Payment Systems and Classifications
Payment system is a system or method adopted to settle financial transactions through the transfer of monetary value. The system enables cash equivalents to be used for settlements in domestic and international transactions in lieu of physical cash. Letter of credit and negotiable instruments such as draft, cheque etc, were the major instruments handled by a traditional payment system. Payment systems underwent a transformation with the launch of innovative electronic payment instruments and methods. Cash-substitutes like debit cards, credit cards, electronic funds transfers, mobile wallets, smartphone based Apps, direct credits and debits, internet banking and e-commerce payment systems are parts of modern payment systems. Despite the transformation, paper based payment system still continues to handle a significant portion of payments.
How does a payment system work?
The exchange or transfer of monetary value is ensured by integrating various components and participants of payment system such as institutions, instruments and people by adopting rules, procedures and standards and harnessing power of technology. Operational network among banks for clearing of instruments is the most common form of payment system. Clearing based on presentation of debit instruments gradually migrated to electronic conversion of cheque data (CTS) and electronic posting for debit to drawer and credit to drawee(payee), followed by settlement among banks and participating financial institutions. Payment systems are properly regulated and monitored to ensure transparency and mitigate risks and failures. Digital channels ensured success of payment systems while payment systems redefined the concept of digital banking.
What are the major classifications of payment systems?
Payment systems can be broadly classified in the following categories:
1. Electronic data based real time transfers for high value amounts. Fedwire in US, CHAPS-Sterling in UK and RTGS in India work on this principle.
2. Electronic data based transfers, on batch basis at regular frequencies, for smaller amounts. CHIPS in US and NEFT in India come under this category.
3. Mandate based, electronic and automated, regular collection of payments. ACH in US, BACS in UK and ECS / NACH in India are examples for this category.
4. Paper based systems – Cheques clearing systems and Cheque Truncation System (CTS) fall under this category.
5. The next category covers transactions through POS, net etc settled among banks.
What are the trends in payment systems?
Payment systems are dynamic and functions in a fast changing landscape with tremendous scope for disruptions and innovations. From a utility service, it has evolved as a strategic initiative for banks, financial institutions, start ups and regulators. Personalisation and customisation of services by leveraging data mining and analytics will push payment services to next level in near future. At the same time, payment systems are prone to cyber attacks and frauds. Adoption of innovative technologies, identification of key markets and use cases and ensuring security of data and systems through adoption of the best cyber security practices are requisites for survival in payments system market.
