A payment system is any

system A system is a group of interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its boundaries, structure and purpose and express ...

used to settle

financial transaction A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...

s through the transfer of

monetary value In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a specif ...

. This includes the

institutions Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...

instruments Instrument may refer to: Science and technology * Flight instruments, the devices used to measure the speed, altitude, and pertinent flight angles of various kinds of aircraft * Laboratory equipment, the measuring tools used in a scientific lab ...

, people, rules, procedures, standards, and

technologies Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...

that make its exchange possible.Biago Bossone and Massimo Cirasino, "The Oversight of the Payment Systems: A Framework for the Development and Governance of Payment Systems in Emerging Economies"The World Bank, July 2001, p.7 A common type of payment system, called an operational network, links

bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type of ...

s and provides for monetary exchange using

bank deposit A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...

s. Some payment systems also include credit mechanisms, which are essentially a different aspect of payment. Payment systems are used in lieu of tendering

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...

in domestic and international transactions. This consists of a major service provided by banks and other financial institutions. Traditional payment systems include

negotiable instrument A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...

s such as

drafts Draft, The Draft, or Draught may refer to: Watercraft dimensions * Draft (hull), the distance from waterline to keel of a vessel * Draft (sail), degree of curvature in a sail * Air draft, distance from waterline to the highest point on a vessel ...

(e.g., cheques) and documentary credits such as

letters of credit A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...

. With the advent of computers and electronic communications, many alternative electronic payment systems have emerged. The term electronic payment refers to a payment made from one bank account to another using electronic methods and forgoing the direct intervention of bank employees. Narrowly defined electronic payment refers to

e-commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain managemen ...

—a payment for buying and selling goods or services offered through the

Internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...

, or broadly to any type of

electronic funds transfer Electronic funds transfer (EFT) is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of ...

. Modern payment systems use cash-substitutes as compared to traditional payment systems. This includes

debit cards A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term ''plastic card'' includes the above and as an identity document. These are similar to a credit card, but un ...

, credit cards, electronic funds transfers,

direct credit A direct deposit (or direct credit), in banking, is a deposit of money by a payer directly into a payee's bank account. Direct deposits are most commonly made by businesses in the payment of salaries and wages and for the payment of suppliers' acco ...

s, direct debits,

internet banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial insti ...

and

e-commerce payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for offline transfer, also known as a subcomponent of electronic data interchange (EDI), e-commerce payment systems have become incre ...

s. 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-specific and product-specific systems. Examples of payment systems that have become globally available are credit card and

automated teller machine An automated teller machine (ATM) or cash machine (in British English) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, fund ...

(ATM) networks. Additionally, forms exist to transfer funds between financial institutions. Domestically this is accomplished by using

Automated clearing house An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ...

(ACH) and

real-time gross settlement Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real-time" and on a " gross" basis. Settlement in "real time" means a paym ...

(RTGS) systems. Internationally this is accomplished using the

SWIFT Swift or SWIFT most commonly refers to: * SWIFT, an international organization facilitating transactions between banks ** SWIFT code * Swift (programming language) * Swift (bird), a family of birds It may also refer to: Organizations * SWIFT, ...

network.

Domestic

An efficient national payment system reduces the cost of exchanging goods, services, and assets. It 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. Such 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. The technical efficiency of the payment system is important for the development of the economy. An

automated clearing house An automated clearing house (ACH) is a computer-based electronic network for processing transactions, usually domestic low value payments, between participating financial institutions. It may support both credit transfers and direct debits. The ...

(ACH) system processes transactions in batches, storing, and transmitting them in groups. An ACH is considered a

net settlement A net settlement is a payment system used for inter-bank transactions. It is the process by which banks calculate the collective total of all transactions through designated times each day. In an inter-bank payment system using net settlement, deb ...

system, which means settlement may be delayed. This poses what is known as

settlement risk Settlement risk is the risk that a counterparty (or intermediary agent) fails to deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered securit ...

Real-time gross settlement Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real-time" and on a " gross" basis. Settlement in "real time" means a paym ...

systems (RTGS) are funds transfer systems where the 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. Comparatively, ACHs are typically used for low-value, non-urgent transactions while RTGS systems are typically used for high-value, urgent transactions. Countries and regions have also implemented real-time or instant (or faster) payment systems which typically operate 24x7x365 and perform the transaction from debit of ordering customer's account to credit of beneficiary customer's account within a timeframe of 10–15 seconds.

International

Globalization is driving corporations to transact more frequently across borders. Consumers are also transacting more on a global basis—buying from foreign eCommerce sites as well as traveling, living, and working abroad. For the

payments industry A payment is the voluntary tender of money or its equivalent or of things of value by one party (such as a person or company) to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making the ...

, the result is higher volumes of payments—in terms of both currency value and number of transactions. 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. Payments systems set up decades ago continue to be used sometimes

retrofit Retrofitting is the addition of new technology or features to older systems. Retrofits can happen for a number of reasons, for example with big capital expenditures like naval vessels, military equipment or manufacturing plants, businesses or go ...

ted, sometimes force-fitted—to meet the needs of modern corporations. And, frequently, the systems creak and groan as they bear the strain. Examples of such systems include

STEP2 EBA Clearing is a provider of pan-European payment infrastructure wholly owned by shareholders that consist of major European banks. It owns and operates major payment infrastructure in Europe for Euro payments between banks. This includes EURO1 ...

(an upgrade from 2003), which processes only Euros, and

TARGET2 TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is the real-time gross settlement (RTGS) system for the Eurozone, and is available to non-Eurozone countries. It was developed by and is owned by the Eurosystem ...

(an upgrade from 2007), which is closed on Saturdays and Sundays and some public holidays. As of 2014, STEP2 is the only

Pan-European automated clearing house A pan-European automated clearing house (PE-ACH) is a clearing house that is able to settle SEPA compliant credit transfers and direct debits across the Eurozone. At present there is only one PE-ACH in operation – STEP2 – which was establishe ...

(or PE-ACH system) in operation. This type of system is thought to become less relevant as banks will settle their transactions via multiple clearing houses rather than using one central clearing house. TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is a RTGS system that covers the European Union member states which use the

euro The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens ...

. It is part of the

Eurosystem The Eurosystem is the monetary authority of the eurozone, the collective of European Union member states that have adopted the euro as their sole official currency. The European Central Bank (ECB) has, under Article 16 of its Statute,

, which comprises the

European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important central b ...

and the national central banks of those countries that have adopted the euro. 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. 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 cobbling together old systems to meet new demands. For these providers, cross-border payments are both lucrative (especially given

foreign exchange The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspe ...

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 factors are changing the types of cross-border transactions conducted. Such factors include: * 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 Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...

is leading to new in-country and new cross-border intracompany transactions. * More enterprises are participating in complex, automated

supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...

s, 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.

References

External links

A Guide to Replacing Legacy Payment Systems

Inside National Payment SystemsThe end of a monopoly
- New consumer payment systems.
The Future of Money-Like Things
- Past, present, and future overview of consumer payment systems. {{DEFAULTSORT:Payment Systems

Domestic

International

See also

References

External links