How do instant payment systems generally affect settlement risk?

Instant payment systems generally reduce settlement risk because they provide real-time processing of transactions. In these systems, payments are settled almost immediately, which helps to minimize the time during which funds are in transit and vulnerable to issues such as default or liquidity shortages. This immediate settlement feature means that once a payment is initiated, the receiving party can access the funds instantly, mitigating the risk of the payer failing to fulfill their obligation after the transaction has been initiated.

In traditional payment systems, there is often a delay between the initiation and completion of the transaction, which creates a window where the risk of non-settlement exists. By contrast, instant payment systems streamline this process, effectively lowering the probability of operational or credit risk impacting the transaction outcome. Overall, the implementation of these systems fosters greater security and confidence in the settlement process, thereby reducing the overall settlement risk.