Payment system

A payment system is any system used to settle financial transactions through the transfer of monetary
value. This includes the institutions, payment instruments such as payment cards, people, rules,
procedures, standards, and technologies that make its exchange possible.[1][2] A payment system is an
operational network which links bank accounts and provides for monetary exchange using bank
deposits.[3] 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 domestic and international transactions. This
consists of a major service provided by banks and other financial institutions. Traditional payment
systems include negotiable instruments 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—a payment for buying and
selling goods or services offered through the Internet, or broadly to any type of electronic funds transfer.

Modern payment systems use cash-substitutes as compared to traditional payment systems. This includes
debit cards, credit cards, electronic funds transfers, direct credits, direct debits, internet banking 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 (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 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.[4] 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.[5]

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.[6]

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, 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 retrofitted, 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 (an upgrade from 2003), which processes only Euros, and TARGET2 (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 (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[7] 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. It is part of the Eurosystem,
which comprises the European Central Bank 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 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 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 Commuter worker.
Individuals are increasingly taking their investments abroad.

See also
Aadhaar Enabled Payment System
ATM Industry Association (ATMIA)
Automated clearing house
BankAxept
Bharat Bill Payment System
BHIM
Cheque Truncation System
Clearing
Clearing house
Credit card
Debit card
Direct Deposit
Digital currency
E-commerce credit card payment system
E-commerce payment system
Electronic bill payment
Digital Wallet
Electronic commerce
Electronic funds transfer
Giro
Immediate Payment Service
Interbank Network (ATM / EFT / EFTPOS )
List of on-line payment service providers
National Automated Clearing House
National Common Mobility Card
National Electronic Funds Transfer
NUUP Services
Online banking
 Payment card
Payment service provider
Payments as a Service
Real Time Gross Settlement
RuPay
Society for Worldwide Interbank Financial Telecommunication
Structured Financial Messaging System
Systemically Important Payment Systems
Unified Payments Interface
Wire transfer
Automated Teller Machine

References
1. "What is a Payment System?" (https://web.archive.org/web/20121021060104/http://app.ny.fr
b.org/CfCBSWEB/Payments_Presentation.pdf) (PDF). Federal Reserve Bank of New York.
October 13, 2000. Archived from the original (http://app.ny.frb.org/CfCBSWEB/Payments_Pr
esentation.pdf) (PDF) on 21 October 2012. Retrieved 23 July 2015.
2. 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
3. "Payment Systems: Design, Governance and Oversight", edited by Bruce J. Summers,
Central Banking Publications Ltd, London, 2012, p.3
4. Biagio Bossone and Massimo Cirasino, Op.Cit, p.7
5. Michael Tompkins, Payments Canada Research Unit, and Ariel Olivares, Bank of Canada.
"Clearing and Settlement Systems from Around the World: A Qualitative Analysis" (https://w
ww.payments.ca/sites/default/files/2016-qualitative-analysis.pdf) (PDF). www.payments.ca.
Archived (https://web.archive.org/web/20181120221044/https://www.payments.ca/sites/defa
ult/files/2016-qualitative-analysis.pdf) (PDF) from the original on 20 November 2018.
Retrieved 19 November 2018.
6. "Instant payments definition" (https://www.ecb.europa.eu/paym/retpaym/instant/html/index.e
n.html). www.ecb.europa.eu. European Central Bank. 2017. Archived (https://web.archive.or
g/web/20180909033729/https://www.ecb.europa.eu/paym/retpaym/instant/html/index.en.htm
l) from the original on September 9, 2018. Retrieved September 8, 2018.
7. Syrbe, Benjamin. "European Trend Survey 'Banks & Future' " (http://www.equens.com/knowl
edgeandresearch/downloads_knowledge_research.jsp). Equens whitepaper. Equens.
Archived (https://web.archive.org/web/20131111011726/http://www.equens.com/knowledge
andresearch/downloads_knowledge_research.jsp) from the original on 11 November 2013.
Retrieved 15 October 2013.

External links
A Guide to Replacing Legacy Payment Systems (http://www.aciworldwide.com/-/media/files/
collateral/aci_guide_to_replacing_legacy_pymt_sys_tl_us_0411_4610.pdf) Archived (https://
web.archive.org/web/20131106001809/http://www.aciworldwide.com/-/media/files/collateral/
aci_guide_to_replacing_legacy_pymt_sys_tl_us_0411_4610.pdf) 2013-11-06 at the
Wayback Machine
Inside National Payment Systems (http://www.investopedia.com/articles/economics/08/nps.
 asp)
The end of a monopoly (https://www.economist.com/news/special-report/21601624-and-no-
end-new-ways-pay-your-bills-end-monopoly) - New consumer payment systems.
The Future of Money-Like Things (https://www.theatlantic.com/technology/archive/2014/05/f
uture-payment-systems/370902/) - Past, present, and future overview of consumer payment
systems.

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