The efficiency of slow: Rethinking speed in payments

Abstract

Speed is a recurring theme in almost any discussion about payments, usually because people feel payments are not fast enough. Whether the debate is about launching instant payment services, introducing regulations to speed up adoption, international efforts to remove barriers to cross-border payments (eg initiatives by Bank for International Settlements1 and the Financial Stability Board2), or the belief that distributed ledger technology will make everything instant, speed is often treated as a problem that can be solved simply by adding new technology, standards or systems. However, while technology has certainly made payments faster over the past decade, it is not the only factor. This paper outlines key issues that arise when moving from intraday to immediate processing, suggesting that not everything scales as easily as technology. The paper argues that speed is a scarce resource and comes at a cost. The relationship between payment speed, settlement risk and the availability and cost of liquidity provides a useful way to understand the trade-offs involved, and shows why the challenge cannot be viewed through a purely technological lens. Liquidity is a crucial part of the payment process and must be built into system design. Fragmented market infrastructures, and limits on the ability to schedule or delay payments, will affect the overall cost of making payments. These factors should be carefully considered when shaping the underlying ‘plumbing’ of the financial system. This article is also included in the Business & Management Collection which can be accessed at http://hstalks/business.