Payment and settlement systems (Part III)
In payment and settlement transactions which use medium of exchange other than cash, or what we call as money substitutes such as checks, ATM cards and credit cards, there are third parties who become part of the transactions. These parties can be classified as follows:
1. The operator of the payment system who provides clearing or settlement services and maintains the operational framework for the system. For check clearing, the operator is the Philippine Clearing House Corporation; for ATM cards, the ATM networks; and for credit cards, the credit card companies. The Bangko Sentral is also an operator of a payment system called the Philippine Payments and Settlements System or PhilPaSS;
2. The participants who can be the operator, issuer, service provider or any person involved in the payment system other than the end-user;
3. The service provider or the entity that provides arrangements, technology or infrastructure to operators of a payment system;
4. The issuer or any person who provides the means or the instrument to hold or transfer funds; and
5. The end-user or any person who originally initiates the instruction to pay or the ultimate receiver of funds in a payment system.
In payments and settlements processing there can be numerous parties involved such as different check issuers, different credit card users, different ATM account holders, different banks and different merchants and there can be thousands of crisscrossing transactions among them within a given period. To facilitate the accounting and reconciliation among the participants, there is a “netting” process which allows the offsetting of obligations among them. Such netting is made against the demand deposit accounts maintained by the banks with the Bangko Sentral. This means that there is no need for a separate fund transfer for each transaction from one bank to the other; instead, the transactions between these two banks are grossed and totalled and then these are offset against each other.
To carry the process a notch higher, the Bangko Sentral established and operated the PhilPaSS to implement the Real Time Gross Settlement System or RTGS to eliminate the time gap between the delivery of the object of the transaction and the payment of the monetary consideration therefor. To illustrate, in a sale of securities between two institutions, normally, the delivery of the securities and the transfer of funds do not take place at the same time, meaning, there can be a time gap between them. Such situation may lead to risks of non-delivery of the securities because, for example, of an issuance of a garnishment order against the securities, or viceversa, non-payment because insolvency intervened in the meantime. Settlement through RTGS eliminates these risks because the system makes sure that delivery of the securities and the transfer of funds occur at the same time, or what is referred to as “real time.” This is almost like an over-thecounter transaction where the delivery of the object of the sale and the payment for said object occur simultaneously.
In conclusion, these 3-part articles are meant to provide basic information on the rationale, objectives and operations of payment and settlement systems. As we all know, this is a field that is progressing very rapidly owing also to rapid advancements in technology and to the keen competition among the participants in these systems. More product developments, promotion and marketing can be expected along the way. All these efforts however should remain aligned with the objective of the State to protect public interest through safe, secured, efficient and reliable systems. That should be the paramount mandate for all those who are involved in such systems.
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The above comments are the personal views of the writer. His email address is jzuniga@ bsp.gov.ph