Introduction to Payment Systems by Cat Denoon Stevens
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This document provides an introduction to payment systems. It discusses what a payment is, why payments occur, common payment instruments like cash and cards, and payment channels including on-us and not on-us transactions between institutions. The payment system is made up of real-time gross settlement systems, clearing and settlement systems, non-bank payment operators and intermediaries, as well as networks like Visa and UnionPay. Differences in payment systems across countries can be attributed to factors like the natural evolution of infrastructure, competition, investment levels, economic conditions, regulatory frameworks, and cross-border influences.
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Introduction to Payment Systems by Cat Denoon Stevens
- 1. INTRODUCTION TO PAYMENT SYSTEMS CAT DENOON-STEVENS 25 May 2017 Senior Research Associate CENFRI
- 2. Page 2 The payer’s transfer of a monetary claim on a party acceptable to the payee WHAT IS A PAYMENT? Source: BIS, 2003
- 3. Page 3 WHY DO PAYMENTS OCCUR? Remittances (P2P) Social welfare transfers (G2P, D2P) Bill payments (P2P, P2B, B2B) Spot payments (P2B, B2B) Salary payments (B2P, G2P, D2P, P2P) Tax payments (B2G, P2G) Source: Thom et al, 2015
- 4. Page 4 HOW? PAYMENT INSTRUMENTS Cash Cheques Cryptocurrency E-fiat currency Electronic Funds Transfer (EFT) Mobile money/ e-money Payment cards Vouchers Source: BIS, 2015
- 5. Page 5 HOW? PAYMENT CHANNELS On-us (same institution)
- 6. Page 6 HOW? PAYMENT CHANNELS Not on-us (different institution) On-us (same institution)
- 7. Page 7 WHAT MAKES UP THIS SYSTEM? RTGS Settlement system Clearing system NPS Operators & intermediaries Visa/ MasterCard/ Union pay Securities providers Cash Mobile money operators Payment service providers Money Transfer Operators/ bureaus Merchants Source: BIS, 2006
- 8. Page 8 WHAT CAUSES DIFFERENCES IN PAYMENT SYSTEMS? • Systems naturally evolve and transition to fully interoperable systems with all components present takes time • Competition on infrastructure inhibits interoperability • Investment in system components required • Economic pre-conditions (e.g. infrastructure) • Business case for payments systems components needs to be viable • Differing regulatory frameworks (inclu. influence by global SSBs) • Influences from cross border payments connections
- 9. THANK YOU Cat Denoon-Stevens Senior Research Associate Cenfri Catherine@Cenfri.org www.cenfri.org
Editor's Notes
- BIS, 2003: http://www.bis.org/cpmi/glossary_030301.pdf
- Thom et al, 2015: http://cenfri.org/documents/MAP/2015/Malawi/MAP%20Malawi%20Diagnostic%20Report.pdf Requited and unrequited payments: Remittances: transfer of funds between two people (P2P) for which no compensation is expected. Social welfare transfers: Similar to the above, but done by governments or donors to people. Bill payments: Payment to fulfil an obligation between people and businesses created by an account/ receipt/ bill. Bill payments refer to the settlement of documentary accounts once presented for acceptance. A key element of a bill payment transaction is that it can be discounted to an intermediary and still charged in full to the client. Spot payments: Similar to the above, spot payments constitute the payment by a person to a business in return for a good or service. Spot payments are payments that are made at the point at which delivery is taken of the good or service. The distinction between bill and spot payments hinges upon the immediacy of 164 the transaction and fulfilment, coupled with the handover of possession or control of goods and therefore whether the transaction is better described as ad hoc, on the spot for possession of goods versus the settlement of documented accounts of future or past services or in respect of delivery of goods. Salary payments: Salary payments constitute the payment of individual employees by their employer, either a business, individual, donor or government. Tax payments: Payment by people or businesses to fulfil tax obligations to the government. Tax payments would largely affect the salaried employees that are required to pay income tax and the MSMEs who are required to pay VAT on goods and services sold.
