Settlement speed, particularly in the world of finance and commerce, has become a key differentiator. Nearly ten years ago, Europe paved the path by reducing the settlement cycle to T+2, necessitating a comprehensive overhaul of the European market structure. In just a few months, European firms will again be challenged by the US NEXT-DAY settlement system.
With the evolution of technology and the increasing demands of businesses and consumers alike, there’s been a significant push for faster, more efficient settlement processes. In this article, we delve into what next-day settlement means, how it is seen in different parts of the world, its benefits, challenges, and finally, how businesses can implement it.
Next-day settlement explained
Next-day settlement, as the name implies, is the process by which transactions are finalised and funds are transferred between parties within one business day. Traditional settlement systems might have taken multiple days or even weeks, depending on the nature of the transaction and the parties involved. With next-day settlement, funds move from the payer’s account to the payee’s account within a 24-hour timeframe.
Next-Day Settlements - Europe vs the US
While next-day settlement is becoming increasingly prevalent, its adoption varies regionally. In Europe, for example, efforts have been made to enhance the efficiency of payment systems, resulting in quicker settlement times for many transactions, including those that cross borders within the European Union. The EU’s push for a Single Euro Payments Area (SEPA) has played a significant role in this.
Contrastingly, the US traditionally operated on a T+3 settlement cycle (transaction date plus three business days) for many years. However, there’s been a move this year towards T+1, or next-day settlement, mirroring the European model. This move not only aligns with global standards but also responds to the need for faster capital movement in an increasingly digital economy.
Key benefits of next-day settlement
Here are the three main benefits of using next-day settlement processes for your business:
It boosts cash flow
Faster settlements mean that businesses have quicker access to funds. This can improve liquidity, allowing businesses to meet operational costs, invest in growth initiatives, or manage debts more effectively.
Faster cross-border transactions
In an increasingly globalised world, businesses are often dealing with partners, suppliers, or customers in different countries. Next-day settlement reduces the waiting period for cross-border transactions, enabling businesses to operate seamlessly across various jurisdictions.
Gives businesses oversight on finances
Quicker settlements offer real-time or near-real-time insights into a business’s financial status. This can be crucial for financial planning, budgeting, and decision-making.
Main challenges of next-day settlement processes
Here are the main challenges you should watch out for when working with next-day settlement processes:
An increase in settlement fails
Faster settlements mean that businesses have quicker access to funds. This can improve liquidity, allowing businesses to meet operational costs, invest in growth initiatives, or manage debts more effectively.
Legacy systems integration
Many institutions operate on older, legacy systems. Integrating these systems with the latest technologies required for next-day settlements can be complex, time-consuming, and expensive.
Not managing the volume of payments
With the possibility of more transactions occurring in a shorter timeframe, there’s a need for robust systems that can handle this increased volume. If not managed properly, it could lead to bottlenecks or system overloads.
Key benefits of next-day settlement
To switch to next-day settlement processes, most businesses go through the following five recommended steps:
Assess current systems
Understand the capabilities and limitations of your existing systems. Identify areas that need upgrades or overhauls.
Engage with expertise
Consult with financial and tech experts who have experience in implementing next-day settlement processes and who can understand how sophisticated your requirements are.
Pilot test
Before a full-scale rollout, conduct pilot tests to identify potential issues and mitigate them.
Training and onboarding
Ensure that staff members are trained and familiar with the new processes to reduce the chances of human-induced errors.
Continuous monitoring and optimisation
Even after implementation, it’s crucial to continuously monitor the system for any anomalies and optimise processes as necessary.
While next-day settlements offer multiple benefits for businesses, from boosting cash flow to providing a clearer financial overview, there are still challenges to consider. With the right approach, strategies, and expertise, businesses can navigate these challenges and harness the advantages that next-day settlement brings to the table.
Recognise the benefits of next-day settlement and prepare to strategise and navigate its implementation. Leverage our expertise and technology for lighting-fast settlement speeds.
