Payment system
Encyclopedia
A payment system is a system used for transferring money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts
(e.g., checks
) and documentary credits such as letter of credit
s. With the advent of computers and electronic communications a large number of alternative electronic payment systems have emerged. These include debit cards, credit cards, electronic funds transfer
s, direct credits, direct debits, internet banking and e-commerce payment systems. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash
in domestic and international transactions and consist of a major service provided by banks and other financial institutions.
Payment systems may be physical or electronic and each has their own procedures and protocols. Standardisation have allowed some of these systems and networks to grow to a global scale, but there are still many country and product specific systems. Examples of payment systems that have become globally available are credit card
and automated teller machine
networks. Specific forms of payment systems are also used to settle financial transaction
s for products in the equity markets, bond market
s, currency markets, futures markets, derivatives markets, options markets
and for transfer funds
between financial institution
s both domestically using clearing
and Real Time Gross Settlement
(RTGS) systems and internationally using the SWIFT
network. Due to the backing of modern fiat currencies
with government bond
s, payment systems are a core part of modern monetary systems.
The term electronic payment can refer narrowly 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
.
Bankers' acceptance
A banker's acceptance, or BA, is a promised future payment, or time draft, which is accepted and guaranteed by a bank and drawn on a deposit at the bank. The banker's acceptance specifies the amount of money, the date, and the person to which the payment is due. After acceptance, the draft...
(e.g., checks
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
) and documentary credits such as letter of credit
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
s. With the advent of computers and electronic communications a large number of alternative electronic payment systems have emerged. These include debit cards, credit cards, electronic funds transfer
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
s, direct credits, direct debits, internet banking and e-commerce payment systems. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
in domestic and international transactions and consist of a major service provided by banks and other financial institutions.
Payment systems may be physical or electronic and each has their own procedures and protocols. Standardisation have allowed some of these systems and networks to grow to a global scale, but there are still many country and product specific systems. Examples of payment systems that have become globally available are credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
and automated teller machine
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
networks. Specific forms of payment systems are also used to settle financial transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
s for products in the equity markets, bond market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
s, currency markets, futures markets, derivatives markets, options markets
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
and for transfer funds
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
between financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s both domestically using clearing
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
and Real Time Gross Settlement
Real Time Gross Settlement
Real time gross settlement systems are funds transfer systems where 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 payment transaction is not subjected to any waiting period. The transactions are settled...
(RTGS) systems and internationally using the SWIFT
Swift
The swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...
network. Due to the backing of modern fiat currencies
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
with government bond
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
s, payment systems are a core part of modern monetary systems.
The term electronic payment can refer narrowly to e-commerce
Electronic commerce
Electronic commerce, commonly known as e-commerce, eCommerce or e-comm, refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online...
- a payment for buying and selling goods or services offered through the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
, or broadly to any type of electronic funds transfer
Electronic funds transfer
Electronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
.
See also
- Real Time Gross SettlementReal Time Gross SettlementReal time gross settlement systems are funds transfer systems where 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 payment transaction is not subjected to any waiting period. The transactions are settled...
- Clearing houseClearing house (finance)A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...
- ClearingClearing (finance)In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
- E-commerce payment systemsE-commerce payment systemsAn e-commerce payment system facilitates the acceptance of electronic payment for online transactions. Also known as a sample of Electronic Data Interchange , e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.There are...
- Society for Worldwide Interbank Financial TelecommunicationSociety for Worldwide Interbank Financial TelecommunicationThe Society for Worldwide Interbank Financial Telecommunication operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions...
- Direct DepositDirect depositDirect deposit also known as Direct credit is a banking term used to refer to certain payment systems used to transfer money where a payment is initiated by the payer not the payee, namely:* In Europe, the giro system...
- Interbank NetworkInterbank networkAn interbank network, also known as an ATM consortium or ATM network, is a computer network that connects the ATMs of different banks and permits these ATMs to interact with the ATM cards of non-native banks....
(ATMAutomated teller machineAn automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
/ EFTElectronic funds transferElectronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....
/ EFTPOSEFTPOSEFTPOS is the general term used for debit card based systems used for processing transactions through terminals at points of sale. In Australia and New Zealand it is also the brand name of the specific system used for such payments...
) - Electronic funds transferElectronic funds transferElectronic funds transfer is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems....