How do fast payment systems work?
6 March 2017
(Extract from page 59 of BIS Quarterly Review, March 2017)
A defining characteristic of a fast payment system is the ability to complete a payment almost immediately and at any time. To achieve this outcome, all fast payment systems require immediate clearing between the payment service providers (PSPs) of the payer and payee. Funds settlements between the PSPs, however, do not necessarily need to occur immediately for each and every payment order. Payee funds availability and inter-PSP settlement can be either coupled (ie real-time settlement) or decoupled (ie deferred settlement).
In real-time settlement, payee funds availability and inter-PSP settlements are coupled, with inter-PSP settlements occurring in real time. In other words, the debiting and crediting of funds from the payer to the payee occur at the same time as associated debiting and crediting of the PSP in the fast payment system. In this model, credit risks between participating PSPs do not arise, but participating PSPs continuously require sufficient liquidity to support real-time settlements of fast payments. Therefore, a system is required to address the possible need for liquidity provision to the participant PSPs in the system, the adequacy of the settlement system's operating hours and associated liquidity facilities. Countries that use this model include Mexico and Sweden.
In deferred settlement, payee funds availability and inter-PSP settlements are decoupled, with inter-PSP settlements being deferred with batch settlement. That is, while payer and payee accounts are debited and credited in real time or near real time, the associated settlements between the PSPs are batched and executed at pre-specified times. In this model, credit risk inherently arises for PSPs, as the payee's PSP advances the funds to the payee before inter-PSP settlement takes place. A variety of tools can mitigate this risk, including prefunding of positions, a maximum limit on the net debit or credit position that can be established between PSPs, and collateralisation of debit positions. Countries that use this model include India and the United Kingdom.
Examples of fast payment systems
Mexico - The Sistema de Pagos Electrónicos Interbancarios (SPEI) is the Bank of Mexico's main payment system, providing both wholesale and retail payment services. SPEI was launched in 2004 and provided near real-time retail payments. As of November 2015, the service offers 24/7 availability. Funds are available to the payee in less than 15 seconds for mobile payments and less than 60 seconds for other online payments. Currently, 109 institutions (66 banks and 43 non-banks) participate in SPEI as direct members to provide their customers with fast payment services.
Sweden - BiR/Swish, introduced in 2012, is a real-time settlement system for mobile payments in Sweden. Being a privately owned special purpose institution that conducts settlement in commercial bank money, which in turn is fully backed by funding in central bank money, the system allows real-time settlement of fast payments even during times when other settlement facilities (eg the central bank real-time gross settlement system) are closed. The typical time between payment initiation and availability of final funds to the payee for a successful fast payment transaction is one to two seconds. More than half of the country's population uses the Swish mobile app to make fast payments
India - The Immediate Payment Service (IMPS) went live as a new instant mobile payment system in 2010. The system allows mobile phone subscribers and internet-connected devices to send and receive payments. Payees typically receive funds in less than 30 seconds. The service provides access to fast payments through 190 PSPs. In December 2016, IMPS processed 60.5 million transactions, which represented a 50% increase from the previous month - the largest monthly increase to date - likely driven by the Indian banknote demonetisation directive of November 2016 and the subsequent push from the government to get digital payments adopted nationwide.
United Kingdom - The Faster Payments Service (FPS) is a deferred net settlement system for credit transactions in the form of single, immediate payments, forward-dated payment, or standing orders for households and corporates. The service, which was launched in 2008, allows a payer to initiate a payment simply using the payee's mobile phone number. Funds are typically available to the payee within seconds of the payer initiating the payment transfer. FPS has 10 direct participants, who open up their customer channels to FPS. In December 2016, the service processed 125 million payments totalling £103 billion.
CPMI (2016b) defines clearing as the process of transmitting, reconciling and, in some cases, confirming transactions prior to settlement, potentially including the netting of transactions and the establishment of final positions for settlement.
Sources: CPMI (2016b); publicly available information.