Mechanism Design for Near Real-Time Retail Payment and Settlement Systems

• Main Authors: GUO, Zhiling, KAUFFMAN, Robert John, LIN, Mei, MA, Dan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Delays; Real-time systems; Economics; Europe; Technological innovation; Mobile communication; Computer Sciences; E-Commerce; Management Information Systems
• Online Access: https://ink.library.smu.edu.sg/sis_research/2495; https://ink.library.smu.edu.sg/context/sis_research/article/3494/viewcontent/7367e824.pdf
• Institution: Singapore Management University

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 a payment system, but bears inherent operational risks. As large dollar volumes of retail payments accumulate swiftly, real-time gross settlement (RTGS) is an attractive option. It permits immediate settlement of transactions during the day, but it brings up other risks that require consideration. We propose a hybrid payment management system involving elements of both DNS and RTGS. We explore several hybrid system mechanism designs to allow payment prioritization, reduce payment delays, enhance liquidity by pooling payments from banks, and optimize settlement. We provide a modeling framework and experimental set-up to evaluate the proposed approach. Our results shed new light about cost-effective and valuemaximizing mechanisms to quickly settle increasingly large volumes of retail payments.