Introduction to Electronic Payment systems

Electronic Payment Systems

Introduction to Electronic Payment systems

Everyday people buy or sell goods and services for money. Money becomes the major medium of exchange. Later some payment systems were developed out of a need to facilitate the growth of commerce and economic development.

The media used for transferring the value of money is very diversified, ranging from the use of simple payment instruments (e.g. cash) to the use of complex systems (e.g. cryptocurrency). Physical money (cash), is the traditional and most widely used payment instrument that consumers use, in their daily lives to buy goods and services.

As the volume and variety of transactions expands, the volume of money also expand. Using cash for each of large transactions is neither feasible nor practically possible. Security and transportation problems arise in cases where large amounts of cash transactions are involved.

Banks would support in such cases by offering other payment methods. The cashless society has been discussed for long time. The demise of cash and cheques could not be sudden. Though old habits hardly die, people do not hesitate adapting new things.

Definition

An Electronic payment system is a financial arrangement that consists of an intermediator to facilitate transfer of money-substitute between a payer and a receiver. Sometimes it is also called liquidation, clearing system or clearing service. It ensures the transfer of value from one subject of the economy to another and plays an important role in modern monetary systems.

Modern payment systems may be physical or electronic and each has its own procedures and protocols that guide the financial institution with payment mechanisms and legal systems. Standardization has allowed some of these systems to grow globally.

The term electronic payment refers to a payment made from one bank account to another bank account using electronic methods forgoing the direct intervention of bank employees.

Payment system is an essential part of a company’s financial operations. But it becomes complex, when many different payment systems are used. Further challenges come from the continuous introduction of newer payment systems such as paytm, UPI, bitcoin and various mobile payment options. As a result there are more than 750 payment systems throughout the world. See Figure 16.1