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Why are interbank payment (settlement) systems (TARGET2, for example) closed for weekends and holidays?

Are they saving on the electricity of their servers or something? Or are they really checking these zillions of payments by hand? And if so, what exactly do they check and why not provide 24/7 service (surely a country can afford to keep a little more personnel at staff?)

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My guess there are a lot of back office processes running during off hours and weekends, such as reconciliation, reports, archival. –  Vitalik Dec 14 '12 at 2:22
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2 Answers 2

The second part of your question is the easiest to answer, how much manual work is involved in settlement processes?

Payment systems which handle low value (i.e. high volume) transactions work on the basis of net settlement. Each of the individual payments are netted across all of the participant banks, so that only one "real" payment is made by each bank. Some days banks will receive money, others they will pay money. This is arbitrary and depends on whether their outbound payments exceed their inbound payments for that day.

The payment system will notify each Bank how much it owes/will receive for the day. The money is then transferred between all of the banks simultaneously by the payment system to remove the risk that some pay and others don't.

If you're going to make or receive a very large payment, you're going to want to make certain that its correct. This means that if there's a discrepancy, you need operations people available to find out why its wrong.

When dealing with this many payments, answering that question can be hard. Did we miss a payment? Is there a duplicate? Etc.

The vast majority of payments will process without any human involvement, but to make the process work, you always need human brains there to fix problems that occur.

This brings me to your first question. On every day that settlement happens, a bank will receive (or pay) a very large sum of money. As a settlement bank you must settle that money - the guarantee that every bank will pay is one of the main reasons these systems exist.

For settlement to happen, every bank has to agree to participate, and be ready to verify the data on their side and deliver the funds from their account.

So there is no particular reason that this doesn't happen on weekends and holidays other than history. But for any payment system to change, it would require the support of (at least) a majority of participants to pay staff to manage the settlement process on weekends.

This would increase costs for banks, but the benefits would only really be for you and me (if at all). That means it's unlikely to happen unless a government forces the issue.

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So basically when a bank thinks that the lump sum to be paid with the next settlement is way too big, it can defer the clearing cycle to investigate the individual payments which make up this sum? Why is this necessary? I can't believe that it's because of software errors or something like that... I also don't believe that they're gonna phone their customers asking if they're really sure they meant to transfer 10M and not 1M to bank B's customer... –  Henno Dec 14 '12 at 7:27
    
No, it cannot defer the settlement cycle. The cycle is set by the market and it must settle its obligation at the agreed time, so banks will spend the whole day making sure everything is correct before it happens. –  thepassiveinvestor Dec 14 '12 at 8:16
    
You are right, they won't contact customers directly to do this, they will just decide what to do themselves. Could all these decisions be automated? Yes. But believe me, I work for a bank and the processes are highly manual in many cases. And remember, for a payment system you need everyone to be fully automated or willing to provide staff on weekends, not just some banks. –  thepassiveinvestor Dec 14 '12 at 8:17
    
To be clear, my answer to your question is "Yes, you're absolutely right, payments could be made on weekends, but banks on the whole have rubbish processes that require manual oversight and take a long time to change" –  thepassiveinvestor Dec 14 '12 at 8:18
    
Couldn't the national bank just fix the rubbish procedure fiasco by issuing a decree stating that starting from the year after the next year, all banks participating in its settlement system need to adhere to its new specs which ensures that all processing happens in real time? More than once I have sent out a payment to a person who needs it friday evening and it arrives on Monday morning by which time it is not needed any longer. –  Henno Dec 14 '12 at 20:25
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TARGET2 is a high value realtime settlement system across Europe and for this to be open on weekends would mean all the Banks including Central Banks in the Euro Zone work. Quite a few times to manage intra day liquidity, banks borrow from each other, hence there is an active monitering of the liquidity by Banks. The borrowing happens over phone and fax and the lending bank sending a high value transaction that credits the borrowing banks.

These is the day to day job of treasury group [highly paid individuals] to manage liquidity.

Now if on weekends the volume is less, it does not make sense to keep these people, the cost of supporting this for very insiginificant business gain is not driving to build such systems.

On the other hand on retail transactions, say Cards [Debit / Credit], ATM, the value is not high and hence there is no treasury function involved and there is a huge need, everything is automated. So no issues.

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Whilst the value on retail transactions is not that high, the volume is huge. There's also a higher chance of error with retail transactions. Your point about liquidity is a good one, its yet another process that's needed for settlement to work. For ATM and credit card transactions on weekends they are recorded at the weekend but settlement processes are performed on business days. The things you buy at the weekend will actually be settled a few days later for the same reasons as I mentioned in my answer. –  thepassiveinvestor Dec 14 '12 at 8:26
    
@thepassiveinvestor: Fully agree. On retail the transactions are settled only on working days. On Cards most transactions square off, ie the amounts the bank need to pay each other is not high. –  Dheer Dec 14 '12 at 11:57
    
@thepassiveinvestor What kind of errors are you talking about exactly? Can you give an example how can these errors occur? –  Henno Dec 14 '12 at 20:35
    
Someone puts in the wrong account number or branch/sort code. Someone issues a payment but then a direct debit comes through and they no longer have sufficient funds. –  thepassiveinvestor Dec 15 '12 at 6:53
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