Deel 2: European Payment Services Flashcards
What is a payment?
A transfer of funds which discharge an obligation on the part of a payer to a payee.
What is a “payment system”?
A payment system is a formal arrangement based on legislation or private contractual arrangements between the member to facilitate the circulation of money.
The complete set of instruments, intermediaries, rules, procedures, process and IFTS’s* which facilitate the circulation of money.
*Interbank Funds Transfer System
A payment system is a formal arrangement based on legislation or private contractual arrangements for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members.
What are the three main elements of a payment system?
- payment instruments: cheques, credit transfers, cash,…
- processing: the actual payment instruction is being executed; A allows its bank to transfer money to B.
- settlement for the relevant banks: the banks execute the payment and the money is now officially transferred from A to B
Describe the life cycle of a payment.
- Choice of payment instrument and submission of the payment instruction
- Bank’s internal processing
- Interbank processing of the payment
- Interbank settlement of the payment
- Bank’s intenral processing
- Information and communication

Explain “choice of payment instrument and submission of the payment instruction” in context of the life cycle of a payment.
Depending on the payment instrument chosen, the payer or payee submits a payment instruction to its bank.
This happens more and more electronically.
Explain “bank’s internal processing” in context of the life cycle of a payment.
The sending bank verifies and authenticates the payment instruction in order to establish its legal and technical validity. It also checks if enough funds is available and prepares to payment instruction for clearing and settlement.
Explain “interbank processing of the payment” in context of the life cycle of a payment.
Here everything gets double-checked and sorted out before moving to the actual settlement.
Sometimes netting happens here as well, to minimize the amount of cash transferred.
Explain “interbank settlement of the payment” in context of the life cycle of a payment.
The settlement asset is transferred from the sending bank to the receiving bank. Now the interbank transfer becomes final (unconditional and irrevocable).
Explain “bank’s internal processing” in context of the life cycle of a payment.
The receiving bank credits the account of the recipient.
Explain “information and communication” in context of the life cycle of a payment.
The receipt of the payment is communicated to the beneficiary.
How can payments be classified on the basis of the different types of payers/payees involved?
- Retail payments: large numbers of transactions, small value per transaction
- Wholesale payments: small number of transactions, large value per transaction
- Commercial payments: payments generated by corporations
How can payments be classified on the basis of number of payers and payees involved?
- one-to-one transactions
- C2C
- C2B
- B2B
- one-to-many transactions
- government to private households
- social security payments
- many-to-one transactions
- households to the government
- taxes
What are “clean payments”?
All transportation documents relevant to the trade are exchanged directly between the trading partners.
What are “documentary payments”?
Trading partners (almost always international) entrust the handling documents to banks as a way of ensuring that the exporter receives payment for the goods sold and the importer receives and pays for the goods ordered.
What is a payment instrument?
A tool or set of procedures to transfer funds from the payer to the payee.
What is the most common dinstinction in payment instruments?
Cash vs non-cash payments
Explain “cash payments”.
Cash payments are usually associated with face-to-face transactions of low value between individuals where the parties do not exchange information regarding their identity, the payment is said to be anonymous.
Explain “non-cash payments”.
Non-cash payments involve the transfer of funds between accounts.
Therefore it means that a payer gives its bank authorization for funds to be transferred (credit push) or by which a payee gives its bank instructions for funds to be collected from a payer (debit pull).
How can non-cash payments be classified?
- Physical form (paper-based or electronic based)
- The party submitting the payment instrument for processing (credit push or debit pull)
- Most important credit-based instruments: credit transfers (storten via bank)
- Most important debit-based instruments: card payments, cheques…
- Electronic money (money stored on a device or in software)
- E-money is more of a settlement than a payment instrument, since it’s effected using one of the core payment instruments (like credit cards, cash, transfers,…)
What are the most common non-cash payment instruments?
- credit transfers: instructions sent by a payer to its bank to transfer money to a payee
- direct debits: payer gives authorization to the payee to debit money from his account
- credit cards: payee receives the money, payer can postpone payment
- cheques
- letter of credit
- …
What are the trends in the use of payment instruments?
Over the past two decades, the most significant long-term trend in the use of payment products has been the shift away from cash in favor of non-cash payment methods (mostly payment cards) for consumer payments.
The use of internet banking and internet shopping has also increased considerably, allowing payer to make payments regardless of location or time.
Cards were initially introduced to improve face-to-face transactions, they are now more and more being used for telephone or internet purchases. This has, however, increased fraud with as result that new security and authentication measures have to be invented.
E-money schemes such as PayPal, Bitcoin… have used software-based technology that stores funds on prepaid accounts for multi-purpose use.
What are “in-house payments”?
Payments that can be done within the same institution.
This means that the payee and the payer have accounts at the same bank.
If this is the case, all aspects of the transaction can be done within this institution, without needing arrangements or discussions with other banks.
There are, however, multiple scenarios regarding in-house payment handling:
- When a bank holds all accounts centrally (at the same level in the organization) all internal payments are processed within the bank.
- When banks decentralize the holding of their accounts (per region for instance) a bank might need to use interbank arrangements to transfer money between its own branches.
What are “interbank payments”?
Interbank payments are payments where the payee and the payer have accounts in different financial institutions.
The money will need to be transferred from one to the other through interbank agreements.
The payment information has to be communicated between the two institutions before the settlement can be transferred from the payers’ bank to the payee’s bank.
What are the two main types of arrangements to handle interbank payments?
- Correspondent banking arrangements:
- Bilateral arrangements or arrangements involving a third party that provides the service
- Payment systems:
- Multilateral arrangements based on a common set of procedures whereby financial institutions present and exchange data relating to the transfer of funds to other financial institutions.