Balancing the Payment System

TL;DR

This paper introduces the concept of balanced payment systems, demonstrating how balancing methods can improve liquidity management, reduce gridlock, and enhance financial stability through a novel approach applicable to various payment infrastructures.

Contribution

It presents a new framework for constructing balanced payment subsystems and generalizes the balancing method for broader application in financial systems.

Findings

Balanced payment subsystems can be settled in full, removing them from the system.

Balancing methods can reduce payments gridlock and improve liquidity.

Application of the method can contribute to financial stability.

Abstract

The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies are making it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, the interbank balancing method can also be applied to private payment systems, complementary currencies, and trade credit clearing systems to provide better liquidity and risk management. In this paper we introduce the concept of a balanced payment system and demonstrate the effects of balancing on a small example. We show how to construct a balanced payment subsystem that can be settled in full and, therefore, that can be removed from the payment system to achieve liquidity-saving and payments gridlock resolution. We also briefly introduce a generalization of a payment system and of the method to balance it in the form of a specific application (Tetris Core Technologies), whose wider adoption could contribute to the financial stability of and better management of liquidity and risk for the whole economy.