«July 2012 THE WORLD BANK Acknowledgements The preparation of this paper was led by the Financial Inclusion Practice of the World Bank. Lead author is ...»
Large value payments are defined as payments typically of a relatively high-value and between banks and/or participants in a financial market.13 Based on this definition, retail payments are also commonly referred to as low-value payments. However, retail payments can also be for relatively large amounts. In a more general way, for the purposes of this document a retail payment is defined here as a payment that meets at
least one of the following characteristics:
The payment is not directly related to a financial market transaction;
The settlement is not time-critical;14 The payer, the payee or both are individuals or non-financial organizations; and Either the payer, the payee or both are not direct participants in the payments system that is processing the payment.
This definition of retail payment includes person-to-person, person-to-business, business-to-person, business-to-business, person/business-to-government, and government-to-person/business payments.
A retail payments system is defined here as a system comprising the technical infrastructure; participants; instruments; arrangements for clearing and settlement;
business relationship arrangements (such as bank-customer relationships, rules, procedures, the applicable legal framework, and governance arrangements) that, put together, provide the overall environment within which retail payments are posted, authorized, processed, cleared, and settled.
A National Retail Payments System is defined here as a collection of individual retail payments systems that support the practical and efficient use of a range of payment instruments and payment services.
A retail payment instrument is defined here as an instrument that facilitates the transfer of funds, for example a check, debit card, or credit transfer. A related term is electronic payment instrument, which is defined here as a payment instrument that uses electronic means for initiation, authorization and authentication of a payment transaction. Even though a transaction might be initiated electronically, the subsequent processes of clearing and settlement might involve a combination of manual and electronic procedures. The common payment instruments in use today are defined and discussed later in this document.
It needs to be noted that ―not time-critical‖ should not be interpreted to mean not real-time. There are many retail payment transactions that are processed on a near real-time basis, such as a person-to-person funds transfer. However in such cases the settlement agent is the same as the issuer or the settlement is completed at a later time (typically on a deferred net settlement basis) for (example as in the case of a card payment transaction.
II. Overview of Retail Payments II.1 Retail Payment Instruments Retail payment instruments that are available in most countries today may be classified
into four broad categories:
Paper-based instruments: These include cash, cheques, money orders, travelers‘ cheques etc. Cash is typically used in face-to-face transactions of low value between two counterparties. Other paper-based instruments normally require the involvement of one or more financial institutions to effect the transfer of value from the payer to the payee. Non-cash paper-based instruments are used for both face-to-face as well as remote payments, usually of value higher than that of cash payments.
Electronic Funds Transfer (EFT)-based products: These include direct credit and direct debit transfers, and are typically used for remote payments. Credit transfers are defined as a payment order, or possibly a sequence of payment orders, made for the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the funds described therein move from the bank of the payer/originator to the bank of the beneficiary. Some common credit transfer-type transactions include payroll, pensions, and dividend payments. In processing terms, a debit transfer can be viewed as the reverse of a credit transfer since the payee originates the payment order for the purpose of collecting payment from the payer. Debit transfers are typically used for person-to-business or person-to-government payments, for example for the payment of utility bills and installment payments, and often need to be set up in advance by the payer by way of providing explicit permission to the payee to collect funds through a debit transfer payment order (often referred to as a ―mandate‖). The evolution of information technology has made it possible that credit transfers can now be initiated through a range of channels—Internet, telephone, interactive voice response (IVR), automated teller machines (ATMs), and increasingly through mobile phones—in many countries. The processing of EFT products is generally conducted using an interbank network under well-codified rules and procedures. These networks are usually domestic although there are networks that have an international coverage.
Payment card-based instruments: These include credit, debit, prepaid and other smart-card based applications, and typically involve usage of a physical card by a payer to discharge the payment obligation to the payee. The physical card has the associated account information encoded in a magnetic stripe or in an embedded Integrated Circuit (IC) chip. The information on the magnetic stripe or IC chip when read by an appropriate device of the payee triggers a funds transfer from the payer‘s account in favor of the payee.15 Payment cards can be used for in-person purchases, as well as for remote It needs to be noted that payment cards also often have some elements of the account information also printed/embossed on the card face to enable using this information for initiating remote payments through the Internet or other channels.
payments. Increasingly, card-based payments are accepted in all standard banking channels like ATMs, automated voice response mechanisms like IVR, Internet, through mobile phones, and kiosks. Card-based transactions typically involve the payee being guaranteed payment provided all the acceptance procedures specified by the payment network have been adhered to.16 This guarantee is generally provided by the payment card network.
Innovative payment products:17 This category includes payment products that are emerging in both developed and developing countries. In general terms, these products involve the payer maintaining a pre-funded account with an institution, not necessarily a banking or financial institution, and drawing down this pre-funded account to make payments to participating payees as well as person-to-person transfers through a network of business correspondents, at participating merchants, or through conventional retail payments infrastructure such as ATMs or point-of-sale (POS) terminals.18 The payment instruction to draw down the pre-paid funds could be initiated through the Internet, mobile phone or via specific payment cards issued for this purpose. E-money products are one type of innovative payment product. E-money is a record of funds or value available to a consumer, stored on a payment device such as chip, prepaid card, mobile phone, or on a computer system. At the time of transaction, the stored value is read/accessed through an appropriate infrastructure and the value transferred accordingly.
