Payment netting is a treasury procedure that consists of grouping multiple cash flows into a single ‘netted’ amount. This practice allows positive and negative values to offset each other, thereby reducing cash flow risk.
Payment netting strategies are useful for companies with numerous cash flows on the same day because they help them to reduce settlement risk. That is why it is also known as “settlement netting”.
When a cross-border payment is due, netting strategies require that the counterparties group their cash flows. What is finally transferred is then the difference in the total amounts, which is delivered by the counterparty with the larger amount due to pay.
What are the benefits of payment netting?
- It reduces the administration time and higher costs of multiple transactions.
- It reduces credit risk, settlement risk, liquidity risk and systemic risk.
- It reduces the amount of a currency that has to be delivered.