Collateral
Definition:
An asset that is delivered by the collateral provider to secure an obligation to the collateral taker.
Collateral arrangements may take different legal forms. Collateral may be obtained using the method of title transfer or pledge of assets.
An asset or third-party commitment that is used by a collateral provider to secure an obligation vis-à-vis a collateral taker.
Details:
Collateral in lay terms is what you own other than hard currency that can be used to pay for your credit. For a normal person this can be: a house ,a car, jewellery, foreign currency etc.
The same logic applies in the case of participants in a payment system, but different types of assets are used.
The whole idea of having collaterals in a payment system is to increase the liquidity. If you pledge collaterals you will be able to sedn payments with an amount that exceeds you “real-time real” hard cash balance.
Note:
This is a series of posts with definitions for the jargon used in #banking, #fintech and #payments.
Too many people use some terms without understanding them beyond the definition.
Too many “experts” use the terms but they never had experience with the actual implementation of anything in #banking, #fintech and #payments.