Basic Payment Systems

Payment systems come in many forms, but their purpose is always the same - namely, to enable people to transfer funds from an account at one bank to an account at another bank. The alternative for the payer and the payee would be to settle their transaction either using cash or by barter. Banks themselves also use payment systems to transfer funds as a result of their own transactions (as distinct from their customers'). Whatever its particular form, a payment system can be seen as comprising three main elements or processes: A means of authorising and initiating the payment ie the means by which the payer gives authority to his bank for funds to be transferred. A means of transmitting and exchanging the payment instruction between the banks involved - usually referred to as clearing. A means of settlement between the banks involved - ie the payer's bank has to compensate the payee's bank, either bilaterally or through accounts that the banks hold at a third-party settlement agent, usually (but not always) the central bank. This Handbook considers these processes in more detail, and in particular the risks and policy issues that they present. A recurring theme is that, while there are a number of common risks and problems to be addressed, there is no single ideal way of addressing them. Solutions adopted in one country may not necessarily be appropriate in another. Another important message is that, in developing a new payment system or modifying an existing one, the emphasis must be on agreement and co-operation - both between central bank and commercial banks as the operators of the system, and between the system operators and its customers. This handbook is also available in Arabic and Spanish.