Payment system

Definition

A payment system is

“

[a] financial system that establishes the means for transferring money between suppliers and users of funds, usually by exchanging debits or credits between financial institutions.

”

Overview

The main role of a payment system is to provide a way of transferring value between different parties in the economy. As such, it determines partly economic transaction costs. Its design will be optimal if organised to allow quick and effective value transfers while imposing a minimum of additional costs and risks. High costs of the payment process may seriously affect economic activity in that transactions are rendered too expensive and, as a consequence, reduced. Conversely, lower costs through efficient payment systems could have a positive impact on economic growth.

The use of any payment system involves direct and indirect costs. Direct costs are the fees charged by financial payment service providers. Indirect costs include those related to the complexity of transaction processes, speed of transactions, risk and uncertainty, and opportunity costs for the buyers and sellers involved. The modalities of the payment system also affect the cost structure as they determine the financial loss to both parties in case either one of them defaults on the terms of the contract.

Source

• "Overview" section: Online Payment Systems for E-Commerce, at 6.