My Greeting to Functional people! My name is Piyush Srivastava, and I’m working as in functional/Automation for more than 5 years on various projects with respect to Banking and payment domain as a Senior Consultant and SME. Now I’m working in *Luxoft * where I got great chance to upskill myself in better way. I wanted to share some Banking concepts for the Functional people.
With the help of this article, I wanted to encourage you to start using this basic concept in your daily work or at least give it a try it will increase your payment domain concepts for sure once you start using and looking deep dive with this basic as I will keep adding my knowledge with this type of post which I gathered with my experience in this domain.
Payments
Payment is the mechanism of sending or giving money in a currency either in cash, cheque or electronically for a goods or services or fees or donation etc. Electronic payments are done through the banking channels from account of client A to account of client B of the same bank or different bank in the same country or foreign country in the same currency or different currency!
Payments done by the corporates using their corporate internet banking channels are basically classified for corporate payments. Payments done by the retails/individuals using their internet
banking channels are basically classified for retail payments.
This method is also known as EFT - Electronic Fund Transfer.
Payment Systems – A definition
“A set of instruments, procedures and rules for the transfer of funds among system participants”.
(Committee on Payment and Settlement Systems of the BIS, Basle) The above definition describes the various components which constitute a payment system.
Instruments: Wallet payments, UPI payments, Cheque, Credit Cards, Debit Cards, E-money, Demand Drafts, Banker Cheque, Pay Order, Mail Transfer, Telegraphic Transfer, Traveler’s cheque
etc. These instruments instruct the bank on how and where the funds are to be transferred.
The way or the mode in which this transfer is made is determined by the instrument of payment used and the channel through which the parties choose to make the payment. The transactions thus can be categorized into:
● Cash transactions
● Non-cash transactions
For cash payments the payment is finalized at the actual time of payment, when the instrument of payment, that is to say, banknotes and coins, are exchanged. Here we have no intermediaries.
Money transfers, card payments through debit and credit cards, cheques and bank money orders are examples of payment instruments that initiate transfer of funds between two or more accounts
held by one or more intermediaries, usually banks. They are all therefore said to be account based payment instruments. Such payment instruments can often be used in and via different channels.
The payment channel indicates the route chosen to send the information about the transaction.
For example, a bank card can be used for payments over the counter in the shop, on the internet or even by telephone.
Credit-based and Debit-based Payment Instruments
The initiation of a payment is the first, and in many ways the most visible, step in the whole process of transferring funds between the bank accounts of different customers. The selection of
payment instrument for a particular transaction will depend on the answers to a range of questions:
● What is the cost to the customer of using particular instruments?
● Is the transaction ‘face to face’ (e.g. in a shop) or a ‘remote’ transaction?
● Is it a regular (monthly, quarterly) transaction or a ‘one-off’ transaction?
● Is it urgent (e.g. requiring same-day availability of funds to the receiver) or non- urgent?
● Is it a high-value or low-value payment?
● Is it a local or long-distance payment?
● Is it domestic or cross-border?
● Is the privacy of the transaction data maintained?
● To what extent the processing is secure and reliable using a particular instrument?
Credit based instrument:
When a credit-based instrument is used (for example, a payment order), the sender gives the instruction directly to his own bank for onward transmission to the receiver’s bank.
Debit based instrument:
When a debit-based instrument is used (such as a cheque), the sender first of all gives the instruction to the receiver himself, and the receiver then passes the instruction to his bank, which will in turn pass it to the sender’s bank.
Categories of Payment Instruments:
● Paper based payment instruments, Cash, Negotiable instruments
● Card based instruments.
● Electronic funds transfer – debit transfer and credit transfer
*Different parties in payments flow: *
Payor: Client who initiated the payment and whose account would be debited with the instructions provided in payment instructions.
Payor Bank: Bank of payor through which payment has been initiated and account held.
Receiver: Client who receives the payment sent by payor in exchange of goods or services provided to payor.
R*eceiver Bank:* Bank of creditor/receiver/beneficiary to which payment has been sent by payor and receiver’s account held.
Bank Payment Channels: Internet Banking, ERP channels for file payments.
Payment Gateway: There are different payment gateways used by Banks.
