Different modes of Payment

As the commerce and economy expand, volume and variety of transactions expand where there is a need to exchange the money. Using cash for each of these transactions is neither feasible nor practically possible. There are concerns regarding security and transportation of cash in cases where large amounts of money are involved. Banks support ease and velocity in such cases by offering various payment systems as solutions.

What are Payment Systems?

A Payment System is a mechanism that facilitates transfer of value between a payer and a beneficiary by which the payer discharges the payment obligations to the beneficiary. Payment Systems are the medium to transfer funds from one person to another that facilitate businesses and economies. Payment system enables two-way flow of payments in exchange of goods and services in the economy. Payment systems help consumers to transfer funds to each other. Cash is the traditional and most widely used payment instrument that consumers use in their daily lives to purchase goods and services. Banking channels also provide other payment instruments through different platforms and these are also widely used in commerce. Payment systems comprises of instruments through which payments can be made, rules, regulations and procedures that guide these payments, institutions which facilitate payment mechanisms and legal systems etc. that are established to facilitate transfer of funds between different participant institutions. Payment systems are used by individuals, banks, companies, governments, etc. to make payments to one another.

Classification of Payment Methods

Payment Systems can be broadly classified into Large Value Systems and Retail Payment Systems. For the purpose of making things easy to understand we have classified the various payment methods in the following format:

1. Large Value Payment System:
2. Retail Payment System:
   1. Cash Payment
   2. Paper Based Payments
      1. Cheques
      2. Demand Drafts
      3. Payment Orders or Banker’s Cheques:
   3. Card Based Payments
      1. Credit Card
      2. Debit Card
   4. Electronic Payments and Remittances
   1. Electronic Clearing Services:
   2. Electronic Funds Transfer:
   3. Real Time Gross Settlement:
   4. Internet Banking:
   5. Mobile Banking:
   6. E-Wallet
   5. Unified Payment Interface (UPI)
   6. Unstructured Supplementary Service Data (USSD)
   7. Aadhaar Enabled Payment System (AEPS)

1. Large Value Payment System:

Large value systems typically process high value critical payments. It is an essential payment system which ensures the smooth functioning of the economy and the financial system. If this system fails, it could trigger disruptions or transmit shocks within the economy. These systems mostly relate to interbank / inter-financial institutional transactions. Generally these large value systems are strictly regulated by the Central Banks of respective countries and are electronic based. . These systems enable payments to be made electronically and instantly in real time. They offer speed, reliability, safety, convenience, cost and accuracy. Some examples of Large Value Payment Systems are:

1. Inter-Bank Cheques Clearing Systems (the Inter-bank Clearing)
2. High Value Cheques Clearing System (the High Value Clearing)
3. Government Securities Clearing System (the G-Sec Clearing)
4. Foreign Exchange Clearing System (the Forex Clearing)
5. Real Time Gross Settlement (RTGS) System
6. Systemically Important Payment Systems (SIPS)
7. FIJICLEAR to make large value payments in Fiji
8. SWIFT (Society for the Worldwide Interbank Financial Telecommunication)
9. Large Value Transfer System (LVTS) in Canada

2. Retail Payment System:

Retail payment systems generally cater to the payment of transactions related mainly to settlement of obligations arising from purchase of goods and services. This payment system is as important as the large value payment system and has a larger user group. They typically handle transactions which are low in value, but very large in number, relating to individuals firms and corporates. The retail payment systems in any country comprise both paper based as well as electronic based systems. A person with a payment card of any kind is part of the retail payment system. At the retail level most transactions involve cash, cheques, cards or electronic transfers. Retail payments can be classified as:

Types of Bank Payments:

1. Cash Payment
2. Paper Based Payments
3. Card Based Payments
4. Electronic Payments and Remittances
5. 2(a) Cash Payment:

---

2(a) Cash Payment:

Cash payment is the oldest, most common payment system which is well known and is the most preferred method for small payments because it involves no credit. With cash, you can usually purchase goods and services easily as it widely accepted. Carrying too much cash is risky as it can lead to theft and other problems. However, people still carry cash for its convenience and flexibility. From the payee’s point of view, transactions are completed immediately and this cash can be re-used for other transactions. This system is suited for small amounts of payments.

