Payment Systems

There are basically two ways to effect payments:
– In a trustless manner, namely through currency movements. This requires logistics of carrying and saving physical currency. Also cryptocurrencies are trustless, as the registry cannot be tampered under certain circumstances.
– Under the form of a “system” that involves the participation of parties that are trusted, and where a promise or a claim to receive money from them is equivalent than receiving currency from the one that needs to pay. Such systems require less physical logistics and are dominating payments these days.

A simple payment system may have an institution that the merchant trusts, and if the payer actually can obtain that that institution will promise to pay the merchant instead of the payer, then this can be completely okay for the merchant. This is for instance used in the system of letters of credit in international trade. However, that institution that the merchant trusts, might not have a relationship with the payer – and might not be willing to deliver that promise as long as he hasn’t an institution that he can trust: this will be an institution with who the payer maintains a relationship but who that merchant’s institution trusts. Such system was used by bankers some centuries ago, in the early days of international trade.

A system like it is used by credit card operators, looks closely like this simple system, but with the added twist that an operator of an payment network performs real time checks between a large network of institutions that otherwise don’t know or trust each other, to see if they will honor the requested promise on a case-by-case basis (which basically happens by checking the remaining credit of a credit card that has been issued by them). Then the payment network operator promises the payment to the institution of the merchant (any non-payment of the case-by-case promise from the credit card issuing institution, is than an issue between that institution and the payment network operator):



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As in all systems that require the handover of information and instructions between parties, where they require automated processing, interoperability is necessary to eliminate manual work and standardisation can help to reduce the participation costs.

EMVCo is promoting the global standardisation of electronic financial transactions – in particular the global interoperability of chip cards. “EMV” stands for “Europay, MasterCard and Visa”.



Acceptor: a merchant or other entity that accepts a payment instrument presented by a client in order to transfer funds to that merchant or other entity.

Acquirer (card acquirer): in point-of-sale (POS) transactions, the entity (usually a credit institution) to which the acceptor (usually a merchant) transmits the information necessary in order to process the card payment. In automated teller machine (ATM) transactions, the entity (usually a credit institution) which makes banknotes available to the cardholder (whether directly or via the use of third-party providers).

Agency: a contractual relationship whereby one party (the agent) acts on behalf of another (the principal).

Batch (bulk payments): a group of orders (payment orders and/or securities transfer orders) to be processed together.

Electronic money: a monetary value, represented by a claim on the issuer, which is:
1) stored on an electronic device (e.g. a card or computer);
2) issued upon receipt of funds in an amount not less in value than the monetary value received; and
3) accepted as a means of payment by undertakings other than the issuer.

Electronic money institution (ELMI): a term used in EU legislation to designate credit institutions which are governed by a simplified regulatory regime because their activity is limited to the issuance of electronic money and the provision of financial and non-financial services closely related to the issuance of electronic money.

Gross settlement: the settlement of transfer orders one by one.

Real-time gross settlement (RTGS) system: a settlement system in which processing and settlement take place on a transaction-by-transaction basis in real time.

Settlement: the discharge of obligations. Basically the logistics so that the funds have become under the power and control of the payee or his agents. With currency, it means handing it over, but with systems that imply claims and promises to various trust-based parties, it’s about making sure that the payee or his agent can exercise these.
TARGET2: the real-time gross settlement system for the euro. TARGET2 settles payments in euro in central bank money and functions on the basis of a single IT platform, to which all payment orders are submitted for processing. This means that all payments are received in the same technical form. TARGET2 is legally structured as a multiplicity of RTGS systems (TARGET2 component systems).