A payment system is any system used to settle

financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, Service (economics), services, or assets for payment. Any transaction involves a change in the status of the finances of two or mo ...

s through the transfer of

monetary value In economics, economic value is a measure of the benefit provided by a goods, good or service (economics), service to an Agent (economics), economic agent, and value for money represents an assessment of whether financial or other resources are ...

. This includes the

institutions An institution is a humanly devised structure of rules and norms that shape and constrain social behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions and ...

, payment instruments such as

payment cards Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and mak ...

, people, rules, procedures, standards, and

technologies Technology is the application of Conceptual model, conceptual knowledge to achieve practical goals, especially in a reproducible way. The word ''technology'' can also mean the products resulting from such efforts, including both tangible too ...

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 payment system is an operational network which links

bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, ...

s and provides for monetary exchange using bank deposits. Some payment systems also include

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

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 book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...

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 (e.g., cheques) and documentary credits such as letters of credit. 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) refers to commercial activities including the electronic buying or selling products and services which are conducted on online platforms or over the Internet. E-commerce draws on technologies such as mobile co ...

—a payment for buying and selling goods or services offered through the Internet, or broadly to any type of

electronic funds transfer Electronic funds transfer (EFT) is the transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems. The funds transfer process generally consists ...

. 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 card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either ...

, credit cards, electronic funds transfers, direct credits,

direct debits A direct debit or direct withdrawal is a financial transaction in which one organisation withdraws funds from a payer's bank account. Formally, the organisation that calls for the funds ("the payee") instructs their bank to collect (i.e., debit) ...

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

and e-commerce payment systems. 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) is an electronic telecommunications device that enables customers of financial institutions to perform financial transactions, such as cash withdrawals, deposits, funds transfers, balance inquiries or account ...

(ATM) networks. Additionally, forms exist to transfer funds between financial institutions. Domestically this is accomplished by using Automated clearing house (ACH) and real-time gross settlement (RTGS) systems. Internationally this is accomplished by correspondent banking (possibly 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 * SWIF ...

network) or a more centralised system like the CLS settlement system.

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 (ACH) system processes transactions in batches, storing, and transmitting them in groups. An ACH is considered a net settlement system, which means settlement may be delayed. This poses what is known as settlement risk. Real-time gross settlement 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 Globalization is the process of increasing interdependence and integration among the economies, markets, societies, and cultures of different countries worldwide. This is made possible by the reduction of barriers to international trade, th ...

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, 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. Some of these payments can be cumbersome, error prone, and expensive. Payments systems set up decades ago might be retrofitted or force-fitted to meet modern business needs. Frequently, the systems become unstable or less reliable, for example, STEP2 (an upgrade from 2003), which processes only euros. As of 2014, STEP2 is the only Pan-European automated clearing house (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. T2 is a RTGS system that covers the European Union member states which use the

euro The euro (currency symbol, symbol: euro sign, €; ISO 4217, currency code: EUR) is the official currency of 20 of the Member state of the European Union, member states of the European Union. This group of states is officially known as the ...

. 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 central component of the 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 Big Four (banking)#International ...

and the national central banks of those countries that have adopted the euro. T2 is used for the settlement of central bank operations, large-value Euro interbank transfers as well as other euro payments. It 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 Borders are generally defined as geographical boundaries, imposed either by features such as oceans and terrain, or by political entities such as governments, sovereign states, federated states, and other subnational entities. Political borders ...

payment 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 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: * Companies 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 a business practice in which companies use external providers to carry out business processes that would otherwise be handled internally. Outsourcing sometimes involves transferring employees and assets from one firm to another ...

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

supply chain A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers, while supply chain management deals with the flow of goods in distri ...

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 system and by smaller enterprises purchasing directly. * There is continued growth in the number of cross-border commuters. * Individuals are increasingly investing 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