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

Rapid expansion of e-commerce, along with rising domestic and cross-border payments, has fueled the demand among financial institutions for cost-effective means to achieve real-time settlement of retail payments. 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 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 value-maximizing mechanisms to quickly settle increasingly large volumes of retail payments.