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Payments > Bank Payment Systems > Flashcards

Bank Payment Systems Flashcards

1
Q

LVPS

A

Large-Value Payments Systems

  • Handle large value payments and time critical payments
  • CHAPS in the UK
  • Fedwire in the US
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2
Q

RPS

A

Retail Payment Systems

  • Typically handle high volumes of relatively low value payments
  • BACS in the UK
  • FedACH in the US
  • Pix in Brazil
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3
Q

PISP

A

Payment Initiation Service Provider

  • For bank payments, this could be a technology provider that supplies bank account holders (payers) with the means to make a payment through their bank account
  • Cash App
  • Venmo
  • Zelle
  • iDEAL
  • SOFORT
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4
Q

P2P Payments

A

To the user it looks like you are making a payment directly to your friend without intermediaries

  • Regardless of the rails used (i.e. card or bank), these payments still need to go through the existing mechanisms (i.e. authorisation, clearing, and settlement)
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5
Q

A2A Payments

A

“Account to Account (A2A) payments allow a payer to move money from their bank account to a payee’s bank account”

  • All common bank payments types are A2A
  • Open Banking payments are a subset of A2A payments
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6
Q

Can A2A Payments work without intermediaries?

A

No

Centralized payments ecosystems always involve intermediaries whose function is to preserve the integrity of the ecosystem (authorization, clearing and settlement)

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7
Q

Deferred Net Settlement

A
  • In batch at the end of the day

“this is where banks batch their transactions at the end of the day and submit them in one go according to the scheme rules”

  • This settlement method is used by older AC schemes and involves a multi-day settlement cycle
  • Example schemes: UK BACS, US FedACH
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8
Q

Deferred Net Settlement Several Times A Day (near real time)

A

“this is where banks batch their transactions at several points during the day and submit the batch each time”

  • Used by some real time payment schemes
  • To a payer, a payment looks like it has settled instantly
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9
Q

In Real Time (Real Time Gross Settlement)

A

“each payment instruction is cleared and settled as it is presented, and the payments are irrevocable”

  • Each payment is presented and settled immediately
  • This is relatively new and was originally confined to large value payments
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10
Q

Bank Payments Transaction Authorization

A

The bank will verify the transaction and authorize it according to applicable regulations & payment scheme rules

  • In Europe, authorization must be completed according to PSD2 with Strong Customer Authentication, which means the use of multifactor authentication for bank-account holder verification
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11
Q

Payment Instruction Through A PISP

A
  • PISPs can be involved, but the principles remain the same
  • Depending on the geography, the PISP may be subject to additional authentication requirements
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12
Q

Similarly to the card rails, settlement on the bank rails will have two phases

A
  • Interbank Settlement
  • Retail Settlement
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13
Q

The way payment instructions are presented to the scheme depends on the settlement method:

A
  • For RGTS, each transaction is cleared (processed) by the payment scheme as it is presented, and settlement follows straight through.
  • For Deferred Net Settlement, the process will be similar to clearing on the card rails, in as much as participants will batch their transactions in clearing files presented to the payment scheme according to the rules for the payment scheme. This can happen several times a day as for some real-time payment schemes (e.g. UK FPS), or at the end of the day in one go for older ACH Schemes (e.g. UK BACS or US FedACH)
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14
Q

Role Of Central Bank

A
  1. When a bank account holder makes a payment to a business or a person, the payer’s bank owed the payee’s bank the value of the payment
  2. A payment scheme must use an intermediary for the final settlement of funds between banks
  3. The settlement agent will hold accounts for banks, which are used to settle funds moved between them
  4. On the bank rails, the settlement agent is usually a central bank
  5. An account held by a bank at the settlement agent (aka central bank or monetary authority) for settlement purposes is called a Real-Time Gross Settlement (RTGS) Account
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15
Q

Bank Payment Systems

A

“Similarly to the way card networks operate, bank payment systems will provide the clearing and settlement infrastructure for bank payments”

  • The actor which provides the centralized payments infrastructure and operating rules is the Payment Scheme
  • Payment schemes can be:
    1. Domestic
    2. Cross border
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16
Q

3 Participation Models For Bank Payment Schemes

A
  1. Directly Connected Settling
    - Directly connected to the scheme
    - Settle directly through the settlement agent
  2. Directly Connected Non-Settling
    - Directly connected to the scheme
    - Cannot settle directly with the settlement agent
  3. Indirectly Connected
    - Neither connected directly to the scheme nor able to settle directly through the settlement agent
    - They can still access the payment scheme through participants which are able to do so
17
Q

Direct Debit (DD)

A

“A Direct Debit is a payment instruction from the account holder to their bank authorizing a biller (Utility company) to collect payment from their account at regular intervals”

  • A type of recurring transaction
18
Q

Request To Pay (RtP)

A
  • Similar in intent to sending an invoice

“RtP involves a payee (supplier of good or services) issuing a digital payment request to a payer, without having to send an invoice”

  • For each payment request, a payer may choose to pay in full, pay in installments or decline to pay altogether
19
Q

Bank Account Numbers

A
  • There is an international standard (ISO 13616) for an International Bank Account Number (IBAN)
  • Each country may implement its particular national IBAN format
20
Q

Clearing

A

“Each bank will, at the frequency defined by the scheme rules, present their payment instruction”

The way payment instructions are presented to the scheme depends on the settlement method:

Real Time Gross Settlement
- Each transaction is cleared by the payment scheme as it is presented, and settlement follows straight through

Deferred Net Settlement
- Participants will batch their transactions in clearing files presented to the payment scheme according to the rules of the payment scheme
- This can happen several times a day as for some real time payment schemes (UK FPS) or at the end of the day in one go for older ACH schemes (UK BACS or UD FedACH)

21
Q

Interbank Settlement

A

“This is a centralized function coordinated by the payment scheme, supported by a settlement agent, with participation from both sending and receiving banks”

  • Purpose is to exchange value between banks
  • The settlement agent will hold accounts for banks, which are used to settle funds moved between them
  • On the bank rails, the settlement agent is usually a central bank
22
Q

Retail Settlement

A
  • Happens after interbank settlement

“A payee will receive their money according to the rules governing the payment scheme, and settlement times apply to everyone according to the scheme governance rules

23
Q

How does a Fedwire Transactions Work?

A

“Fedwire is a real-time gross settlement transfer system, which means that it processes each transaction individually and in full”

  • A payment is initiated when the sender provides payment instructions to their bank.
  • The bank debits the account and sends an instruction to its Federal Reserve Bank to transfer funds to the recipient.
  • If the sender and receiver both have accounts with that particular Federal Reserve Bank, that Federal Reserve Bank can debit the sender’s account and credit the receiver’s account, and notify the recipient’s bank of the credit. - When the recipient’s bank gets the notification, it can credit the recipient’s bank.
  • Once the payment settles, it is irrevocable.
24
Q

3 Settlement Cycles

A
  1. Deferred Net Settlement
    - In batch at the end of the day
    - Multi day settlement cycle
  2. Deferred Net Settlement Several Times A Day
    - Near real time
  3. Real Time Gross Settlement
    - In Real time
    - Each payment in presented and settled immediately

Payments (20 decks)

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