Payment system

A payment system is any system used to settle financial transactions through the transfer of monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and technologies that make such an exchange possible.^[1][2] A common type of payment system is the operational network that links bank accounts and provides for monetary exchange using bank deposits.^[3]

What makes a payment system a system is the use of cash-substitutes; traditional payment systems are negotiable instruments such as drafts (e.g., checks) and documentary credits such as letters of credit. With the advent of computers and electronic communications a large number of alternative electronic payment systems have emerged. These include debit cards, credit cards, electronic funds transfers, direct credits, direct debits, internet banking and e-commerce payment systems. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash in domestic and international transactions and consist of a major service provided by banks and other financial institutions.

Payment systems may be physical or electronic and each has its own procedures and protocols. Standardization has allowed some of these systems and networks to grow to a global scale, but there are still many country- and product-specific systems. Examples of payment systems that have become globally available are credit card and automated teller machine networks. Specific forms of payment systems are also used to settle financial transactions for products in the equity markets, bond markets, currency markets, futures markets, derivatives markets, options markets and to transfer funds between financial institutions both domestically using clearing and Real Time Gross Settlement (RTGS) systems and internationally using the SWIFT network.

The term electronic payment can refer narrowly to e-commerce - a payment for buying and selling goods or services offered through the Internet, or broadly to any type of electronic funds transfer.

National payment system

An efficient national payment system reduces the cost of exchanging goods, services, and assets and is indispensable to the functioning of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money ^[4] The technical efficiency of payment system is important for a development of economy. Real-time gross settlement systems (RTGS) are funds transfer systems where transfer of money or securities takes place from one bank to another on a "real-time" and on "gross" basis. Settlement in "real time" means that payment transaction does not require any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching or netting with any other transaction. Once processed, payments are final and irrevocable.

RTGS systems covering multiple countries: TARGET resp. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) in 26 countries of the European Union. TARGET2 is the Real Time Gross Settlement system for the Euro currency, and is offered by the Eurosystem, which comprises the European Central Bank and the National Central Banks of those countries that have adopted the Euro currency. The Eurosystem and the European System of Central Banks will co-exist as long as there are EU Member States outside the Euro area. TARGET2 is used for the settlement of central bank operations, large-value Euro interbank transfers as well as other euro payments. TARGET 2 provides real-time financial transfers, debt settlement at central banks which is immediate and irreversible.

This "electronic" payment system is normally maintained or controlled by the Central Bank of a country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $100,000 and increasing the amount of Bank B's account by the same. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as BACS. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. The best RTGS national payment system cover up to 95% of high-value transactions within national monetary market. The World Bank has been paying increasing attention to payment system development as a key component of the financial infrastructure of a country, and has provided various form of assistance to over 100 countries. Most of the RTGS systems in place are secure and have been designed around international standards and best practices.^[5] By 1985 only 3 central banks had implemented RTGS system. At the end of 2005, the use of RTGS systems had diffused to 90 central banks.^[6]

Cross-border payments

Globalization is driving corporations to transact more frequently across borders. Consumers are also transacting more on a global basis—buying from foreign eCommerce sites; traveling, living, and working abroad. For the payments industry, the result is higher volumes of payments—in terms of both currency value and number of transactions. Interestingly, this is also leading to a consequent shift downwards in the average value of these payments.

The ways these payments are made can be cumbersome, error prone, and expensive. Growth, after all, is often messy. Payments systems set up decades ago continue to be used sometimes retrofitted, sometimes force-fitted—to meet the needs of modern corporations. And, not infrequently, the systems creak and groan as they bear the strain.

For users of these systems, on both the paying and receiving sides, it can be difficult and time consuming to learn how to use cross-border payments tools, and how to set up processes to make optimal use of them. Solution providers (both banks and non-banks) also face challenges, struggling to cobble together old systems to meet new demands. But for these providers, cross-border payments are both lucrative (especially given foreign exchange conversion revenue) and rewarding, in terms of the overall financial relationship created with the end customer.

The challenges for global payments are not simply those resulting from volume increases. A number of economic, political, and technical forces are changing the types of cross-border transactions conducted. Consider these factors:

• Corporations are making more cross-border purchases of services (as opposed to goods), as well as more purchases of complex fabricated parts rather than simple raw materials.
• Enterprises are purchasing from more countries, in more regions.
• Increased outsourcing is leading to new in-country and new cross-border intracompany transactions.
• More enterprises are participating in complex, automated supply chains, which in some cases drive automatic ordering and fulfillment. Online purchasing continues to grow, both by large enterprises as part of an automated procurement systems and by smaller enterprises purchasing directly.
• There is continued growth in the use of cross-border labor.
• Individuals are increasingly taking their investments abroad.

See also

References

External links

• A Guide to Replacing Legacy Payment Systems
• Inside National Payment Systems
• Payments Best Practice
• The end of a monopoly - New consumer payment systems.
• The Future of Money-Like Things - Past, present, and future overview of consumer payment systems.