Basics of Payment

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According to Wikipedia

A payment is the tender of something of value, such as money or its equivalent, by one party (such as a person or company) to another in exchange for goods or services provided by them, or to fulfill a legal obligation or philanthropy desire.

Example: A Payee (Seller) sells goods worth $1Mn. to Payer(Buyer). In exchange for goods provided, the Payer has to pay $1 Mn. to the Payee.

Payment Instruments

Payment Instruments are how a payment is executed. They have pre-defined characteristics and are usually bound by rules and regulations.

Instruments provide convenient alternatives to making cash payments. They are broadly classified into 2 categories:

1. Physical Instruments
2. Electronic Instruments

Example: Following the above example, The Payer has to settle a legal obligation by making a payment to the Seller.

The simplest way for him to pay is to make a cash payment. However, cash payment is not always feasible or efficient.

The Payer can make the payment from his account to the Payee account. Here, the Payer and Payee hold accounts in different banks.

Types of Physical Instruments

1. Cheque: A document submitted by the Payer that orders a bank to pay a specific amount to Payee.
2. Bank Giro Credits: A preprinted paper slip used to pay cash or cheques into a specified bank account. Read here for more
3. Demand Draft: A Demand Draft is a cheque-like document that is guaranteed by the bank that allows the drawer to instruct a bank to pay a specific amount to a specified beneficiary.
4. Cheque Truncation: When a cheque is deposited, it is truncated or cut off at the collection centre, and a digital image or microfilm of the cheque is sent to the drawee bank for clearance. Read more here

Source: Cheque Truncation System (CTS)

Types of Electronic Instruments

1. NEFT/ACH/RTGS: NEFT (National Electronic Funds Transfer), ACH (Automated Clearing House), and RTGS (Real-Time Gross Settlement) are all electronic payment systems that allow individuals and businesses to transfer funds online.
2. Card Payments: Card payments refer to the use of a payment card, such as a credit or debit card, to make a transaction. These transactions are typically processed through a network, such as Visa or Mastercard, and are secured by a unique card number, expiration date, and security code.
3. Standard Instructions: Standing Instructions is a scheduled payment order/ instruction set by Bank customers to ensure regular funds transfer on a specific date. To debit a specified amount from your account on a recurring basis.
4. Direct Debit: Transaction in which the Payer pre-authorized the bank to directly transfer funds from the account to the Payee account. It can be used in payment of EMI’s or Utility bills.

Payment Sources

Payment Sources can be broadly classified into two categories

1. Retail
2. Institutional

Retail Payments

These are payments made by retail customers. So these are small-value but high-volume payments. Example:

1. Fund Transfer: Payment made by one individual to another. It can be a one-off or recurring payment.
2. Bill Payment: A Bill is a document requesting payment against service or goods provided previously. Individuals make payments to utility companies for the bills.
3. Remittances: Transfer of money by a migrant to his or her country. The customer initiates the remittance to the beneficiary account.

Institutional Payments

1. Corporate: Payments made to suppliers, receiving payment from customers, Salary payment and Redemptions.
2. Trade: Payments made from customers in the form of letters of credit, cash in advance, documentary collections and counter trade.
3. Treasury: Payment to carry out functionality like ForEx management, Liquidity management, money market & cash management.
4. Securities: Payment towards security-related transactions used for trading in financial markets like Stocks or bonds.

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