PMCF7

Module 3

THE PAYMENT SYSTEM:

AN OVERVIEW

This module is a
combination of synchronous &
asynchronous learning and will
last for one week.

Ester C. Castillo
Instructor
estercastillo686@gmail.com

March 16, 2023

Date Initiated
March 23, 2023
Date of Completion

San Mateo Municipal College PMCF7 – MONETARY POLICY AND CENTRAL BANKING POLICY
BSBA Major in Financial Management Prepared by: Ester C. Castillo, Instructor

“Sharing of this module to any flatform is not allowed without proper consent of the
owner and the institution this was submitted”.
 MODULE 1

This module is designed to be discussed for a period of one week. Lesson delivery will be done in
synchronous and asynchronous learning. The platform to be used will be facebook messenger, google
classroom and google meet created for the class.

LEARNING OBJECTIVES:

At the end of the module, you are expected to:

• Distinguish between commodity and fiat money
• Explain the importance of checks
• Enumerate and explain the desirable outcomes of a payments system
• Explain how a bank client can use automated teller machines (ATMs)
• Explain how e-money, bitcoin and blockchain are used in the payments system

INPUT INFORMATION

Introducing The Payment System: An Overview

INTRODUCTION

Money facilitates transactions in the economy. The mechanism for conducting such transactions is
called a payment system. The payments system have evolved over time from relying on payments made in
gold and silver coins, to payments made with paper currency and checks written on deposits in banks, to
payments made by electronic fund transfers.

The Transition from Commodity Money to Fiat Money

Commodity money refers to a good used as money that has value independent of its use as money.
Fiat money refers to money, such as paper currency that has no value apart from its use as money. People
accept paper currency in exchange for goods and services partly because the government has designed it to
be legal tender, which means the government accepts paper currency in payment of taxes and requires that
individuals and firms accept it in payment of debts.
Money is also useful because of its ability to serve as a standard of deferred payment. Money can
facilitate exchange at a given point in time by providing a medium of exchange and unit of account.
In the modern economies, the central bank (Bangko Sentral ng Pilipinas), issues paper currency. The
modern BSP payments system is a fiat money system because the BSP does not exchange paper currency
for gold or any other commodity money. The BSP issues paper currency and holds deposits from banks and
the national government. Banks can use this deposits to settle transactions with one another. Today, the
BSP has a legal monopoly on the right to issue currency. Although in the nineteenth century private banks
issued their own currency, they can no longer do so.

The Importance of Checks

Paper money has drawbacks. Another major innovation in the payments system came in the early
twentieth century, with the increasing use of checks. Checks are promises to pay on demand money
deposited with a bank or other financial institution. They can be written for any amount, and using them is a
convenient way to settle transactions. Accepting checks requies more trust on the part of the seller than does
accepting peso bills.

New Technology and the Payments System

The BSP supervises the payments system but doesn’t directly control it because may payments are
processed by banks and other private firms. The BSP has listed what it believes to be the five most desirable
outcomes for a payments system:
1. Security
2. Efficiency
3. Speed
4. Smooth international transaction
5. Effective collaboration among participants in the system

Debit cards can be used like checks. Cash registers in supermarkets and retails stores are link to
bank computers, so when you use your debit card to buy groceries or other products, your bank instantly
credits the store’s account with the amount and deducts it from your account. Such a system eliminates the
San Mateo Municipal College PMCF7 – MONETARY POLICY AND CENTRAL BANKING POLICY
BSBA Major in Financial Management Prepared by: Ester C. Castillo, Instructor

“Sharing of this module to any flatform is not allowed without proper consent of the
owner and the institution this was submitted”.
problem of trust between the buyer and the seller that is associated with the checks because the bank’s
computer authorizes the transaction. In recent years, many consumers have begun using apps on their smart-
phones or smart-watches that are linked to credit or debit card.
Automated Clearing House (ACH) transactions include direct deposits of payroll checks into the
checking accounts of workers and electronic payments on car and mortgages, where the payments are sent
electronically from the borrower’s account and deposited in the lender’s account. ACH transactions reduce
the transactions costs associated with processing checks, reduce the likelihood of missed payments, and
reduce the costs lenders incur in notifying borrowers of missed payments.

