Payment

A payment is the transfer of an item of value from one party (such as a person or company) to another in exchange for the provision of goods, services or both, or to fulfill a legal obligation.

The simplest and oldest form of payment is barter, the exchange of one good or service for another. In the modern world, common means of payment by an individual include money, check, debit, credit, or bank transfer, and in trade such payments are frequently preceded by an invoice or result in a receipt. However, there are no arbitrary limits on the form a payment can take and thus in complex transactions between businesses, payments may take the form of stock or other more complicated arrangements.

In law, the payer is the party making a payment while the payee is the party receiving the payment.

Payment methods

There are two types of payment methods; exchanging and provisioning. Exchanging is to change coin, money and banknote in terms of the price. Provisioning is to transfer money from one account to another. In this method, a third party must be involved. Credit card, debit card, Cheque, money transfers, and recurring cash or ACH (Automated Clearing House) disbursements are all electronic payments methods. Electronic payments technologies include magnetic stripe cards, smartcards, contactless cards and mobile payments.

Parties involved

Payments may be classified by the number of parties involved to consummate a transaction. For example, a credit card transaction in the United States requires a minimum of four parties (the purchaser, the seller, the issuing bank, and the acquiring bank). A cash payment requires a minimum of three parties (the seller, the purchaser, and the issuer of the currency). A barter payment requires a minimum of two parties (the purchaser and the seller).

Payment providers

The infrastructure and electronic clearing methods are formed by the payment provider. Global credit card payment providers are Diners Club, Visa, American Express and Mastercard. Maestro and Cirrus are international debit card payment providers.

Interbank payments

The central bank CB(Ccy) of a currency can maintain a loro account for a bank (which the bank would call a nostro account).

Direct Payment

A bank P (the payer) with a central bank nostro can pay directly to another bank R (the receiver) which has also a nostro with CB(Ccy) by instructing the central bank to make a payment of N[Ccy] (or an amount N in Ccy). The central bank however will only accept Ps payment instruction if the balance B on P's loro before the payment is B≥P. The payment itself is a booking in the accounts of the central bank where P's loro is debited with P (it will be B-P≥0 thereafter) and simultaneously Rs nostro is credit with P (its balance C will be C+P≥0 thereafter).

We denore the payment symbolically with [P→CB→R].

Indirect Payments

If the payer P maintains a loro account for another bank X, P can act as a payment agent for X: X instructs P to pay to R; then P instructs CB(Ccy) to pay on behalf of X: [X→P→CB→R].

In this example the first half of the payment is indirect and the second one (from CB(Ccy) to R) is still direct. If X would pay via P to R and finally to another party Y, the payment would be 'fully indirect': [X→P→CB→R→Y]. In practice, not every payment agent might have a direct nostro with the central bank, thus rather weird payment constellations can exist, which are hard to describe.

Directness Coefficient (p,q)

If we define (p,q) where p is number of parties on the sender side and q on the receiver side, we can classify the directness of payments.

S_n,R_m Description of Payments

We denote with S_n the senders ans with R_m the receivers in a payment process, such that

R₀=S₀=CB_CCY is the central bank of the currency which has 'no' distance (n=m=0) to the payment process,

m,n=1: the direct nostro agents of the sender / receiver: S₁ ist the direct payer; R₁ is the direct receiver (or nostro agent)

m,n=2: the indirect nostro agents of the sender / receiver: S₂ ist the indirect payer; R₂ is the indirect receiver

m,n=3: the sender / payer bank : S₃ ist the sender bank; R₃ is the receiver bank

m,n=4: the sender / payer: S₄ ist the sender (payer); R₄ is the receiver (payee)

Here is an (p=q=4) example:

[sender→sender bank → indirect agent of sender bank → direct agent of sender bank → central bank → direct agent of receiver bank → indirect agent of receiver bank → receiver bank → receiver(payee)]

or

[S4 → S3 → S2 → S2 → S0=R0 → R1 → R1 → R2 → R3 → R4]

Global payments market

In 2005, an estimated $40 trillion globally passed through some type of payment system. Roughly $12 trillion of that was transacted through various credit cards, mostly the 21,000 member banks of Visa and MasterCard. Processing payments, including the extending of credit, produced close to $500 billion in revenue. In 2012, roughly $377 trillion passed through noncash payment systems. This led to total account and transaction revenues close to $524 billion.

Debit cards

In the U.S., debit cards are the fastest growing payment technology. In 2001, debit cards accounted for 9 percent of all purchase transactions, and this is expected to double to 18.82 percent in 2011

Cheques

Historically, checks have been one of the primary means of payment for purchasing goods and services in the U.S. In 2001, cheques accounted for 25 percent of the U.S.-based payment mix; in 2006, this is projected at 17 percent.

In the USA, a cheque as a form of payment can legally be refused for any reason (or no reason). Simply put: A payment via cheque is not a "payment" until the cheque was cashed and clears the banks. Example: You cannot order a fast food meal, throw a cheque on the counter and just leave with the meal, if they do not accept your payment via cheque, you would be committing larceny by taking the meal.

Timing of payments

For some purposes the timing of a payment has legal implication. For U.S. tax purposes, for example, the timing of a payment may determine whether it qualifies as a deduction in a taxpayer's calculation of taxable income.

Cash payments occur at the time of payment. This is the easy case, but payments in other forms can be trickier. Payment also occurs when the taxpayer transfers property or performs services in lieu of making a cash payment. Payment by check is deemed to occur when the check is delivered, as long as the check is honored on presentation by the payee. This rule is enforced even where presentation does not occur until the next taxable year, and even though the taxpayer could stop payment on the check in the meantime. Postdated checks, however, are not considered payment when delivered. Generally, payment by credit card occurs at the point of the sale and not when the taxpayer is billed by the credit card company or when the taxpayer pays the bill.

See also

• Accounting
• Alternative Payments
• APACS (The UK Payments Association)
• Business
• Commerce
• Financial transaction
• Money
• Money transmitter
• Trade

References

• Schaeffer, Mary S.: New Payment World, John Wiley & Sons 2007
• Schaeffer, Mary S.: Controller & CFO Guide to Accounts Payable, John Wiley & Sons 2007
• Schaeffer, Mary S.: Accounts Payable & Sarbanes Oxley, John Wiley & Sons 2006