Banking Operations: Different Types of Payments & Payment Systems

Everyday people trade goods use services and need to make payments using cash as cash money is the major medium of exchange. Banks have developed various payment methods to facilitate the exchange of money that stimulates the growth of commerce, helps economic development and facilitates flexibility with lower transaction costs with security. Various payment systems exist today, ranging from cheque, wire transfer, cards to online transfer. In this article, we will discuss different types of payment methods that are available today with banking channels.

2(c) Card Based Payments:

Card-based payments are made by using a credit card or a debit card or an ATM Card. The major advantage of card payments is that it will only be accepted if the cardholder 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 the money to be received and acknowledged and cards are operated at a fee payable to the bank generally both by the cardholder and the merchant.

2(c)(i) Credit Card:

A credit card system is a credit facility extended to a user who is issued a plastic card that 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 the card issuer to the merchant and subsequently billed to the customer. Funds are settled at a later date. Cardholders 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 cardholder 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 is 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 premiums, 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 a large number of small debts 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. The 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 the 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 the post and the inherent delay in reaching the money to the receiver. Banks may charge a commission for using this service. 

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

The real-time gross settlement system facilitates the instant transfer of money from one account to another 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 fund's 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 the 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 the 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 the 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 are that it is secured and available to user at all times, a 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 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.

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