Solving T+2

In a meeting last week we were talking about T+2 challenges. Certainly Robinhood has brought these back to light. Companies these days are commonly raising capital left and right just to fund payments.

The thing is, T+2 is going away right before our very eyes and pre-funding requirements are now being solved through various mechanisms. Some are cash based and some are technology based as this post outlines. The technical solutions are preferable because any cash solution is just a slightly different take on the same problem.

With new transfer types like RTP coming to market in the US, you can now swap your transfer types in a API and start taking off huge chunks of time. By swapping in Same Day ACH and RTP for the traditional methods, speed and pre-funding are totally different. Change the transfer type and you change the settlement window. How this plays out is pretty straight forward.

T+2 Settlement Solutions

Swapping between these transfer types is becoming far less complex these days. Dwolla has focused on abstracting all the complexity and just giving developers the ability to change the transfer type in the API instruction. Programming the speed is becoming as simple as changing the instruction you send when initiating a payment.

How this actually plays out in markets is the stuff of hilarity and complexity. An exchange has banks, the banks have custodians that are other banks, the traders have banks, the traders have customers, and they all deal with the issue above and just compounds because you can’t get money from one side of the market to the other without dealing with this.

T+2 Settlement Ridiculousness

That dirty little T+2 problem between all these entities results in piles of cash sitting around exchanges. A project I worked on at one point had more than $80 billion dollars sitting in those cash piles to offset the risk sitting between entities.

$80 billion. All because a set of transfer types wasn’t readily available. That’s one exchange! This is now starting to become avoidable just by using the right API.

Yes, I understand the wire argument but they aren’t really programmable and quite frankly, they don’t run 24/7 like RTP does. If wire was going to solve T+2 it would have been obvious decades ago. NSS had it’s chance but for whatever reason it remains novel. As the new transfer types are implemented in the US markets liquidity won’t be managed on rolling settlement windows, it’ll eventually happen in real time. I can finally see it happening and I think it’s wonderful.

Once the market can actually run 24/7 because the underlying payment tools enable it, the obvious impact is a greater efficiency and less pent up cash in the system. It might even open up more capital to go into the market giving us an extension of the markets amazing bull run. Wouldn’t that be something?!

I’m excited to see the Dwolla team tackle some of these T+2 hurdles. They’re quietly shipping massive improvements in speed that will change the funding dynamics for innovations built on the platform.

We’re almost there. T+2 won’t last forever.