A Payment System is defined as an arrangement that allows users to transfer “money”. In simple terms, “money” is regarded as cash (i.e., notes and coins issued by the government or central bank) and claims against credit institutions in the form of deposits. The use of bank deposits to make payments has become an important medium in most developed countries and to make a payment, the payer must issue an instruction in the form of a paper-based instrument (e.g. a check) or an electronic instruction (e.g. using a credit or plastic card).
The effectiveness of payment activities is fully dependent on the arrangements that facilitate fund transfers between members and it is through these arrangements that constitute a “payment system”. Payment Systems consist therefore of networks that link the members with existing rules and procedures for the of use of this infrastructure. A Payment System normally requires the following:
- Standard methods of transmitting payment messages between members
- Agreed means of settling claims within the members/participants (normally through the deposits of the members/participants with the central bank)
- Common operating procedures and rules (admission, fees, operating hours)
Payment Systems are a vital part of the economic and financial infrastructure. Their efficient functioning, allowing transactions to be completed safely and on time, makes a key contribution to overall economic performance. Payment Systems, however, can also involve significant exposures and risks for members and it is for this reason that central banks have always taken into account the design and operation of payment systems additional control features to eliminate these risks.