What type of U.S. or foreign banking setup is suitable for clearing thousands of instant, fully settled transactions between institutions and customers?
Banking
Asked by Question Bot12/May/20141 answer
1 Answer
F
Faisal Khan
Answered 12/May/2014
Your answer depends on if the payments are US concentric only or International or a combination of both?
US Concentric
Non-US (International Markets):
US Concentric
- If payments need to be settled instantaneously (assuming these are not commercial payments), one way of settling them is to use some form of a an financial network (for example like VISA, MasterCard, Plus, etc.) What you can essentially do is to have the debit and credit treated like a Cash advance, in this manner the money will be settled in both the accounts instantaneously. The downside of this is both the payer and payee would need some form of an app to do so. There is a relatively hefty fees (because of using the financial network), but you essentially mimic the transaction as a CNP Cash Advance and route it over the ATM or Card network. In the absence of US having a real-time settlement switch, this is the closest hack. Your stumbling block will be negotiating a good rate with the financial network to ride your transactions.
- The other alternative is to open bank accounts in those banks that generate or conduct 80% of your business. So you would most likely open bank accounts with say 100 or so banks and then keep an active balance for instantaneous intra-bank settlement between accounts. So for example, you need to Debit an account in BoA in Chicago for US$ 2,000 and Credit a Well-Fargo SF account, this would be pretty easy. Since you maintain accounts with both banks, your can then simply do an intra-bank transfer from your Nostro account in Wells-Fargo to the account that needs credit. Whilst on the Debit side, you can get money instantly (near instantly) in BoA in Chicago, into your Nostro account. The downside of this is needless to say the money in play that you would need. The other thing to worry about is to have API access to automate this process (transaction banking or commercial/corporate banking should allow you to do this by the bank). There may be some banks that just might not be able to provide you with an API or near real-time settlement, so you would have to hold on to the counter transaction till such time you are assured that the money has been debited/credited to your Nostro accounts before proceeding ahead with the other half of the transaction set.
- Your day end settlements for accounts reconciliation can be through FedWire / ACH.
Non-US (International Markets):
- For the Rest of the World, most countries provide a real-time settlement switch for IBFT (Inter Bank Funds Transfer). You would need access to this, via any one member bank to have complete access to the the entire network.
- In multiple countries, the same concept would apply, having multiple Nostro account with settlement banks. In countries where a real-time switch is provided for, you would only need a single Nostro account with a participating member bank. In the absence of such a switch, you would need multiple accounts with each bank you wish to participate with.
- Your day end-settlement would most likely be via SWIFT for international money movement (am assuming there is a free flow of money in/out of the countries you are operating in). FX adjustment is not taken into consideration here.
- With each country, because of the real-time switch, you are already up to date with your account, so it is reflecting the net position always.
- As with the US case, the important point here is to have a API or some form of an automated access to reconcile the system updates with your core-banking software / accounting.
- You can also forge relationships with larger banking partners who have access in multiple countries, HSBC, Citibank, ABN-AMRO, RBS, Bank of America, etc. are some prime examples. In such, they will take care of your banking needs for all the territories that you would like to be present in. However, you must be cognizant that banks would prefer a little bit of float on the money be traversed through them.
- In addition to this, there are companies (for sake of neutrality I will not name them), that have connectivity and banking arrangements in multiple countries that you can tap into and have access to a larger market. The downside, additional layer of transaction charges.