Payment and settlement systems
(Part 1)
The third pillar of central banking in the Philippines is an efficient payment and settlement system, the first two pillars being price stability and financial stability. This article will endeavor to present in a simplified manner what a payment and settlement system is all about, what its governing law is, and how it operates.
Payment and settlement arise from financial transactions like the sale of goods and services. A buyer of a motor vehicle, for example, has the obligation to pay the seller and if cash is delivered to the seller in exchange for the delivery of the vehicle, there is payment and settlement of that transaction. Such cash transaction is not feasible however for high-value transactions, or where the parties are in separate locations, or where security threats are to be avoided, or where better efficiency is desired. Cash transactions have disadvantages because these are risky, cumbersome and time-consuming. In lieu of cash, the buyer in the above example may just issue a check in favor of the seller and once the check is cleared through the banks, payment and settlement are also completed. As may be noted, third parties involving the banks and the clearing house enter the picture as participants in this transaction. Their procedures and processes constitute an example of a payment and settlement system.
Other examples of payment and settlement systems would be the ATMs where one deposits or withdraws money not with a bank but with an ATM network, and credit cards where one pays the merchant up to a prearranged ceiling authorized by the credit card issuer. Another example would be debit cards which enable the holder to have his purchases directly charged to his deposit account. Technology has rapidly spawned the emergence of other payment and settlement systems like pre-paid cards, electronic fund transfers, direct debit/credit systems, e-money, Internet banking and multiple variations thereof with increasing complexity. These services are now being offered as major products by banks and other financial institutions in a highly competitive environment.
In view of their reliability, efficiency and cheaper costs, payment and settlement systems are being utilized by companies for their transactions, by individuals for their purchases and payments, and also by governments in their receipts and disbursements. These transactions are happening not only domestically but also across borders on a global basis. That is the magnitude that payment and settlement systems bear on the economy.
A payment and settlement system is thus defined as the set of payment instruments, processes, procedures and participants that ensures the circulation of money or movement of funds. There is settlement by virtue of an act that discharges obligations through fund transfers between two or more parties.
As mentioned, payment and settlement systems are vital parts of the economic infrastructure and are essential to the effective functioning of financial systems worldwide. It is for these reasons that the Bangko Sentral ng Pilipinas has taken a lead role in the administration of payments and settlement sytems in the Philippines. Such role falls within the responsibility of the Bangko Sentral to provide policy directions in the areas of money, banking and credit. The objective is to have safe, secured, efficient and reliable payment and settlement systems that will provide finality of settlement and adequate protection to the public. The next discussion will be on the Philippine payments act. ***** The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph