Making Urgent Payments
There are times when a local or cross-border payment just needs making today, now. This can be because a payment needs to be cleared and settled at a specific date and time, e.g. for a contract, it can also be because a payment has been forgotten and the 1-3 day ACH or cheque clearing cycle is too long to deliver the funds in time.
Types of Same Day Payment System
Same day payment system come in three basic flavours sizes - Real-Time Gross Settlement systems, Deferred Net Settlement systems, and Same Day ACH type systems.
RTGS Systems
A Real Time Gross Settlement systems is a funds transfer mechanism where transfer of money takes place from one bank to another on a " real time", i.e. no delay and on " gross settlement" basis transaction by transaction. All RTGS systems are operated by the Central Banks, and the payment is taken as final and irrevocable. RTGS systems are available in all the developed economies, examples include FedWire in USA, Target 2 in Europe, CHAPS in UK.
Generally, the charges for RTGS payments are high - ranging from a few dollars to $20+, although over the last 4-5 years they have dropped considerably as these systems now have competition from other same-day clearing systems.
Deferred Net Settlement Systems
In Net Settlement Systems, the banks only pay/settle the net balance outstanding balance. Deferred Net Settlement systems settle transactions in batches at a particular point of time. All transactions are held up until that time. The DNS systems vary as to how many settlements take place in a day. In the USA's CHIPS system, which is responsible for over 95% of USD cross-border and nearly a half of all domestic wire transactions totaling $1.5 trillion daily, the payments are netted and released throughout the day.
How CHIPS Works
Source: © 2011. The Clearing House Payments Company L.L.C.
Same Day ACH Systems
National ACHs around the world over the last decade have started to provide same-day clearing service, typically clearing 2 or 3 times per day. Although the systems vary quite considerably and some, like the UK's Faster Payments Service, clear and settle the payment with two hours and typically in a few minutes or less.
However, most of the systems are in the early stages of development and not all banks within the country offer the service, and/or the banks offer different levels of service, e.g. the banks in the UK have different maximum payment amounts, they will accept, in the USA only a few banks are a member of the scheme.
Same Day ACH Services are much cheaper than RTGS and DNS systems, typically banks charge 50¢ to $5+ per payment.
Cross-Border Cross-Currency Same Day Payments
Within a bank group, same day payments are relatively easy, between banks is more complicated. Traditionally the fastest inter-bank clearing cycle has been T+2, but clearing cycles are coming down and today T+1 is widely available. Same day cross-border cross-currency payments are available between some banks using SWIFT and the local same-day clearing systems. Charges can be high, ranging from a few dollars to $50+.
In the eurozone there is a multi-country RTGS system, Target 2, which links all the Central Banks and banks in Europe.
Same day payments have their place, but for most businesses they should be the exception rather than the rule because most payments are known about well in advance of when they have to made. Many same-day payments represent a failure to plan. National Same Day ACH Services are extremely useful when all banks are members and there is the identicle level of service and transaction levels across most banks. When this happens, Same Day ACH becomes very useful.