- BIS, http://www.bis.org/cpmi/publ/d133.pdf A payment instrument is a means of exchange that facilitates the transfer of funds/value, and can be broadly grouped into cash (banknotes and coins) and cashless instruments. Cashless retail payment instruments can be paper-based or electronic instruments. Paper-based instruments include cheques and credit transfers initiated on a paper form. Nowadays, paper-based instruments are often converted into electronic format at some point in the retail payment processing chain. • Cash: physical money (paper and coins) in circulation — in most places, issued by the central bank; • Cheques or bills of exchange: written orders from one party (the drawer) to another (the drawee, normally a bank) to pay a third party, the payee; • Electronic credit transfers: electronic instructions to debit the payer’s own account and credit the account of the payee; they are known as ‘push payments’ since the payer directly authorizes the debit to his account and the credit to the payee (sometimes also known as EFT credits); • Electronic debits (such as direct debits): debits that are pre-authorized by the payer but are submitted by the payee; they are known as ‘pull payments’ since the payer’s instruction is introduced to the system by the payee’s provider, which pulls the funds across from the payer (sometimes also known as debit orders); and • Payment cards: a broad category including debit, credit and prepaid cards, which are presented by the cardholder, usually to a merchant, and, usually together with a signature or PIN, authorize the merchant’s bank to initiate a charge on the payer’s account; card payments generally follow a pull approach, but they are subject to very different sets of rules from direct debits. Use e-fiat currency and vouchers as examples Factors: Instruments have different rights/obligations Run on different protocols and systems Instrument needs to clear and settle Need to be appropriate for use case
- Onus (closed loop): An on-us item is a check or draft that is presented to the bank where the check writer has the funds on deposit (i.e. within the institution).
- Not on-us: The bank or institution processing the transaction is not the same as one issuing the instrument. Bi-lateral: between two institutions Open loop system: multiple institutions connected. Open-loop payments networks, such as Visa and MasterCard, are multi-party and operate through a system that connects two financial institutions—one that issues the card to the cardholder, known as the issuing financial institution or issuer, and one that has the banking relationship with the merchant, known as the acquiring financial institution or acquirer—and manages information and the flow of value between them.
- BIS, 2006: http://www.bis.org/cpmi/publ/d70.pdf “The National Payments System controls how participants at all levels (person on the street to banks, government and international participants) exchange value within an economy and across national borders.” Settlement lies at the heart of the NPS, which then radiates outwards through layers of entities and functions. The inner core of the NPS includes the functions of settlement and clearing for inner core participants. Generally, only banks authorized or designated to do so may participate. The intensity of regulation increases the closer one moves to the core. The outer layers of the NPS contain open and closed loop systems and the various intermediaries such as PSPs operating within this domain. The outer core includes the end-customer as payer and payee. This area is currently receiving a large amount of focus from guiding bodies and regulators due to the emerging complexity and nature of some systems, such as e-money.
- Why don’t all components exist? Why is full interoperability between all types of providers not achieved? Why do all instruments/ providers not exist (for e.g. mobile money)? Notes for speaking: Need cash to operate digital Business case: in the context of the market Economic pre-conditions: spread of people (e.g. from MAPs – DRC you can’t have cash reticulation without a road; when mobile connectivity doesn’t reach the mobile money target market, Zambia – lack of roads and power beyond cities makes it impossible to run non-urban branches, Madagascar it’s where the cash trucks are willing to go – i.e. security) Cross border: for e.g. connecting to regional hubs to facilitate cross-border transactions Participants in a payments system face various costs. First, they have to install and operate IT systems enabling them to connect to other participants. Second, they usually are required to pay the following fees associated with their membership in the PSMB where applicable and/or the ACH or card association: • Entry fees (in addition to the other costs associated with undergoing any certification, training or auditing); and • Annual or recurring membership fees. These direct charges are in addition to the costs of meeting ongoing requirements such as holding certain balances as collateral. There are likely other fees, too: • Switching fees — usually charged per transaction by the switch operator, depending on the switching agreement; and • Licensing fees — usually charged by a payment scheme operator such as a card association for the use of its brand, and may be on a per instrument (card) issued or per transaction basis. The business model for the operator — whether for profit or not for profit — and the operator’s scale and efficiency will make a big difference on the amount of these fees. Further, the fees may be subject to volume discounts, so the cost per transaction of larger participants could be reduced. In the 2010 Global Payment Systems Survey, many regulators reported that their payment switches were run on the basis of making a surplus (which may not mean for profit in the sense of profit distributing to owners), while about two-thirds operated at least on a cost recovery basis, like a utility (Figure 21). Note that this data is not limited to national switches since in many countries there are multiple switches.