2(b) Paper Based Payments:

Paper based payments are in the form of cheques, demand drafts, payment orders, banker’s cheques, refund orders, warrants etc. These are also referred to as negotiable instruments. For simplicity, they are generally referred to as cheques. Advantages of paper based payments are that they are safer than cash for example a crossed cheque can only be deposited into the payee’s account. They are preferred for large amounts and a large number of payments to avoid carrying large sums of cash. Payments can be made at payer’s convenience and posted to the payee. The biggest disadvantage of paper based payments is that it can take up to 3 – 4 working days before funds are available to use. Moreover there is no guarantee that the payer has sufficient funds and hence the cheque may become dishonored (bounce) by the bank and it is advisable to use demand draft or banker’s cheque in such circumstances where trust is a factor. There are extra costs if the payee wants an immediate clearance of funds. Paper based instruments have other administrative costs associated to it.

2(b)(i) Cheques:

A cheque is an order to transfer funds from the payer’s bank to the account of the payee. Cheques are simply a payment instruction from the account holder to his/her banker directing that a certain sum of money should be paid to a specific individual or to the bearer of the instrument. On receipt of cheques, the beneficiary will deposit it with his banker who will collect the money through clearing house system, where banks in a city exchange cheques with one another and settle the payments by arriving at a net amount of payables and receivables. After exchange of cheque, the account of the issuer of the cheque is debited and the credit is passed on to the banker of the beneficiary.

2(b)(ii)Demand Drafts:

Demand drafts are used when one person wants to send or transfer money (remit) to another person who is in another city. The person wanting to send money, deposits cash in a bank or issue a cheque in favor of the issuing bank, which issues him a demand draft. The demand draft is sent to the person who is to receive the money. The receiver gives it to the branch/bank where he holds an account and receives the payment. Banks normally charge a commission for issuing demand drafts.

2(b)(iii) Payment Orders or Banker’s Cheques:

Payment orders or Banker’s Cheques are similar to demand drafts but are usually issued for payments within a city. These are usually valid for a shorter period of time compared to other instruments. Banks may charge a commission for issuing Payment Orders and Banker’s Cheques.

2(c) Card Based Payments:

Card based payments are made by using a credit card or a debit card or an ATM Card. Major advantages of card payments is that it will only be accepted if the card holder has sufficient funds in his/her account and safer than cash and faster than the paper based payments. Can also be used for mail order or online purchases and carries lesser risk than holding cash. The risk of theft is mitigated by having pin codes. Some major disadvantages are that for the merchant it might take up to three days for money to be received and acknowledged and cards are operated at a fee payable to the bank generally both by the card holder and the merchant.

2(c)(i) Credit Card:

Credit card system is a credit facility extended to a user who is issued a plastic card which can be used in place of cash for making any type of payment/purchase. Credit Card enables its holder to buy goods and services with a credit line given by credit card issuer. The institution which issues the card has a tie up with the concerned merchant establishment and the card issuing organization, if different, to facilitate this arrangement. The amounts charged to the customer are paid by card issuer to the merchant and subsequently billed to the customer. Funds are settled at a later date. Card holders are billed on a monthly basis and bear financial charges (interest) on outstanding amounts if payments are not made by the due date. Credit cards are issued through commercial banks and/or other issuers. A credit card holder may not be an account holder in the bank which issues the credit card.

2(c)(ii) Debit Card:

Debit Card is a payment card where the transaction amount is deducted directly from the card holder’s bank account upon authorization. Debit cards can be of two types, one which are linked to an account and is issued by banks to account holders only. Second could be pre-loaded cards where a certain amount is stored in the card. Generally, debit cards are also ATM cards. The mode of using debit cards and credit cards is generally the same.

2(d) Electronic Payments and Remittances:

With the advent of computers and electronic communications a large number of alternative electronic payment systems have emerged. These include electronic funds transfers, direct credits, direct debits, internet banking and e-commerce payment systems. 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. Standardization has allowed some of these systems and networks to grow to a global scale, but there are still many country and product specific systems.

2(d)(i) Electronic Clearing Services:

These are electronic payments offered by banking channels for receiving or making payments. Electronic Clearing Service is a mode of payment by an institution and receipt by individuals for interest, dividend, salary, pension, etc. This is an electronic money transfer facility in which money is transferred automatically from a payer’s to payee’s bank accounts. A large number of investors, shareholders, employees, ex-employees can receive their dues electronically directly into their accounts on due dates without using paper cheques/instruments. Similarly bank customers can make small value repetitive payments such as electricity bills, telephone bills, loan installments, insurance premium, club fees, etc. The payer instructs their bank to make direct debit payments and the payee provides amounts and dates of the payments. The process operates on the basis of large number of small debits and one consolidated credit from users to the service provider. The system provides the convenience of paperless payment on due dates by direct debit to the customer’s account. This facility can be used for paying different amounts and is useful for paying regular bills. Advantages of this system are guaranteed payments and no need to remember payment dates.

