When a banknote or coin is handed over by a customer in a store, there is an instantaneous settlement of that transaction. The merchant becomes the owner of the funds and can use them immediately, e.g. to give change to the next customer or pay an employee. The merchant incurs no payment risk and no credit risk.
If the same transaction is settled using a non-cash payment system, the settlement can take up to several months. While large merchants may receive settlement the following day, small or mid-sized stores receive the funds 2 or 3 days later. Some merchants, considered by card processors and acquirers as risky, may receive the funds in batches, as much as several months later.
The banking community is clearly aware of the opportunities in accelerating the settlement of transactions. Global payments technology provider Clear2Pay has undertaken a comprehensive review of faster payments initiatives across the world 47
It defines a faster payment as a “domestic, inter-bank (i.e. not alternative payment schemes), purely electronic payment system in which irrevocable funds are transferred from one bank account to another and where confirmation back to the originator and receiver of the payment is available in one minute or less.” In other words, these initiatives are undeniably faster than “traditional” card payments, but in most cases are not real-time, unlike cash transactions. Transaction volumes for these initiatives remain relatively low; the Japanese fast payment system Zengin, which was the first to be established in 1973, processes 6 million transactions per day for a total population of 127 million.
For retailers, the delay in the settlement of the transaction presents two challenges. Firstly, they bear the payment risk as long as they have not received the funds. Secondly, they do not earn interest on the funds until they reach their account.