Pre-funding Payment System Settlement Risk Management
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Solution Overview
Problem
Current payment processing systems face uncertainty and operational challenges due to funds reclamation provisions, which can lead to settlement risk and recasting issues in multilateral netting schemes, hindering market adoption and ubiquity.
Innovation Solution
Implementing a pre-funding method where Buyer Banks are required to pre-fund daily aggregate debit totals, with advance authorization requests and funds transfers to Supplier Banks, ensuring payments are made with available funds and reducing settlement risk.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If funds reclamation provisions are used to reclaim funds from Supplier Banks, then settlement risk for payment processing organization is reduced, but uncertainty regarding finality of funds for Supplier Banks increases
Solution Approach 1:
The system requires Buyer Banks to pre-fund their daily aggregate debit totals before settlement occurs. This preliminary funding action ensures that funds are already available and settled in the payment processing organization's account before any supplier payments are made, eliminating both settlement risk and fund finality uncertainty simultaneously.
2Productivity
If multilateral netting is used to offset receivables and payables among participants, then processing efficiency is improved, but recasting issues and operational complexity increase when funding failures occur
Solution Approach 1:
The system extracts the funding risk element from the multilateral netting process by requiring pre-funding of aggregate debit totals. This separates the funding assurance function from the netting calculation function, allowing multilateral netting to operate efficiently without the threat of recasting issues when funding failures occur.
Solution Approach 2:
By requiring pre-funding of aggregate debit totals before settlement, the system performs the funding action in advance, eliminating the need for complex recasting operations when funding failures occur during settlement processing.
3Reliability
If conservative daily aggregate debit limits are established to manage risk, then settlement risk is reduced, but market adoption and ubiquity are impeded
Solution Approach 1:
The system replaces conservative limit-setting with pre-funding of aggregate debit totals. This preliminary funding action provides explicit assurance of fund availability, allowing the system to accommodate any transaction volume without imposing arbitrary conservative limits, thereby enabling broader market adoption while maintaining risk management.
Data Source
AI summary
A method for pre-funding is disclosed. The method includes sending a plurality of pre-fund authorization requests to a buyer financial institution, and then receiving a plurality of responses to the pre-fund authorization requests from the buyer financial institution, where each response either accepts or declines a pre-fund authorization request. A funds transfer request is sent to the buyer financial institution, where the funds transfer request corresponds to a total value of the accepted pre-fund authorization requests. Notification that funds have transferred from the buyer financial institution in response to the funds transfer request is received. Then, the sending of the funds to a supplier financial institution is authorized.