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Payment systems part 1

Payment systems part 1

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Published by ashimadania
This is the part 1 if the certification. If you all read only this many you willl get very good marks. If incase you willl find any problem be in touch.
This is the part 1 if the certification. If you all read only this many you willl get very good marks. If incase you willl find any problem be in touch.

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Published by: ashimadania on May 27, 2009
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Certificate Program in Payment Systems Domain Competency AcademyCompetency V 2.0Page 3 of 17
Chapter 1 -Basics of Payments System
1.1Introduction
This session gives you an idea about how the ancient practice of barter system hasevolved into the present day payment systems. It is interesting to understand thestandards involved and various methods deployed for transferring funds and evolutionof the payment systems over the years.In this session, we will focus on importance of payment systems and the operations,roles, and associated risks involved in carrying out payment transactions.
1.2Learning Objective
After reading this chapter you will get a grasp of:
How financial transactions have evolved
What are the various payment systems and their importance in bankingindustry
Associated risks involved in payment systems.
Topics Covered:
Chapter 1 - Basics of Payments System...................................................................................................31.1Introduction.....................................................................................................................................31.2Learning Objective.......................................................................................................................31.3Introduction.....................................................................................................................................41.4Payment Systems A definition.............................................................................................51.5Importance of Payment Systems............................................................................................71.6Goals of Payment Systems......................................................................................................101.7Role of Central Banks in Payment Systems......................................................................111.8Evolution of Payment System in India...............................................................................131.9A Time line of payment instruments and systems in modern India......................151.10Summary.........................................................................................................................................16
 
Certificate Program in Payment Systems Domain Competency AcademyCompetency V 2.0Page 4 of 17
1.3Introduction
“There are no free lunches in this world -
An old Economics adage 
We homo-sapiens are essentially consumers, everyday we consume either goods in theform of food, clothes, soaps, detergents, etc. or services (also be termed as intangiblegoods) in the form of banking services, medical & healthcare services, entertainmentservices etc. However, goods and services do not come for free and we have to pay forthem. In the manufacturing and delivery of goods & services, producers do incur somecost , which need to be paid for by the consumers of such goods and services.In ancient times long before the usage of money as a medium of exchange the “BarterSystem” existed. In that system, goods were exchanged for other goods or services. ..Barter system is referred to as a trade system in societies that donot have any monetarysystem.Barter system solely relied on the coincidence and reciprocity of need. Forexample:
If a person X has 3 cows and wants to trade one out of three with a pair of mules, he would have to wait until some person Y turns up with the exactly reciprocalneed.
If the same person X has free bushel of grains and wants a person who canmend his house roof, then again he has to wait until somebody turns up withthe exact reciprocal need.
Also, if a person X has to exchange one commodity for another, say, cotton forwheat, he can never have an exact value in cotton in terms of wheat, it alldepends on the needs and wishes of the person involved and not on the valuethe commodity is holding. So it creates a fallacy in the system.Problems associated with the barter system were:
No proper method of valuation of goods
- As there were innumerous goodsand each can’t be valued against the others justifiably.
Information and Time delays
 – A full fledged market place with a single modeof exchange wasn’t available, and hence people generally get delayedinformation.
Dissatisfaction amongst the exchangers (parties)
- As one person’s estimateof the value of certain good may not be acceptable to another and they wouldhave to compromise eventually as per the urgency of transaction.
Difficulty in coincidence of wants:
The goods or services in possession of twoparties must be useful and needed by each other.
 
Certificate Program in Payment Systems Domain Competency AcademyCompetency V 2.0Page 5 of 17
Difficulty in contractual payments
or future payments under barter systemAfter the dawn of money as a medium of exchange above-mentioned shortcomings ofthe barter system were addressed. Initially, precious metals like gold, silver, copperwhich were not abundantly available but have some intrinsic value attached to themwere used as money (in the form of coins). Due to relative abundance of copper vis-à-vis other precious metals like gold and silver, copper coins of various denominationwere in vogue in Sweden. However, higher denomination coins meant more weightand this made copper unsuitable for higher denomination coins. During 1661, Swedenintroduced paper currency in lieu of metal coins (especially for higher denominationcurrency) which heralded the advent of the Paper Currency as we know today.With the advent of the banking system, banks became the keeper and issuer ofcurrency. Banks also perform the function of lending money and money transferfunction from one bank account to another, either in the same bank or to another bank.As banks take care of all types of monetary transactions (inter-account, inter-bank, intra-bank, and forex transactions) various payment systems are employed to perform everyspecific type of transaction. Worldwide different countries employ different paymentsystems but the core phenomenon and the purpose behind all of them is same.
1.4Payment Systems A definition
“A set of instruments, procedures and rules for the transfer of funds amongsystem participants
”.
- (Committee on Payment and Settlement Systems of the Bank for International Settlements, Basle 
 ) 
“A system that enables payment to be effected between a payer and abeneficiary and includes clearing, settlement or payment service
.
-
(Payment System Bill, 2002)
The above definition describes the various components which constitute a paymentsystem.
a) A Set of Instruments
 – Every payment system consists of various modes of makingpayment. Examples include cheque, credit cards, debit cards, E-money, Demand Drafts,Banker Cheque, Pay Order, Mail Transfer, Telegraphic Transfer, Traveler’s cheque etc.The adoption of new payment system depends of incentives the new payment modeprovides to the customer. These instruments instruct the bank on how and where thefunds are to be transferred.

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