2(d)(ii) Electronic Funds Transfer:

This electronic mode of remittance of funds is enabled by the participating banks under supervision of the central bank of the country. The amount sent from the sender’s bank branch is credited to the receiver’s bank branch on the same day or at the most the next day. This facility saves the effort of sending a demand draft through post and the inherent delay in reaching the money to the receiver. Banks may charge commission for using this service. 

2(d)(iii) Real Time Gross Settlement:

The real time gross settlement system facilitates instant transfer of money from one account to other across cities. This is basically a large value remittance system where funds are required to be transferred quickly. While all the above payment and remittance systems are settled between banks on a net basis, this system is settled on a gross basis which means that each transaction is settled independently. This facility is useful to banks for their funds management, for companies to transfer large amounts for individuals who require urgent payments.

2(d)(iv) Internet Banking:

Online banking (or Internet banking or E-banking) allows customers of a financial institution to conduct financial transactions on a secure website operated by the institution. This is a very fast and convenient way of performing banking transactions such as transferring funds from your savings to current account or to a third party account. The major advantages are that the payments are made at the convenience of the account holder and are secured by user name and password. This facility can be used at any time and from anywhere in the world with internet access. The only disadvantage is that for making this payment access to computers and internet services is required and internet comes at an additional cost.

2(d)(v) Mobile Banking:

Mobile banking is a service provided through the combined effort of a bank and a mobile service provider, to perform common banking transactions. An active bank account is needed and a mobile phone equipped with features required by the bank. The advantages of this system is that it is secured and available to user at all the times, very fast and convenient way of making payments as the payments can be made from anywhere that has mobile network coverage. Some disadvantages are security as mobiles need to be kept safely, otherwise misuse may occur.

In a monetized economy there are many different types of transactions that are conducted daily that facilitate the transfer of goods and services from one person to another and need to be settled by way of a payment. Payment systems play an important role in any country and are very important for the effective functioning of the economy. The central banks of the country are an integral part of the payment systems as it monitors, supervisors and regulates the whole payment system processes.

2(d)(v) E-Wallet:

What is an E-Wallet?

E-wallet is an online prepaid account where one can stock money, to be used when required. As it is a pre-loaded facility, consumers can buy a range of products from airline tickets to grocery without swiping a debit or credit card. 

How do you get one? 

You can log on to sites ranging from telecom services, online grocery stores, recharge portals to even sites selling furniture that use e-wallet as an alternative payment option and get started on saving. 

2(e) Unified Payment Interface (UPI):

Digital payment and cashless is the new and upcoming way of payment system and the recently launched Unified Payment Interface (UPI) is likely to gain popularity with the government's recent move of banning Rs500 and Rs1000 notes.

UPI enabled apps allows transaction to be done through any smartphone, using VPA-Virtual Payment Address. It reduces the cost of transaction compared to ATM or cheque. It is to make payments convenient and enable users to complete transactions in lesser time by reducing the number of steps. The transactions done through UPI app can be done 24/7 with immediate transfer of money from one bank account to other. The main attractive point of UPI is the money is all these transactions can be done without sharing any personal details like bank account or credit/debit card number. UPI-enable app allows transfers up to Rs.1 lakh and charges 50paise per transaction.

2(f) Unstructured Supplementary Service Data (USSD):

Unstructured Supplementary Service Data (USSD), sometimes referred to as "Quick Codes" or "Feature codes", is a protocol used by GSM cellular telephones to communicate with the service provider's computers. USSD can be used for WAP browsing, prepaid callback service, mobile-money services, location-based content services, menu-based information services, and as part of configuring the phone on the network.

USSD messages are up to 182 alphanumeric characters long. Unlike Short Message Service (SMS) messages, USSD messages create a real-time connection during a USSD session. The connection remains open, allowing a two-way exchange of a sequence of data. This makes USSD more responsive than services that use SMS.

2(g) Aadhaar Enabled Payment System (AEPS)

• Aadhaar Enabled Payment System(AEPS) allows bank-to-bank transaction at PoS (MicroATM) with the help of Banking  Correspondent

• Seed your account with your Aadhaar number
• Now do transactions without remembering any PIN