From the November 2011 issue of Treasury & Risk magazine

Gold AHA Winner in Working Capital

Taking Netting to the Nth Degree: Visa

Michael Donnelly, senior business leader and head of global treasury settlement; Kathrina Novak, senior business leader; Joyce Mueller, business leader; and Richard Laiderman, treasurer Michael Donnelly, senior business leader and head of global treasury settlement; Kathrina Novak, senior business leader; Joyce Mueller, business leader; and Richard Laiderman, treasurer

Visa operates a massive wholesale funds transfer settlement network—making and receiving over 2,000 payments daily from the financial institutions that issue its cards and pay merchants. Total settlements top $3 trillion annually, so the benefits of netting those payments and making or collecting just one payment daily for each financial institution (FI) would be huge. But netting had long been impossible because FIs weren’t making or collecting one payment but thousands of discrete payments that had to be tied to separate business units or purposes. The source or destination of payments had to be identified or it would disrupt efficient processing by the FIs.

Visa treasury solved the netting challenge in 2010 by writing an application that allows it to consolidate payments to and from some of its large FI customers without impacting their operations, explains Richard Laiderman, Visa’s treasurer. Consolidated net payments now include the amount, direction of transfer and payment address for every individual client business unit transaction. The difference is that after netting, these multiple payments are no longer with Visa but are executed internally by the client FI with information supplied by Visa.

The challenge for Visa treasury and IT was to enable a single net settlement transaction daily but keep the components of the settlement transparent to the FI so its legacy systems could continue to post them all as usual, explains Malini Dutta, Visa’s chief software engineer. Now payments are exchanged in a customer consolidation account rather than a Visa settlement account. This ultimately meant “reinventing our entire settlement systems process,” notes Jo-Anne Rodrigo Sevilla, another Visa software engineer, “as work on the many components revealed new complexities.”

Visa already had many high-volume data connections with its FI clients, but each had a discrete business unit on the other end. Some FIs separate the issuing and merchant processing businesses. Others have special programs or multiple platforms as a result of past mergers. For netting to work, one data pipe had to deliver all of the detailed payment information directly to the client bank’s funds transfer system.

“Visa chose SWIFT as the delivery vehicle because SWIFT could efficiently deliver funds transfer information to the ultimate destination,” says Kathrina Novak, treasury senior business leader. “Once a SWIFT message arrived, most banks could do straight-through processing to execute many internal funds transfers because SWIFT is already well integrated in their payment infrastructures.”

Netting substantially aided Visa’s liquidity and working capital management. Without netting, Visa’s intraday settlement exposures to its large clients tied up valuable liquidity. By its nature, intraday payment timing is uncertain; outflows may occur before inflows. In Visa’s case, the liquidity reserves needed to cover those exposures were large. On a normal weekday, it pays out and receives the equivalent of over $8 billion. On a Tuesday after a three-day weekend, that number can hit $35 billion or more. Netting greatly reduced that exposure and freed up a significant amount of working capital and liquidity for other corporate purposes. Visa reduced peak-day settlement liquidity exposure by $1 billion more than was targeted, says treasury senior business leader Michael Donnelly, who led the netting effort.

Visa also achieved its other goal of reducing relevant incoming and outgoing funds transfers to a single payment for each netting customer. “This tool can be used to net payments with counterparties even though the existing individual payments are with decentralized or unrelated business units within the counterparty,” says Donnelly. “It is only possible when everything is automated and all processing is straight-through from beginning to end.”

 

Read about the Caterpillar project that won the silver in the Working Capital category here and the DRS Sustainment Systems project that won the bronze here. 

 

 

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