We go over everything from high-value transactions like RTGS and CHAPS to low-value payments such as ACH and BACS, as well as modern innovations in mobile and digital currencies.
Types of Payment, Definitions, and Global Terminology
High-Value Payments
RTGS (Real-Time Gross Settlement)
RTGS systems facilitate the instant and gross settlement of large-value transactions. This means each transaction is processed individually and settled in real-time, ensuring immediate finality. RTGS is crucial for high-value interbank transfers and is used by central banks globally to maintain financial stability.
CHAPS (Clearing House Automated Payment System)
CHAPS is the UK’s high-value sterling payment system, processing same-day transfers. It is primarily used for large-value and time-critical payments, such as property transactions or corporate payments.
Fedwire
Fedwire is the RTGS service in the United States, used for large-value interbank payments. Operated by the Federal Reserve, it ensures immediate settlement and is essential for the U.S. financial system.
Wire Transfer
Wire transfers are electronic fund transfers across a network of banks or transfer agencies globally. They are used for both domestic and international transactions and are known for their speed and reliability.
Tested Telex
Tested telex is an older method of international transfers, using telex messages often accompanied by a test key for security. While largely obsolete, it played a significant role before the advent of SWIFT.
Low-Value Payments
ACH (Automated Clearing House)
ACH is a batch processing system for low-value transactions, commonly used for payroll, utility payments, and direct deposits. Transactions are processed in bulk, usually within one to two business days.
iACH (Internet ACH)
iACH functions similarly to traditional ACH but utilizes internet-based systems for processing. This innovation allows for more efficient handling of transactions with greater flexibility.
BACS (Bankers’ Automated Clearing Services)
BACS is the UK system for bulk payments, such as direct debits and direct credits. It processes millions of transactions daily, providing a reliable method for low-value payments.
Faster Payments
Faster Payments is a near-instant low-value payments system in the UK, enabling payments to be made within seconds. It supports online, mobile, and phone banking payments, offering convenience and speed.
Direct Debit
Direct debit allows businesses to pull funds directly from a customer’s account for recurring payments. It is widely used for subscriptions and regular bills.
Instant Payments
Instant payments are processed immediately and are available to the recipient within seconds. Examples include the UK’s Faster Payments and the US’s RTP (Real-Time Payments), both of which enhance the speed and efficiency of financial transactions.
Cross Border Payments
SWIFT (Society for Worldwide Interbank Financial Telecommunication)
SWIFT provides a secure messaging system used for international wire transfers, facilitating communication between banks globally to ensure the smooth transfer of funds.
International Wire Transfer
An international wire transfer involves transferring funds between banks in different countries. It often involves currency conversion and adheres to international banking regulations.
FX Payment
Foreign exchange (FX) payments involve currency conversion during the transfer process, allowing businesses to trade internationally with different currencies.
Book Transfer
Book transfers refer to the transfer of funds between accounts within the same financial institution. These transfers are typically instantaneous and do not require the involvement of external networks.
Card Payments
Debit Cards
Debit cards are linked directly to a bank account, and funds are deducted immediately upon making a purchase. They are widely used for everyday transactions.
Credit Cards
Credit cards allow users to borrow up to a certain limit, with the obligation to repay the amount later. They offer flexibility and are commonly used for larger or online purchases.
Prepaid Cards
Prepaid cards are preloaded with funds and can be used until the balance is exhausted. They are often used as gift cards or for budgeting purposes.
Paper Payments
Cheque
A cheque is a written, dated, and signed instrument instructing a bank to pay a specific amount of money to the bearer or a specified person.
Banker’s Draft
Similar to a cheque, a banker’s draft is issued by a bank and guarantees payment. It is often used for large transactions where guaranteed funds are required.
Cash
Cash refers to physical currency, such as banknotes and coins, used for transactions. It is the most traditional form of payment and is widely accepted.
Mobile Payments
Instant Payments via Telecommunications Networks
These payments are facilitated through mobile phone networks, such as SMS payments, allowing users to transfer money quickly and easily.
Mobile Wallets
Mobile wallets, like Apple Pay and Google Wallet, store payment information digitally and enable users to make payments using their mobile devices.
Mobile Money
Mobile money involves financial transactions conducted via mobile devices, particularly in regions with limited banking infrastructure. M-Pesa in Kenya is a prominent example.
Digital Currencies
Cryptocurrencies
Cryptocurrencies, like Bitcoin, are decentralized digital currencies that use blockchain technology to enable peer-to-peer transactions.
Stablecoins
Stablecoins are cryptocurrencies pegged to a stable asset, such as USDC, providing stability in value compared to more volatile cryptocurrencies.
CBDCs (Central Bank Digital Currencies)
CBDCs are digital forms of central bank money, representing a digital equivalent of a country’s fiat currency. They are still in the developmental or pilot stages in many countries.
Settlement and Irrevocability
Settlement refers to the finalization of a payment, ensuring the recipient has access to the funds. In RTGS systems, settlement is immediate and final, while in ACH systems, it may take a couple of days.
Payment Process Explanation
- Initiation: The payer initiates a payment via their chosen method (e.g., ACH, wire transfer, card payment).
- Authorization: The payer’s bank or financial institution verifies the payment details and authorizes the transaction.
- Clearing: The transaction details are communicated between the payer’s and payee’s banks to prepare for the transfer of funds.
- Settlement: The actual transfer of funds from the payer’s account to the payee’s account occurs. For RTGS, this is immediate; for ACH, it may take a couple of days.
- Confirmation: Both parties receive confirmation that the payment has been processed and settled.
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