Technological innovation and globalization are driving today’s financial system and its infrastructure. This is evident with the rapid automation and internationalization of payments.
Wholesale payment systems are known by many names – each country has different references for interbank and corporate payments – such as Institutional payments, High-Value Clearing Systems (HVCSs in Australia), Large-Value Payments Systems (LVPSs in the US), Clearing House Automated Payment Systems (CHAPS in the UK). But regardless of what they’re called, they have always had an important effect on the world’s financial landscape.
Defining wholesale payments
When discussing payments systems, we usually categorize them broadly as “retail” and “wholesale”. The principal differences relate to transaction size and the parties involved.
Retail Payments: Transactions made between consumers and businesses. Retail payments account for almost all payments by number, but represent a small part of the total face value of payments.
Wholesale payments: Used to settle transactions between banks and financial markets. Wholesale payments are small in number, but are typically very high face values, and represent most of the value of payments.
Wholesale payments support the interbank markets and are the main arteries of a country’s economy, so the safe and efficient operation capital markets depends on these systems functioning smoothly, correctly and without fail.
Settlement options in wholesale payments
In wholesale payments, a key concern is the form in which settlement of payments takes place.
Wholesale payments involve two key elements:
- The transfer of payment information between the payer and payee banks – or processing.
- Settlement – or the actual transfer of funds between the banks that occurs at the monetary authority or central bank.
Central banks function as the settlement agents between commercial banks in most payment systems. Large-value payments are usually settled by the transfer of deposits held at the central bank from one commercial banks settlement/clearing account to another. Banks have a choice as to when and how settlement occurs; Deferred Net Settlement (DNS) and Real Time Gross Settlement (RTGS) are two of the standard options available globally.
In an RTGS system a bank can make a payment only if it has adequate balances in its settlement/clearing account held at the central bank at time of payment. This means that any liquidity issues are evident immediately. An RTGS system does not remove the possibility that a bank may fail or delay settlement, systemic risk still exists but it does localize the problem to a specific failed institution.
In a DNS system, banks can continue to make payments throughout the day. This moves any liquidity pressures to the end-of-day settlement session. If there is a problem at that point, it is likely to be greater than that of funding a single payment, and will involve dealing with the whole day’s inward and outward payments. Loss-sharing rules mean other banks carry a share of the burden and depend on the robustness of netting law.
Payment messaging systems
A well-functioning financial system depends on a safe, reliable, secure and efficient wholesale payments environment. A wholesale payment environment is connected by a supporting messaging network with banks, FMIs, customers, other financial institutions and service providers (such as Clearing Houses, Market Infrastructures, SWIFT, etc.), forming a complex ecosystem.
Wholesale payment message systems are used by financial institutions, corporations and other organizations to originate payment orders. These are a critical component of funds transfer activities. While payments systems transmit actual debit and credit entries, message systems process admin messages and instructions to move those funds.
Monitoring for wholesale payments
The safe, efficient operation of wholesale payments systems is essential as they have an important bearing on a bank’s liquidity, risk, reputation, and regulatory responsibility, as well as a nation’s whole financial system. Additionally, wholesale payments systems play a crucial role in international finance as the ultimate settlement mechanism for cross-border markets in multiple currencies. So, it goes without saying that monitoring these large value payments systems with the right monitoring solution is critical.
Monitoring with an off-board solution is non-intrusive, and integrates seamlessly into the existing enterprise environment, bringing real-time visibility to the entire wholesale payments ecosystem. It collects data from all silos across the payments system, filters, correlates and analyzes this information, and brings it into a single application.
Keeping on top of emerging technologies and regulatory changes is challenging, and even more so with high-value payments. Turning data into intelligence will assure the safe, efficient operation of wholesale payments systems worldwide.
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