Near Real-Time Retail Payment and Settlement Systems Mechanism Design

Rapid expansion of e-commerce, along with rising domestic and cross-border payments, has fueled the demand among financial institutions for a cost-effective means to expedite clearing and settlement of low-value retail payments. These are called faster payments settlement systems. Traditionally, ret...

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Main Authors: Zhiling GUO, KAUFFMAN, Robert John, Mei LIN, Dan MA
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2015
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Online Access:https://ink.library.smu.edu.sg/sis_research/3214
https://ink.library.smu.edu.sg/context/sis_research/article/4215/viewcontent/SwiftWP_No_2014_004_1.pdf
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spelling sg-smu-ink.sis_research-42152016-08-25T01:49:23Z Near Real-Time Retail Payment and Settlement Systems Mechanism Design Zhiling GUO, KAUFFMAN, Robert John Mei LIN, Dan MA, Rapid expansion of e-commerce, along with rising domestic and cross-border payments, has fueled the demand among financial institutions for a cost-effective means to expedite clearing and settlement of low-value retail payments. These are called faster payments settlement systems. 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. 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. This research proposes a hybrid faster payments settlement system involving elements of both DNS and RTGS. We explore a mechanism that supports centralized queuing, permits payment prioritization, reduces payment delays, enhances liquidity, and optimizes the settlement process. We offer a modeling framework and experimental simulations to evaluate the proposed approach. Our evaluation is based on a set of system performance conjectures that support operational performance evaluation and mechanism design-related policy insights. Our results 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. 2015-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/sis_research/3214 https://ink.library.smu.edu.sg/context/sis_research/article/4215/viewcontent/SwiftWP_No_2014_004_1.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Computing and Information Systems eng Institutional Knowledge at Singapore Management University Clearing faster payments hybrid mechanism management science mechanism design payment policy analytics payment settlement systems design Computer Sciences E-Commerce Management Information Systems
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Clearing
faster payments
hybrid mechanism
management science
mechanism design
payment
policy analytics
payment
settlement
systems design
Computer Sciences
E-Commerce
Management Information Systems
spellingShingle Clearing
faster payments
hybrid mechanism
management science
mechanism design
payment
policy analytics
payment
settlement
systems design
Computer Sciences
E-Commerce
Management Information Systems
Zhiling GUO,
KAUFFMAN, Robert John
Mei LIN,
Dan MA,
Near Real-Time Retail Payment and Settlement Systems Mechanism Design
description Rapid expansion of e-commerce, along with rising domestic and cross-border payments, has fueled the demand among financial institutions for a cost-effective means to expedite clearing and settlement of low-value retail payments. These are called faster payments settlement systems. 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. 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. This research proposes a hybrid faster payments settlement system involving elements of both DNS and RTGS. We explore a mechanism that supports centralized queuing, permits payment prioritization, reduces payment delays, enhances liquidity, and optimizes the settlement process. We offer a modeling framework and experimental simulations to evaluate the proposed approach. Our evaluation is based on a set of system performance conjectures that support operational performance evaluation and mechanism design-related policy insights. Our results 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.
format text
author Zhiling GUO,
KAUFFMAN, Robert John
Mei LIN,
Dan MA,
author_facet Zhiling GUO,
KAUFFMAN, Robert John
Mei LIN,
Dan MA,
author_sort Zhiling GUO,
title Near Real-Time Retail Payment and Settlement Systems Mechanism Design
title_short Near Real-Time Retail Payment and Settlement Systems Mechanism Design
title_full Near Real-Time Retail Payment and Settlement Systems Mechanism Design
title_fullStr Near Real-Time Retail Payment and Settlement Systems Mechanism Design
title_full_unstemmed Near Real-Time Retail Payment and Settlement Systems Mechanism Design
title_sort near real-time retail payment and settlement systems mechanism design
publisher Institutional Knowledge at Singapore Management University
publishDate 2015
url https://ink.library.smu.edu.sg/sis_research/3214
https://ink.library.smu.edu.sg/context/sis_research/article/4215/viewcontent/SwiftWP_No_2014_004_1.pdf
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