In real-time payment systems, what role does a liquidity module play?
Payments
Asked by Question Bot07/Mar/20161 answer
1 Answer
F
Faisal Khan
Answered 07/Mar/2016
Payments are based on ledger positions, or simply put, when a payment is being made, one ledger is being debited, and one is being credited.
Sounds simple enough right? Well, this is where it gets tricky. When an ATM runs out of money, that is where liquidity is in short supply. You, as a user would love to insert your card into the ATM and get money, except there is none. To put it in colorful words, the liquidity pool for supply of money is dry, i.e. there is no one to offer you money.
Likewise when payments are done, in real-time, someone (some financial entity) is fronting the money in real-time, so that payments can be executed in real-time.
A liquidity module manages and keeps track of liquidity in a payment system. If money is flowing from say Chicago to Toronto, then the there needs to be enough liquidity in Toronto to make sure those payments from Chicago can be fulfilled.
When liquidity is running low, then net deferred settlement needs to be done quickly to top off the pools (this is one of 100s of many examples of how liquidity pools are managed). Another example would be to bring in a market maker that adds more liquidity to the market.
Sometimes a market only has so much liquidity, and you cannot insert more. Then this becomes an issue, for if you don't track it, you will have a lot many open IOUs in your payment system that are simply not being closed.
The general definition of liquidity differs from scenario to system, but all in all it is about demand / supply.
Sounds simple enough right? Well, this is where it gets tricky. When an ATM runs out of money, that is where liquidity is in short supply. You, as a user would love to insert your card into the ATM and get money, except there is none. To put it in colorful words, the liquidity pool for supply of money is dry, i.e. there is no one to offer you money.
Likewise when payments are done, in real-time, someone (some financial entity) is fronting the money in real-time, so that payments can be executed in real-time.
A liquidity module manages and keeps track of liquidity in a payment system. If money is flowing from say Chicago to Toronto, then the there needs to be enough liquidity in Toronto to make sure those payments from Chicago can be fulfilled.
When liquidity is running low, then net deferred settlement needs to be done quickly to top off the pools (this is one of 100s of many examples of how liquidity pools are managed). Another example would be to bring in a market maker that adds more liquidity to the market.
Sometimes a market only has so much liquidity, and you cannot insert more. Then this becomes an issue, for if you don't track it, you will have a lot many open IOUs in your payment system that are simply not being closed.
The general definition of liquidity differs from scenario to system, but all in all it is about demand / supply.