The next sub-section discusses the evolution of these payment instruments in the last few decades.
II.2 The Evolution of Retail Payment Instruments and Services Historically, cash has been the dominant retail payment instrument, especially for faceto-face payment transactions. In the late 19th century, some western countries started introducing paper cheques as a substitute for the use of cash for some retail and personto-person payments. A cheque is defined as a written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified sum on demand to the drawer or to a third party specified by the drawer. Cheques may be used for settling payment obligations or for withdrawing money from banks.
Cheques became an effective way to pay instead of using cash, particularly in cases where the transactions were not conducted face-to-face. However, in the early days of The procedures could delineate, for example, that online authorization should have been obtained, a copy of the charge-slip bearing basic details of the transaction retained, and the transaction submitted for settlement within a particular number of days.
For the purpose of this document, innovative payment instruments include all instruments other than cheques, electronic funds transfers and traditional payment cards.
These products can be pre-funded by users themselves or by another entity on behalf of the user (e.g.
government, corporation, or person).
cheques, the clearing and settlement process was highly inefficient as the banks would typically discount the value of deposited cheques based on the cost of presenting it to the paying bank for payment and some assessment of the latter‘s creditworthiness.
Geographic attributes further complicated cheque processing. For example, the farther away the banks of the payer and that of the payee, the latter would be less familiar with the paying bank‘s financial condition, and the greater the transportation cost associated with clearing the instrument—therefore the greater the discount applied by the banks.
Correspondent banking arrangements helped to address these issues to some extent.
During the first half of the 20th century, driven by the need to integrate regional payment systems, improvements were made when countries began to establish national cheque clearing systems where cheques could be exchanged at par value. Over time, as the volumes grew, central banks as well as correspondent banks started offering cheque clearing services, driving down the cost and improving efficiencies in the clearing and settlement process.
By the 1960‘s, some large commercial banks had already adopted the new technologies that were available for cheque processing, which increased the efficiency of their clearing operations. These banks found the paper cheque payments business to be profitable, and the consumers had become very comfortable and confident in their use of cheques. In many countries, the cheque became the dominant form of non-cash payment, and there was little incentive for change in the payments system. However, there were concerns at the policy level that the increasing volume of cheques would eventually outpace the technology and equipment used for cheque clearing.
As an outcome of several initiatives undertaken to determine alternative approaches to process small value, recurring payments, the electronic Automated Clearinghouse (ACH) was born in the 1970‘s. An ACH is defined as an electronic clearing system in which payment orders are exchanged among financial institutions, primarily via magnetic media or telecommunications networks, and handled by a data processing center.
Over the years, ACHs have focused their development to support two distinct retail payment products: credit transfers and debit transfers, collectively defined earlier as EFT-based products.
Debit transfers are often processed in bulk by the payee collating the various payment orders and submitting them to their financial institution for collection through the ACH. In contrast, the payer often initiates credit transfers individually, and the payer‘s institution then often batches various credit transfers initiated by its clients and processes them subsequently in bulk. As noted earlier, credit transfers and debit transfers are also commonly referred to as Electronic Funds Transfer (EFT) products, as they typically involve processing in an automated manner by an ACH. It needs to be noted, however that, credit transfers and debit transfers are also processed in many countries in a nonautomated manner, in some cases involving bilateral arrangements between the financial institutions in the country.
The adoption levels of ACH as an alternative form of payment was initially mixed. The adoption was slow in countries where only banks and not individuals could initiate ACH payments. Over the years, ACH products have become increasingly practical, with ever growing possibilities and options for individuals to initiate these payments easily and conveniently.19 In some countries (Germany, the Netherlands, Japan, and Belgium, among others) EFT-based direct credit transfers and debit transfers became an important electronic payment instrument to replace cash for consumer-to-consumer payments and also for consumer to business payments many years ago.
Starting in the late 1990s, countries where paper cheques were the dominant form of non-cash payments, electronic cheque conversion (ECC) applications were developed that further expanded the use of the ACH for retail payments. These applications capture information from the cheque‘s magnetic ink character recognition (MICR) line to create ACH transactions at merchant point of sale, at lock box locations, Internet, and over the telephone.
More recently, a new international format for ACH—International ACH Transactions (IAT)—was developed to facilitate cross-border ACH transactions. Other recent developments include same-day ACH services and the use of devices such as ATMs and smart mobile phones to capture cheque images and initiate ACH payments.20 Whereas ACHs have had some success to convert certain types of person-to-person and business-to-business payments from paper to electronic, payment cards have proved to be most instrumental in converting paper-based payments to electronic at the point of sale.