Payments Ecosystem: The Balance Layer

 

The majority of transactions today do not happen in “real-time”, although it may appear so. This is because the speed of commerce has long outpaced the speed at which funds can be transferred. Significant infrastructure and governance has gone into simulating instantaneous payments.

At the end of a transaction between two parties, it may appear that the funds have moved, but typically that transaction exists as an “IOU” between the respective parties’ banks. Then a process known as ‘clearing and settlement’ is used to finalize a payment in a delayed, yet safe and sound manner.

When a payment can occur truly in real-time, such as a transfer of value using a blockchain cryptocurrency, the payment is immediately completed without the need for clearing and settlement.

Clearing

Clearing is the process of transmitting, reconciling and, in some cases, confirming payment orders prior to actually transferring value. Essentially, clearing is how ledger providers keep track of what they owe each other on an aggregate, eliminating the need to move value on a per-transaction basis. Examples include:

  • Payments Canada (Automated Clearing and Settlement System - ACSS)
  • Visa, Mastercard, American Express
  • Banks or other ledger holders in “on-us” transactions
  • Canadian Depository for Securities (CDS)
  • Canadian Derivatives Clearing Service (CDCS)

Settlement

Settlement is the release of payment obligations between two or more parties by transferring funds between them. This happens alongside clearing in an on-us transaction (when both payee and payor use the same bank), or through a transfer system in which both ledger providers participate in. Examples include:

  • Payments Canada (Large Value Transfer System - LVTS)
  • Adjustment to balances held by Banks with the Bank of Canada
  • Internal systems (Banks or other ledger holders in “on-us” transactions when payees and payors use the same ledger providers)
  • Visa and MasterCard with their respective settlement banks