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22 Smartcard Interoperability Issues for the Transit Industry 2.2 Financial Management Issues Financial integrity is the highest priority for any agency participating in an interoperable fare payment system. This section discusses the key financial management decisions and issues that must be addressed, including Transaction clearing and settlement, Funds pool management, and Financial exposure risk associated with advanced features. 2.2.1 Transaction Clearing and Settlement In a fare payment program where multiple operators are selling fare value accepted by more than one operator, transaction clearing and settlement allows each agency to be reimbursed for the services provided, regardless of where the fare product is purchased. Again, the challenge is obtaining agreement from all participating agencies on an approach to transaction clearing and settlement. As presented in Section 2.1.2, clearing and settlement can be accomplished applying either a centralized or decentralized model. 2.2.1.1 Centralized Clearing and Settlement In a centralized clearinghouse, all transaction information (purchases and fare payments) is transmitted to a central system where the net settlement position for each operator is calculated, usually by using settlement software. Differences in sales versus usage will determine whether a given member agency is owed or owes money. The centralized model can be performed in house by one of the member agencies or outsourced to a third party. 2.2.1.2 Decentralized Clearing and Settlement In a decentralized clearinghouse, the member agencies establish financial relationships with each other to enable the movement of funds. The decentralized model often takes advan- tage of existing infrastructure, but, because of multiple points of aggregation, effort is often duplicated. In both centralized and decentralized models, the frequency at which settlement occurs must be decided by the participating agencies. In a high-transaction environment where large amounts of money are involved, settlement is usually performed daily. However, in an environment where transaction volume is relatively low or where an agency's existing procedures have revenue col- lection performed at intervals of multiple days, the increased cost of daily settlement may not be warranted. 2.2.1.3 Clearing and Settlement Strategies The finance departments of the participating agencies must be intimately involved in the project to address financial management decisions. Ideally, a separate finance committee-- consisting of financial professionals supported by technical experts from each agency--should be formed. This type of organization is necessary given the responsibility of having to make deci- sions that affect the movement and management of funds within interoperable fare payment sys- tems. The finance committee would decide whether clearing and settlement should be centralized or decentralized. 2.2.2 Funds Pool Management The funds pool is created as a result of revenue collected (card loads) but not yet used in the system. The funds pool may be in a central account managed on behalf of the participants or it