritization, reduces payment delays, enhances liquidity, and optimizes the settlement process, including a modeling framework and experimental simulations to evaluate the proposed approach.

The results, the researchers claim, point out the qualities of a cost-effective and value-maximizing mechanism to quickly settle increasingly large volumes of retail payments, while ensuring that the incentives for payment system stakeholders are given careful consideration.

Download the full research paper

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