What is Netting Off and How Does It Work?

If Party A in Country A has to send Party B in Country B $100, and Party B in Country B has to send Party A in Country A $100, how is this transaction executed? This is a classical case of what could be netting-off.

Watch this brief video to learn more about netting off and how it works.

Transcription

Hello. My name is Faisal Khan. I’m a banking and a payment consultant. And today I’ll be talking about the concept of netting off.

Netting off is a concept where you have two different book sets and one you know, or two accounting books and one, you know, accounting book owes the other person money and this book or this person money, but if they are both the same then you really don’t have to do anything. You don’t have to make a check to this person, and this person doesn’t have to make a check to this person. He will say hey listen if you owe me a hundred and I owe you 100, we’ll balance it off as paid and we assume you’ve paid me, and I’ve paid you, and everything is equal.

So, netting off is basically an accounting trick if you will, its not even a trick, it’s just a concept. And netting off is used in payments a lot. So let’s say at the end of the day you know there’s a money transfer company in Chicago and they have to send $10,000 to Manila. And there is a company in Manila that has to send the same $10,000 or other $10,000 or some other transactions back to this company in Chicago. Well it doesn’t make sense for that company in Chicago to send $10,000 to Manila and the Manila company needs to send $10,000 back to Chicago. They can just net off. They say ok, I’ll assume you’ve paid me, you assume I’ve paid you and we will net off.

There is no payment instrument issue. There is no transaction or transaction executer on a payment network that actually makes and go there and makes $10,000 come here. It’s just an accounting balance that balances both entries. It is used heavily in the money transfer world and in the world of banking and payments in general. The biggest concept, the problem is to have symmetrical payments. Most of the payments are asymmetrical. There would be more money going into the Philippines than money coming out from the Philippines and so forth.

So, the idea is to balance or net off as much as many payments as you can. I hope I was able to explain that concept to you. If you like this video series please feel free to subscribe and click on the like button. Till next time, have a good one.