The cost of a cleared payment

A payment between two of the firm's entities in different jurisdictions is not an instruction that completes. It is a sequence of instructions that each complete at a different time, through banks we do not control, subject to cut-off times set in local hours. Between the debit and the credit the money exists as an exposure to an intermediary and earns nothing. Commercial Finance measures that interval on every corridor it uses, and the number is larger than most treasurers expect.

Three costs sit inside the interval. The first is funding, because the balance has to exist twice, at the origin until the debit settles and at the destination before the credit arrives, so that obligations can be met on time. The second is credit exposure to whichever institution holds the balance in the meantime. The third is optionality forgone, which is the return the firm could have earned had the balance been deployable. Only the first appears on a fee schedule.

Cut-off times do more damage than fees. A corridor with a nominal one-day settlement that misses a local cut-off by twenty minutes becomes a three-day settlement across a weekend, and a corridor touching two jurisdictions with different weekend conventions can lose four working days from a routine instruction. Our payments calendar records local business days, national holidays and cut-off times for every corridor in use, and treasury schedules against the calendar rather than against a promise.

Small jurisdictions carry a structural disadvantage here that has nothing to do with their competence. Payment finality in a local currency depends on local clearing arrangements, and in a market with few participants those arrangements run once or twice a day. Foreign currency legs then depend on a relationship with an institution outside the jurisdiction, and the number of institutions willing to hold such relationships has fallen steadily for a decade. Fewer routes mean longer intervals and less negotiating power on price.

The response has three parts. The firm holds operating balances in fewer currencies than it has entities, so that internal obligations net before they settle. It concentrates external settlement through a small number of relationships reviewed annually against service data rather than against relationship history. And it maintains an internal corridor table showing expected and worst-case settlement times, used when a facility is priced rather than when a payment is chased.

Payments are not a housekeeping matter. The interval between debit and credit is the reason a trade finance facility priced on a thirty-day cycle behaves like a thirty-six-day one, and six days on a book of any size is a material figure. Institutions that treat payments as an operational matter discover the cost in their margin. Institutions that treat it as a funding matter price it into the facility at the outset. The arithmetic is the same either way.

Published 2021-10-20 by the Commercial Finance division. Research is prepared for eligible counterparties and does not constitute advice.