DFSP Settlement in Real-Time Retail Payments Systems: June 2020 Update
By Glenbrook Partners
Executive Summary:
- Inter-institutional settlement is a key component of interoperable payments systems. The goal of these settlement systems is to provide a mechanism for institutions to settle their obligations while minimizing risks and costs to individual institutions and to the whole system. Operational efficiency is a secondary goal.
- Current models are routed in historical, bank-centric practices. As more countries expand the set of financial services providers who can participate in a payments system – including non-bank entities such as eMoney issuers – it will be necessary to adjust these models if we want them to operate on a safe and low-cost manner.
- Trends towards faster inter-institutional settlement, including shorter net settlement windows, are beneficial and well aligned with the design principles of the Level One Project. A trend towards pre-funded settlement accounts also accords with a goal of minimize risks, but, as we will show in this report, executing a pre-funded settlement system has considerable complexities that a payment system needs to support. In some cases, the way in which a pre-funded model is implemented supports a bank-centric model and may work against Level One Project goals of enabling new classes of DFSPs to operate at low costs.
- Some jurisdictions, and some payments systems, are using or considering gross settlement models as an alternative to more traditional retail net settlement models. This does not appear to be a major trend, however, and we do not anticipate a wholesale adoption of this in the near future.