How digital assets enable instant settlement and reconciliation
This article is written by Fortris The inherent delays involved in traditional cross-border payments are an inconvenience, and can be a barrier to progress and efficiency. What if there were a way to make it all happen in an instant? In banking systems, the journey of a payment from one account to another goes through several stages, often invisible to the everyday consumer. This complex process involves clearing, settlement, and reconciliation to initiate, approve, and finalize payments. However, it’s often slow and cumbersome, especially in cross-border transactions with different systems and standards. Digital asset technology offers a revolutionary leap forward, dramatically shortening the payment cycles for businesses. Read on to find out how. What are clearing, settlement, and reconciliation? First, let’s take a look at how regular transactions work. The process can be broken down into three essential steps: clearing, settlement, and reconciliation. Clearing Clearing involves confirming the details of a transaction, such as the amount to be transferred and the parties involved. This step ensures that the buyer has the funds available and the seller agrees to the sale terms. In the traditional banking system, clearing prepares for the actual movement of money, acting as a safeguard against potential errors or fraud. Settlement Settlement is the actual exchange of payment. Think of it as the moment the money physically leaves one account and lands in another. It usually takes several days, depending on the transaction type and the institutions involved. Reconciliation Reconciliation is the post-transaction verification process. It involves checking that the amounts debited and credited are correct and that the transaction has been recorded accurately on both ends. It’s similar to balancing a checkbook or cross-verifying your bank statement against your records. This process is crucial for businesses and financial institutions to maintain accurate financial records and ensure that all transactions are accounted for properly. How does a transaction work? To help you understand how clearing, settlement, and reconciliation work in practice, let’s take a look at a simple example. Imagine you’re buying a coffee. You swipe your card, and in return, you get your coffee. This transaction goes through a few steps before it’s considered complete for everyone involved, not just you and the coffee shop. Clearing: This is like saying, “I want to buy this coffee.” It’s the process where the details of the purchase (like who’s buying, what’s being bought, and how much it costs) are agreed upon and prepared for the actual money movement. Settlement: This step is where the money actually changes hands. This is when your card payment goes through. The process takes several days because it moves through various systems and checks. Reconciliation: After the settlement, the coffee shop needs to make sure they received the right amount of money for the coffee. This step involves checking records to confirm that the payment made matches the sale’s details. The transaction is longer and more complex than it might seem—and this is just for a cup of coffee. For larger-scale B2B transactions, like paying staff in different countries or bulk ordering raw materials, the process is essentially the same but typically takes longer as more verification is required. Bank transfers and credit card payments Businesses typically send and receive payments via bank transfers or with credit cards. With bank transfers, clearing and settlement can be a slow process, often taking several days to complete, especially if your transfer falls on a weekend or public holiday. Reconciliation, too, can be labor-intensive, requiring manual verification of records. Now, you might be thinking that paying by credit card is more convenient, but that’s not necessarily the case. Credit card payments clear quickly because they use digital systems to initiate and approve transactions. However, settlement typically takes one to three business days. Then, reconciliation involves verifying transaction records against statements, complicated further by fees, refunds, and chargebacks (refunds requested by the cardholder, often due to disputes such as not receiving an item or being charged incorrectly). With both bank transfers and credit card payments, a transaction involves a lot of steps and can take several days. There’s paperwork, verification, and waiting periods. Fortunately, there is a better way: using blockchain-based digital assets. Payments on the blockchain Blockchain technology simplifies the clearing, settlement, and reconciliation process. In a blockchain transaction, when you transfer digital assets, the process merges the verification of the transaction (confirming it’s legitimate) with the actual movement of funds. This happens in a secure and almost instantaneous manner. Once the transaction is added to the blockchain, it’s confirmed and cannot be altered, ensuring both parties have clarity and certainty immediately. Going back to our coffee shop example, imagine paying via the blockchain. You initiate a payment, directly transferring digital funds to the coffee shop’s wallet. This action is immediately verified and permanently recorded on a public ledger, visible to all but unchangeable. The coffee shop sees the payment in real-time, and the deal is sealed right away. Why is it so fast compared to traditional payments? Blockchain technology operates without a central authority. In traditional banking, a central entity like a bank confirms the transactions, whereas blockchain transactions are validated by a distributed network of computers. The lack of a central authority boosts efficiency and reduces the potential for errors and disputes, making blockchain an attractive option for businesses. This decentralized system is enabled by public key cryptography, a secure method of digital communication that ensures only the intended recipient can access the sent funds. This ensures blockchain transactions are not only fast, but also secure. To learn more about how this works, consider reading up on public key cryptography, which provides the building blocks for secure, direct transfers of digital assets on the blockchain. Benefits of digital asset payments Here are the main advantages of digital asset payments: Digital asset payments with Fortris Fortris enables enterprise businesses to take advantage of the speed and efficiency of blockchain payments. Fortris provides an off-chain record of all on-chain transactions using live data from the…
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Everything you need to know to set a budget rate
This guide is from our content partner, Ebury It’s crucial for you and your team to define a robust FX strategy for your business. However, in the global currency landscape, where many factors are constantly changing and evolving and, at times, presenting unprecedented challenges, this begs the question: How do we set a robust FX strategy? What is a budget rate? A budget reference rate, commonly abbreviated as budget rate, is a reference exchange rate that a company uses to set prices, costs, or benchmark for a campaign or budget period. One goal of FX strategy is to protect this budget rate and fortify cash flow forecasts when transacting internationally. For example, if you are a UK importer buying your goods from a supplier in EUR and selling your final product in GBP, you will need to know the cost in GBP to calculate the selling price within the UK. Setting a budget rate is essential for any global business, whether importers or exporters. It enhances financial planning, improves forecasting, provides certainty about the future value of FX exposures, and helps gauge the impact of FX market fluctuations on profit margins. Common methodologies to calculate a budget rate There is no straightforward answer or one-size-fits-all approach to implementing a budget rate in your FX or treasury policy. It should be well-thought, considered within the overall FX strategy, driven by company forecasts and data, and tailored to suit your unique needs and financial goals. If you are an importer, it can be your cost rate plus some buffer to ensure stability. If you are an exporter, it is the rate you expect to convert your incoming foreign currency exchange to home currency. Depending on the seasonality, if you want to set stable prices for the year at the start of your annual budget, the budget rate will coincide with your annual ‘campaign’. In this case, protecting the budget rate (with FX hedging) against unpredictable currency rates is akin to protecting the campaign rate. However, the approach to arriving at this rate changes if you are a business that runs more than one campaign within a budget period. In this case, you will need to protect the budget rate of an individual campaign rather than the annual budget rate. Different businesses approach this depending on their business situation, including FX flows, historical data, cash flow forecasts, needs, goals, and even risk tolerance levels. It can be: Each year, each business, and each goal demands a unique approach. Using last year’s budget rate as a benchmark because the exchange rate favoured you in the previous year may not be the best approach. Similarly, using the current spot rate when budgeting may expose you to future fluctuations. Hence, this approach is best suited when you have a short-term outlook. In a nutshell, depending on your goals, you’ll set a budget rate before the start of the financial year, season, period or order and, accordingly, design an FX strategy. Questions to consider before setting a budget rate If you are from the finance or treasury team, here are some of the questions that will help you assess your business circumstances and FX flows before you set up a budget rate: Setting a budget rate isn’t easy. But the right approach will help you build a resilient FX strategy, fortify financial stability, monitor your exposure, and optimise your international cash flows. Read the free e-book to decode the role of a budget rate, its importance, how to set it and what to consider before applying it: CLICK HERE TO GET E-BOOK Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below. Notice: JavaScript is required for this content.