In-depth understanding of the national payment system

The national payment system is a channel through which buyers and sellers of financial products and services conduct transactions, and is an important part of a country’s financial system. Global financial liberalization and advances in information technology have caused major updates to the architecture of large-value, retail, and securities payment systems, as well as the processes and procedures implemented by operators, administrators, regulatory agencies, and system users.

In many countries, the central bank has a major responsibility for the integrity of the national payment system. This article will outline the financial payment system and its role in the modern global financial system.

Key points

  • A country’s payment system is a financial technology infrastructure that allows commercial and financial transactions to run efficiently and unimpeded.
  • These payment systems also link the financial activities of a country with the global economy.
  • Due to their critical nature, these payment systems are maintained by a country’s central bank and supervised by government regulatory agencies.

Define payment system

The national payment system is an institutional configuration supported by technology-driven processes and practical infrastructure to facilitate commercial and financial transfers between buyers and sellers. A country’s payment system reflects its banking and financial history, as well as the development of supporting communication and technology platforms.

The payment system service market, like any market, operates according to the relationship between supply and demand. On the demand side, users seek easily available payment tools and services to satisfy their various financial transactions, from large-scale bank transfers to point-of-purchase transactions for retail credit tools such as credit and debit cards.

Users like low transaction costs, interoperability between different systems, security, privacy, and legal protection. On the supply side, payment services provide a source of income for banks and other financial organizations and open up markets for suppliers of technology and communications products and services.

Institutions and infrastructure

A typical national payment system includes the following institutions and infrastructure:

Banks and other depository institutions communicate with each other through messaging and routing systems. If you have a checking account with a U.S. bank, you may be familiar with the nine-digit number in the lower left corner of the check: this is the American Bankers Association (ABA) routing transmission number (RTN), which is used to identify the financial institution that issued the check.

If your U.S. employer pays you wages via direct deposit, the transfer instructions (messages) will be sent to your bank through the Automated Clearing House (ACH), which is managed by the non-profit National Automated Clearing House Association (NACHA) and managed by The U.S. Federal operates the Reserve System (FRS) and Electronic Payment Network (EPN), a private-sector payment network.

European structure

If you happen to work for an employer in Europe, but still want to pay your salary to your U.S. bank account, the process is similar to the above process, but instead of routing through the U.S. ACH system, the deposit message is likely to go through the Global Interbank Financial Telecommunications Association (SWIFT) Network, which is a cooperative society headquartered in Belgium, connecting financial institutions in more than 200 countries.

The SWIFT code is similar to the ABA RTN number and can be used to identify the bank that initiated the transfer and the correspondent bank that has an agreement with the bank to facilitate international transfers and fund settlement. The SWIFT platform is used by all central banks belonging to the euro system. It is the currency management agency of 19 EU countries belonging to the euro zone, including Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania , Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.

Clearing and settlement

Clearing refers to the transmission and reconciliation of payment instructions, as well as the establishment of positions to be settled eventually. Settlement is the event of actual fulfillment of obligations-the corresponding debits and credits of the accounts of all parties to the transaction. The integrity of the global financial system depends on the correct accounting of every transaction that occurs in the system; therefore, stability depends on the reliability and accuracy of the clearing and settlement system.

There are three main types of clearing and settlement systems.

  • Retail system Responsible for handling small-scale financial transactions. Although there is no globally accepted definition of “small scale”, it usually refers to personal transfers of less than $1 million.
  • Great Value System Responsible for the clearing and settlement of large transactions.
  • Securities system Handle the clearing and settlement of securities, such as common stock and preferred stock, bonds and other types of instruments.

The clearing and settlement system can settle on a gross or net basis. Total settlement refers to the settlement of funds or securities separately, one transaction at a time. Net settlement is to aggregate a large number of individual positions (credits and debits) into smaller batches for processing, so that the settlement can be done at a specified time on the working day instead of continuously.

Some payment systems may run multiple clearing and settlement platforms, including netting and total settlement. Real-time gross settlement (RTGS) has become the most widely used method for large-value systems. In this case, real-time means that the transmission, processing, and settlement of transactions occur as soon as they are initiated.

The U.S. Federal Wire Transfer System is the main large-value component of the U.S. National Payment System. Settlement is based on real-time totals. The same is true for the TARGET (TARGET2) system, which is the main large-value platform of the European Central Bank and its network. , Such as the Bank of France and the German Bundesbank.

Payment system and systemic risk

One of the main risks in the clearing and settlement environment is that one of the parties may default. If settlement is based on real-time totals, the impact of the default is limited to the single transaction being processed. However, if the default occurs in a netting arrangement, then all parties in the arrangement (which may be hundreds or thousands) may also be at risk, so their counterparties that occur simultaneously in other transactions may also be at risk. Wait for the whole system.

This is an example of systemic risk-the risk that a failure of a certain part of the system will spread to the entire system like an infectious disease. Technology has facilitated the ability to process trillions of dollars a day through the global financial architecture. However, each country has only a few individual systems, and these systems affect each other all over the world, so the consequences of systemic failures are huge.

The institution responsible for the research and development of financial system risk management guidelines is the Bank for International Settlements (BIS), a Geneva-based institution that acts as a central bank’s bank and uses various initiatives to promote international financial and currency cooperation. system.

In 2001, the BIS Committee on Payment and Settlement Systems (CPSS) introduced a set of guidelines for high-importance payment systems, called the core principles of systemically important payment systems. This has laid down 10 principles for prudent operation and risk mitigation for these systems, especially the large-value clearing and settlement systems mentioned above, in which the failure of a certain part of the system may spread rapidly.

The core principles also make recommendations on the special responsibilities of the national central bank to operate, supervise, and use critical systems within its jurisdiction. The good functioning of the national payment system is usually clearly defined in the central bank’s organizational tasks. For example, the organizational responsibilities of the U.S. Federal Reserve System include five activities:

  • Conduct monetary policy
  • Promote the stability of the financial system
  • Supervision and supervision of the banking system
  • Promote the smooth operation of the national payment system
  • Formulate and manage laws and regulations related to consumer credit and community development.

Bottom line

National payment systems are critical to the integrity of the global financial system. Technology and globalization have facilitated the rapid growth of systems that handle non-cash electronic transfers between parties located anywhere in the world.

The payment system of any country will consist of a small number of retail, large-value and securities settlement systems, which are connected to systems in other countries through various linkage platforms and agency relationships. The realization of risks, such as one party’s default large-value transaction, may spread to the entire system, thereby jeopardizing the integrity of the system, making the payment system the main priority of the central bank and other key institutions in the financial sector.


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