In a previous post, I discussed the complexity of the current settlement systems and how a process of cash-sweeping could simplify this complexity significantly. Cash sweeping is a scenario where cash is transferred from one bank to another totally independent of the actual process of payments. One could look at this as decoupling settlement from the actual payment process itself.
There are many direct benefits to such an approach. I touch on some of these benefits below:
It will be a cheaper payment system
The cost of performing a payment is directly influenced by two factors: the number of tasks that are required to complete the payment and the risk associated with the payment. In bot these instances, a system based on cash sweeping would be much less costly. In the first instance, cash sweeping would require much fewer tasks to complete. Because the money never leaves the balance sheet of the bank, the bank will have control over and insight in a transaction for much longer. This reduces the risk associated with such a transaction.
It will strengthen the balance sheet of banks
In traditional payment schema based on a four party model and thus settlement, value immediately moves out of deposits on the balance sheet of the bank when the transaction is authorized. The bank immediately creates a settlement position – a kind of a holding account. In a three party model, money effectively moves from one bank account to another – both as deposits on the balance sheet of the bank. Because the money stays in deposits, the bank’s balance sheet is strengthened and the bank immediately has a higher capital adequacy.
It will improve the liquidity of retailers
In the case of traditional payment systems, retailers can only get access to their money after it has settled. This may be rather quickly in some instances, but in others, they could wait as long as a week for the money to arrive in their bank account. By implementing a settlement approach based on sweeping, there would be no reason that the retailer could not have access to their money a second after completion of the payment.
It will streamline dispute management
In traditional payment schema, dispute management are a complex affair where the actions of multiple entities (the issuer, the acquirer, the card association etc.) must be meticulously coordinated. Without this coordination, it would never be possible to resolve a dispute accurately. In a cash sweeping world, the number of entities involved are reduced significantly. It would make it possible to resolve disputes in real-time, which would be highly unlikely in the old system.
In my mind, there is very little reason why not to implement a system of cash sweeping rather than the existing complex system of settlements, except that it will be very costly to rip out the old system and replace it with a new one.
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