What are the different types of Payment Systems?

payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, instruments, people, rules, procedures, standards, and technologies that make its exchange possible

Types of Payment Systems

■ Cash
■ Checking Transfer
■ Credit Card
■ Stored Value
■ Accumulating Balance

Cash

■ Legal tender defined by a national authority to represent value
■ Most common form of payment in terms of number of transactions
■ Instantly convertible into other forms of value without intermediation of any kind
■ Portable, requires no authentication, and provides instant purchasing power
■ “Free” (no transaction fee), anonymous, low cognitive demands
■ Limitations: easily stolen, limited to smaller transaction, does not provide any float-the period of time between a purchase and actual payment for the
purchase

Checking Transfer

Funds transferred directly via a signed draft or check from a consumer’s checking account to a merchant or other individual

■ Most common form of payment in terms of amount spent ■ Can be used for both small and large transactions

■ Some float

■ Not anonymous, require third-party intervention (banks)

■ Introduce security risks for merchants (forgeries, stopped payments), so authentication typically required

Credit Card

■ Represents an account that extends credit to consumers, permitting consumers to purchase items while deferring payment, and allows consumers to make payments to multiple vendors at one time
■ Credit card associations: Nonprofit associations (Visa, MasterCard) that set standards for issuing banks
■ Issuing banks: Issue cards and process transactions
■ Processing centers (clearinghouses): Handle verification of accounts and balances

Stored Value

■ Accounts created by depositing funds into an account and from which funds are paid out or withdrawn as needed

■ Examples: Debit cards, gift certificates, prepaid cards, smart cards

■ Debit cards: Immediately debit a checking or other demand-deposit account

■ Peer-to-peer payment systems such as PayPal a variation

■ P2P payment systems do not insist on prepayment but do require an account with a stored value, either a checking account with funds available or a credit card with an available credit balance.

■ PayPal is often referred to as a P2P payment system because it allows small merchants and individuals to accept payments without using a merchant bank or processor to clear the transaction.

Accumulating Balance

■ Accounts that accumulate expenditures and to which consumers make period payments

■ Examples: utility, phone, American Express accounts

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