Settlement in Modern Network-Based Payment Infrastructures - Description and Prototype of the E-Settlement Model

Payment systems are undergoing rapid and fundamental changes stimulated largely by technological progress especially distributed network technology and real-time processing. Internet and e-commerce will have a major impact on payment systems in the future. User demands and competition will speed up developments. Payment systems will move from conventions that were originally paper-based to truly network-based solutions. This paper presents a solution - E-Settlement - for improving interbank settlement systems. It is based on a decentralised approach to be fully integrated with the banks' payment systems. The basic idea is that central bank money, the settlement cover, is transferred as an encrypted digital stamp as part of the interbank payment message. The future payment systems would in this model operate close to the Internet/e-mail concept by sending payment messages directly from the sending bank's account/payment server to the system of the receiving bank with immediate final interbank settlement without intervening centralised processing. Payment systems would become more efficient and faster and the overall structure would be come straightforward. The E-Settlement and network-based system concept could be applied with major benefits for correspondent banking, ACH and RTGS processing environments. In order to assess this novel idea the Bank of Finland built a prototype of the E-Settlement model. It consist of a group of emulated banks sending payments to each other via a TCP/IP network under the control of a central bank as the liquidity provider and an administration site monitoring the system security. This paper contains an introduction to network-based payment systems and E-Settlement, the specifications of the E-Settlement model and the description, results and experiences of the actual E-Settlement prototype