Payments - Centralized HUB- Regional Regulations

A payment hub has been a buzz word in the banking industry and in the corporate payment world for some time now. One of the objectives is to have a centralized location for defining payment processes, identifying cost due to scheme operators and for liquidity scenarios, regulatory compliance, identifying the best route among many others.

Banks and Corporates who have operations in multiple countries try to leverage their presence in different countries to save on costs incurred on international payments as also to streamline domestic payments and reconciliation. Banks in particular can create a central payment processors that route the payments to their operations in the countries in question for them to forward the payments further through the domestic networks to reach the end beneficiary.

It is none the less creates a very efficient mechanism for funds transfer but has the potential to fall foul of regulators who would want to track the source and purpose of funding, tracking imports, exports and remittances and ensure that the data of the citizens and their corresponding transactions do not reach unrelated hands.

Some of these regulatory requirements run in contraventions of the centralized processing that the banks and corporates would want. Apart from routing, centralization would include monitoring liquidity position of different entities and account along with different risk controls relating to non delivery and return of instructions.

There are different network topologies that can address these issues. Only the inter-bank accounting entries, a part of the complete payment can go to the processing hub or in some cases just the sufficient data for routing. The central hub can revert back with the confirmation of settlement or the route based on the bare bone structure to the source who can route the complete instruction to the intended recipient of the instruction.

The settlement can be effected by the central switch or can be a bilateral settlement depending on the nature of relationship between the banks or parties involved.