The Payments System

Question 0

What are payment orders and how do they facilitate payments?

Answer 0

• Payments orders are cheques and cards.
• Facilitate payments by transferring funds between accounts with ADIs. (From drawers to depositors)

Legal tender is noted and coins, and precious metals are another alternative.

Question 1

Payment system overview.

Answer 1

• Trading allocates resources and distributed goods and services
• requires efficient and reliable means of exchange.
• transaction is settled when item is exchanged for agreed value on agreed date

Question 2

Describe the “behind-the-scenes” processing if payment orders.

Answer 2

Large number if payment orders need processing.

• Clearing: the process by which institutions agree to the terms of a transaction - managed by the Australian Payments Clearing Association.
• Settlement: the exchange of value that completes a transaction (ADIs hold funds with RBA for this purpose, in exchange settlement accounts)

Question 3

What are the categories of payment orders?

Answer 3

1. Wholesale: generally large value.
   - particularly those that originate in financial markets.
   - large corporate payments
   - use real-time gross settlement
2. Retail: generally small value payments
   - individuals and small businesses.
   - cash, cheques, cards, internet

Question 4

Difference in numbers of retail payment system and wholesale payment system.

Answer 4

Retail.
Daily value = $55b
Daily number = 24 million
Average transaction = $2,300

Wholesale.
Daily value = $165b
Daily number = 30,000
Average transaction = $5.5 million

Question 5

Closer look at the retail payment system.

Answer 5

•Retail payment orders must be:
-authorised by drawer using:
1. a personal identification number (PIN), or
2. signature
-verified by the ADI to ensure the instruction is that of the drawer
•a pin also verifies the transaction, whereas
•a signature must be physically inspected

Question 6

Describe cheques.

Answer 6

A cheque is a date, paper-based I traction to the drawer’s ADI to pay the stated party the stated sum.

Historically used as the principal payment order. Now businesses are the main users. Households use cheques for relatively large amounts, such as property settlement, which requires a “bank cheque”.

Question 7

What us a direct entry payment?

Answer 7

Direct entry payments (or transfers) are pre-authorised and verified orders that are processed electronically -> much more efficient than cheques.

Allow organisations to:
-make payments to large groups
•these are direct credits
•such as salary payments to employees.
-receive payments from large groups.
•known as direct debits
•such as telephone, gas and electricity bills.

Question 8

Debit, credit and charge cards

Answer 8

• Debit cards are issued by ADIs to depositors to enable them to access funds
• credit cards are issued by credit card companies (visa, MasterCard). The credit card companies pay for purchases and then the owner repays the accumulated amount
• charge cards are similar to credit card (American Express, diners club). Full amount is repaid each month.