Annex: 4-step vs 5-step Processes in Domestic Clearing and Settlement

Domestic IPS follow either a 4-step or 5-step clearing and settlement model, described below. Nexus is compatible with both models.

In the 4-step settlement model:

1. The Debtor Agent submits the payment instruction to the IPS

2. The IPS processes the instruction (either by transferring central bank money from the Debtor Agent to the Creditor Agent, or recording a settlement obligation between the two, to be settled at the end of the settlement cycle.)

3. The IPS sends the payment instruction to the Creditor Agent for acceptance or rejection

4. The Creditor Agent will EITHER:

   1. Accept the payment instruction and credit the Creditor Account, OR

   2. Reject the transaction, resulting in a return transaction.

5. The IPS sends a confirmation or rejection message to the Debtor Agent

In the 5-step settlement model:

1. the Debtor Agent submits the payment instruction to the IPS

2. the IPS reserves the funds of the Debtor Agent in its system (either based on prefunding or collateral; the mechanism does not change the flow) to guarantee settlement, but does not yet settle the payment.

3. The IPS sends the transaction to the Creditor Agent for acceptance or rejection

4. The Creditor Agent will EITHER:

   1. Accept the payment instruction OR

   2. Reject the transaction.

5. Upon confirmation from the Creditor Agent, the IPS will either:

   1. settle the transaction (guaranteed by the reservation made earlier), or

   2. cancel the reservation

6. The IPS confirms the positive (or negative) outcome to both the Debtor Agent and the Creditor Agent.

   1. If positive, the Creditor Agent credits the Creditor's account.

Benefits and consequences of a 5-step settlement model over a 4-step settlement model

A 5-step settlement model has the benefit of the IPS being in control of the timeout and the settlement of a payment. Settlement takes place only after both the Debtor Agent and the Creditor Agent have confirmed the transaction. This results in the IPS having control of the final status of the payment at all times.

The downside of a 5-step settlement model is the need for an additional confirmation message towards the Creditor Agent after settlement is completed at the IPS. In the case of high volume, low cost retail payment systems, this additional message may be costly to implement.