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What is Payment Settlement

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2023-01-06
What is Payment Settlement

Introduction

Payment settlement is an institutional arrangement between an exchange and the payment provider that details the financial settlement and amount to be placed in an exchanges fiat account or crypto wallet based on agreed financial obligations. These funds were initially collected on behalf of the exchange by the payment provider and will have to be settled in either two ways.

Types of Payment Settlement

There are two main types of settlements, fiat settlements and crypto settlements. Traditionally, settlements are done in fiat or local currency. For example a payment provider collects ZAR and settles with the exchange in its local ZAR account T+1. However, due to regulatory restrictions and operational efficiencies it is sometimes easy for exchanges to prefer settlements in cryptocurrency i.e stablecoins like USDT/USDC. Some payment providers can directly offer this service or can work with third party OTC providers to facilitate this.

Settlement Fees

Sometimes settlements do not come cheap, due to a number of factors such as local regulation around capital flight, payment system in the jurisdiction or currency volatility. It is not uncommon for stamp duty fees to be part of the settlement fees. This makes providers charge a premium due to the volatility of that particular currency.

How are settlements done?

To understand settlement you need to understand the fund flow - which is the movement of funds from one party to another. Typically in very basic settlement structures. It starts from the depositors/users bank account, to the settlement account managed by the provider and then to the merchant account (In this case the exchange). In most cases there are more complexities to this fund flow. However, it is important that compliance and regulation is a centrepiece of this agreement to avoid contravening particular laws in specific jurisdictions.

Importance of Payment Settlement to the user

Users need to have a basic understanding of settlements because in some cases they determine the fees that the exchange will charge for a deposit and sometimes withdrawal. In cases where settlement or deposit fees are high from the providers side, exchanges might have to charge higher fees for transactions through the channel