Clearing House: A place of bookkeeping where the accounts of every bank with the central bank are maintained. It performs the functions of crediting or debiting i.e. increasing or decreasing the respective banks’ accounts with the central bank.
Participants: Banks participating in payment scheme of Central Bank.
Central Bank: The prime monetary/regulatory authority of the country, issuer of currency, banker of banks. It formulates, implements and monitors the monetary policy, maintains price stability and ensures adequate flow of credit to productive sectors, managing the country's foreign exchange and gold reserves and managing both inflation and exchange rates. It regulates payments settlement process and flow.
Correspondent or Intermediary Bank: Banks having NOSTRO / VOSTRO accounts with the other countries banks which act as intermediary in cross - border payments.
Ultimate Debtor or Creditor: In case the Payor or Creditor is acting institutes to initiate payment on behalf of payor or creditor, the actual payor or creditor has been called as ultimate debtor or creditor.
FI Clients: The clients holding the account with a financial institute which initiate the payment through the bank on behalf of its customer.
Aggregators: Aggregators are mainly used for Bill and Tax Payments, which aggregates multiple service providers and provides one stop solution for all Bill Payments through Internet Banking.
** What is Direct Debit? **
A Direct Debit is an instruction from a customer to their bank authorising an organisation to collect payments from their account as long as the customer is given the payment amounts and dates. A customer gives this authorisation by completing a Direct Debit Mandate form – this can be a paper form or a web page that you complete online. Once authorised, the organisation can automatically take payments from you (provided that they comply with the scheme rules).
Direct Debit is the safest way of making payments in the UK as the means that customers are protected from fraudulent payments.
Direct Debit has traditionally been seen as a payment method only available to large corporations. However, with the advent of Direct Debit providers such as GoCardless, organisations of any sizes can now benefit from the advantages of taking Direct Debit payments. Direct Debit is typically used for taking regular or recurring payments like household bills, subscriptions, memberships or charitable donations.
*Advantages of Direct Debit *
● Lower cost per transaction than credit and debit cards.
● Great for recurring payments. Once you have a Direct Debit in place, you can sit back and forget about it.
● With the Direct Debit Guarantee, customers are protected against payments made in error or fraudulently.
● Unlike credit and debit cards, which can be stolen, lost or expire, a Direct Debit is relatively future-proof. That means failed payments are minimised. The success rate of Direct Debit payments is 95-100%, compared to just 80-95% for cards. Disadvantages of Direct Debit
● Direct Debit is not suitable for same-day payments, as payments to process.
● Traditionally Direct Debit could only be offered by a few, large businesses. Though Direct Debit still requires Bacs approved software, third-party payment platforms such as
GoCardless are making Direct Debit more accessible to more businesses.
● Though ‘set and forget’ is usually seen as a benefit of using Direct Debit, some customers may prefer to keep complete control of their payments, and action each transaction themselves.
● If you do not have the necessary funds in your bank account, then your bank could refuse to pay the Direct Debit. Or it may result in your account going into an unauthorised overdraft, with the potential of penalty fees and interest payments.
National Electronic Fund Transfer (NEFT)
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without having a bank account. Presently, NEFT operates in hourly batches - It is now 24*7 and 48 half hourly settlement cycles between 00:30 hrs to 00:00 hrs. There is no minimum or maximum limit for NEFT.
*Detailed process of NEFT: *
● The customer fills an application form providing details of the beneficiary (like name, bank, branch name, IFSC, account type and account number) and the amount to be remitted. The remitter authorizes his/her bank branch to debit his account and remit the specified amount to the beneficiary. This facility is also available through online banking, and some banks also offer the NEFT facility through ATMs.
● The originating bank branch prepares a message and sends the message to its pooling centre (also called the NEFT Service Centre).
● The pooling centre forwards the message to the NEFT Clearing Centre (operated by National Clearing Cell, Reserve Bank of India, Mumbai) to be included for the next available batch.
● The Clearing Centre sorts the funds transfer transactions destination bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the destination banks (credit). Thereafter, bank-wise remittance messages are forwarded to the destination banks through their pooling centre (NEFT Service Centre).
● The destination banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.
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