PAYMENT SYSTEM: Under bank of international settlement(BIS) definition, a payment system consist of instruments, banking procedures and typically interbank funds transfer that ensures and facilitate the circulation of money. In essence, it facilitates corporation, businesses and consumers to transfer funds to one other.
History OF PAYMENT SYSTems Earliest instruments used:-
Paper currency act 1961, gives monopoly to government to issue notes, end to issue notes by private and presidency banks.
Other payment instruments include cheques(introduced by bank of Hindustan, estb. 1770)
In 1883,cash credit account added to bank of bengal’s array of credit instruments(includes granting loans against security of company’s paper, bullion, jewels etc.
Buying and selling bills of exchange become one of items of business to be conducted by bank of Bengal from 1839.
In 1881, the negotiable instrument act(NI). Formalizing usage of instruments like cheque, bills of exchange, promissory notes, provide legal framework for non-cash paper payment instrument.
MILESTONES OF EVOLUTION OF PAYMENT SYSTEMS IN INDIA: The CLEARING SYSTEM in India provides a convenient and well established institutional mechanism to take care of the problem of physical delivery of instruments as well as funds transfer between different banks. Computerization of clearing operations was the first major step towards modernization of the payments system. The next important milestone was mechanization of the clearing operations with the introduction of Magnetic Ink Character Recognition (MICR) based cheque processing technology (in 1986) using High Speed Reader Sorter Systems (HSRS).
CONTINUED.. The Computerized Cheque Clearing Process has been further consolidated through the introduction of magnetic media based input settlement as an Electronic Banking and Payment System – Reading Material 31 intermediate step towards complete automation of cheque clearing through MICR processing especially to facilitate the high-value and inter-bank clearing. Greyscale Imaging Technology has been introduced (in 2000) as a value added service to the members of the Clearing Houses in some cities which will serve as a forerunner for the introduction of electronic presentment and cheque truncation.
CONTINUED… The Electronic Clearing Service (ECS) was introduced (in 1994) whereby a series of electronic payment instructions are generated to replace paper instruments to meet the requirement of a cost-effective system which would serve as an alternate method of effecting bulk, low value, recurring payment transactions, thereby obviating the need to issue and handle paper instruments. Another development that took place in the payments system scenario was the introduction of the Electronic Funds Transfer Scheme (in 1998) which is a retail funds transfer system and enables an account holder of a bank to transfer funds to another person having an account with any of the participating banks, without any physical movement of instruments from one center to another.
CONTINUED… Centralised Funds Management System (CFMS) – was introduced (in 2002) to facilitate better funds management by account holders with RBI byproviding on-line consolidated information about their transactions / balances across accounts maintained with Deposit Accounts Departments in different offices. Negotiated Dealing System / Securities Settlement System - NDS/SSS – was developed (in 2002) as a system to provide an electronic platform for trading and reporting of transactions in government securities market and to facilitate settlement of these transactions through the delivery versus payment mechanism.
CONTINUED… Clearing of Forex transactions – was instituted (in 2002) as a system to provide net settlement arrangement for forex transactions between members /entities in the foreign exchange market in the country. The process of settling only net obligations reduced the liquidity requirements of foreign currency, sought to reduce transaction costs (SWIFT related) and also take care of settlement related risks since the mechanism was facilitated by guaranteed settlement through central counter party arrangement of the Clearing Corporation of India.
CONTINUED… Real Time Gross Settlement (RTGS) System – was introduced (in 2004) to facilitate predominantly the settlement of inter-bank payments on a real-time and gross basis so as to reduce the incidence of risks in the payment systems.
ROLE OF RBI IN PAYMENT SYSTEMS: The Reserve Bank of India participates in the payment systems as a user of the system, as the service provider for various components of the systems and is also the regulator of the systems in many instances.
CONTINUED… As a user, the RBI submits instruments for clearing in the cheque-based clearing operations. RBI also participates as an user in the ECS and EFT systems for making its own internal payments to its employees, vendor payments etc. Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market Operations etc.,would also be settled through the respective components of payment systems.
Type of Payment Systems Data collected by pearson education in one of its survey.
Instantly convertible into other forms of value without
intermediation of any kind
Portable, requires no authentication, and provides
instant purchasing power
“Free” (no transaction fee), anonymous, low cognitive
Limitations: easily stolen, limited to smaller
transaction, does not provide any float (the period of time between a purchase and actual payment for the purchase.
Checking Transfer Funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual Most common form of payment in terms of amount spend Can be used for both small and large transactions Some float Not anonymous, require third-party intervention (banks) Introduce security risks for merchants (forgeries, stopped payments), so authentication typically required.
Credit Card Represents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time Credit card associations – Nonprofit associations (Visa, MasterCard) that set standards for issuing banks Issuing banks – Issue cards and process transactions Processing centers (clearinghouses) – Handle verification of accounts and balances.
Stored Value Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed Examples: Debit cards, gift certificates, prepaid cards, smart cards Debit cards: Immediately debit a checking or other demand-deposit account Peer-to-peer payment systems such as PayPal a variation
Accumulating Balance Accounts that accumulate expenditures and to which consumers make period paymentsExamples: utility, phone, American Express accounts
Current Online Payment Systems Credit cards are dominant form of online payment, accounting for around 80% of online payments in 2002 New forms of electronic payment include: Digital cash Online stored value systems Digital accumulating balance payment systems Digital credit accounts Digital checking
E-commerce payment system facilitates the acceptance of ELECTRONIC PAAY MENT for ONLINE TRANSACTIONS. Also known as ELECTRONIC DATA INTERCHANGE(EDI), e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.
FACTS AND EXAPMLES: In the early years of B2C transactions, many consumers were apprehensive of using their credit and debit cards over the internet because of the perceived increased risk of fraud. Recent research shows that 30% of people in the United Kingdom still do not shop online because they do not trust online payment systems.
Online Merchants’ Actual and Preferred Online Payments
ORGANISATION STRUCTURE: In order to usher in and establish a modern, robust payments and settlement system consistent with international best practices, the Reserve Bank has adopted a three-pronged strategy of Consolidation of existing Payment Systems, Development of Payment Systems and Integration of the Payment and Settlement System. In order to drive this Payment System reform process an institutional framework and structure has been created within the Reserve Bank.
PAYMENT SYSTEMS GROUP: The base layer of this structure consisted of the Payment Systems Group, which included an exclusive team of inter-disciplinary professionals representing IT, Banking Operations, Supervision, Legal, Economics, Government & Bank Accounts, and Foreign Exchange operations.
PAYMENT SYSTEMS ADVISORY COMMITTEE: The next tier in the institutional framework is the Payment Systems Advisory Committee which is a permanent body and oversees the operations of the Payment Systems Group and reviews the developments in the area of Payment Systems.
NATIONAL PAYMENTS COUNCIL: The apex layer in the institutional structure is the National Payments Council. The council lays down the broad policy framework and guidelines for the implementation of a sound and efficient payments and settlement system for the country.
OVERSIGHT ARRANGEMENTS: Continuous efforts are being made by the Bank to ensure that the systems operated by it are complying with the requirements of the core principles – both in case of already existing payments systems and the ones being introduced newly. Broadly, the RBI derives its regulatory and supervisory powers over the banking system through the provisions of Banking Regulation Act, 1949.