E-Money, Bitcoin, and Blockchain

The boundaries of electronic fund transfers have expanded to include e-money or electronic money,
which is digital cash people use to buy goods and services. One of the best-known forms of e-money is the
PayPal service. An individual or a firm can set up a PayPal account by linking to a checking account or credit
card. As long as sellers are willing to accept funds transferred from a buyer’s PayPal (or other e-money)
account e=money functions as if it were conventional, government-issued money. The central bank does not
control e-money, though, so it is essentially a private payments system.
Recently, journalists, economists, and policymakers have been debating the merits of bitcoin, a new
form of e-money. Unlike Paypal, bitcoin is not owned by a firm is instead the product of a decentralized
system of linked computers. Bitcoins are produced by people performing the complicated calculations
necessary to ensure that online purchases made with bitcoins are legitimate-that is, that someone doesn’t try
to spend the same bitcoin multiple times. People who successfully complete these calculations are awarded
a fixed number of bitcoins-typically 25. This process of bitcoin mining will continue until a maximum of 21
million bitcoins has been produced-a total expected to be reached in 2030.
Because people can buy and sell bitcoins in exchange for dollars and other currencies on web sites,
some people refer to it as a “cryptocurrency”. You can buy bitcoins and store them in a “digital wallet” on a
smartphone. You can then buy something in a store that accepts bitcoins by scanning a bar code with your
phone. A number of web sites, such as BitPay, which is based in Atlanta, allow merchants to process
purchases made with bitcoins in a way similar to how they process credit card payments.

CASHLESS SOCIETY
Blockchain and other new payment technologies are exciting and lead some commentators to predict
a “cashless society”. A study found that noncash payments continue to increase as a fraction if all payments,
and electronic payments now make up more than two-thirds of all noncash payments. Not surprisingly, the
number of checks written has been dropping by more than 2 billion per year. In reality, though, an entirely
cashless (or checkless) society may be difficult to attain in the near future for two key reasons.
1. As we noted with respect to blockchain, the infrastructure for an e-payments system in expensive to build.
2. Many households and firms worry about protecting their privacy in an electronic system that is subject to
computer hackers, although supporters of blockchain believe its encryption technology can overcome this
problem. While the flow of paper in the paper in the payments system is likely to continue to shrink, it is
unlikely to disappear.

The working principle of the payment system

1. Customer who is willing to send money, gives a

payment instruction to his/her bank, which is a member
(participant) of the system.
2. The bank, after receiving the payment instruction from
its customer, transmits this payment instruction to the
system as a “transfer order”.
3. The money is transferred from sender bank’s account
to receiver bank’s account electronically via EFT System.
The receiver bank is informed of the status of
the transaction.
4. The receiver bank is informed about the transaction.
5. The receiver bank pays the money to the payee (its
customer) according to the information received from the
system.
6. Payment instruments used in this flow are personalized
instruments such as cards, mobile phones, and passwords agreed upon by the payment service
provider and the payment service user.

San Mateo Municipal College PMCF7 – MONETARY POLICY AND CENTRAL BANKING POLICY
BSBA Major in Financial Management Prepared by: Ester C. Castillo, Instructor

“Sharing of this module to any flatform is not allowed without proper consent of the
owner and the institution this was submitted”.
7. Actors in today’s economic world make payment transactions for various reasons. Institutions that
are members of this system can carry out any payment transaction with each other by connecting
the payment system.
8. Payment systems enable many complex interbank money transfer operations to be performed in a
flawless and fast manner.
9. The following two concepts regarding the operation of payment systems are crucial:
10. Clearing: It is defined as transactions for transmission of transfer orders sent to the system, mutual
communication of these orders, intermediation of the process of getting provisions, and in some
cases, netting of orders.
11. Settlement: It is defined as fulfilling the liabilities arising from the transfer of funds or securities
between two or more parties.
12. Accordingly, in the structure mentioned above, Step 2 and Step 4 are clearing transactions and Step
3 is settlement transactions. Step 1 and Step 5 are the transactions related to the payment services
between banks and their customers.

LEARNING ACTIVITIES
Answer the following questions according to your understanding about the module
and discussion:

1. Describe a cashless society. Is it easily attainable?

2. Explain briefly the importance of using checks in paying for goods or services purchased.
3. Explain the expression “Legal Tender”.

LEARNING RESOURCES
Textbook:
• Cabrera E.B. et al Financial Markets and Institutions 2020 edition ISBN:978-621-
416-086
• https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Core+Functi
ons/Payment+Systems/Key+Issues/Payment+Service+and+Payment+System/

San Mateo Municipal College PMCF7 – MONETARY POLICY AND CENTRAL BANKING POLICY
BSBA Major in Financial Management Prepared by: Ester C. Castillo, Instructor

“Sharing of this module to any flatform is not allowed without proper consent of the
owner and the institution this was submitted”.
San Mateo Municipal College PMCF7 – MONETARY POLICY AND CENTRAL BANKING POLICY
BSBA Major in Financial Management Prepared by: Ester C. Castillo, Instructor

“Sharing of this module to any flatform is not allowed without proper consent of the
owner and the institution this was submitted”.