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Introduction
The primary goal of any national payment system is to enable the circulationof money in its economy. It is recognized worldwide that an efficient and secure payment system is an of enabler economic activity. It provides the conduit essential for effecting payments and transmission of monetary policy. Payment systems have encountered many challenges and are constantly adapting to the rapidly changing payments landscape. More recently, theproliferation of electronic payment mechanisms, the increase in the number ofplayers in the financial area and the payment crises in quite a few countriesand regions in the 1990s have focused attention on public policy issuesrelated to the organization and operation of payment systems. Three mainareas of public policy have guided payments system development and reform:protecting the rights of users of payment systems, enhancing efficiencyandcompetition, and ensuring a safe, secure and sound payments system. Electronic commerce and finance are growing rapidly. New paymentsmechanisms designed to aid electronic commerce have become routine. Predictions abound about the capabilities of the information andcommunication technology to bring forth important tools for conductingelectronic commerce and payments. We are in the midst of a wave ofinnovation and change. In a dynamic economy, markets need to play a key role in guiding thedevelopment of infrastructure, including mechanisms like payments systems. This means that innovation and competition will be central to the futuredevelopment of the payments system - as they are in other areas of theeconomy. Strategic planning and investments by market participants will be
shaped by views about the future. Public policy should assist them in shapingtheir views by pronouncing its vision and intentions clearly and well inadvance so that the market participants can face the challenges and takeadvantage of opportunities.
This Vision helps in charting out a course topurposeful and orderly change. For such policy pronouncements, a country can opt for a strategic approach, where the state of the payment system is established, its weaknesses andstrengths determined and a way forward charted, giving due regard to thecountry’s environment and the strategic direction of the payment technologiesand practices. This approach enables one to have a holistic vision of theentire payment system, and leads to the development of a StrategicImplementation Plan that is well structured, appropriately phased, properlysequenced and convergent in perspective. India adopted this approach in the year 2001 when it came out with its“Payment Systems – Vision Document”. It detailed, in the Document, thestrategies and implementation plan for the payment system arena for 2001-303. As we completed this period, it is time for taking stock of the plan, reviewits implementation, list and assess achievements and shortfall, learn lessonsand re-plan for the next period. This document, “Payment Systems in India –Vision 2005-08” is the result of that exercise.
The emergence of e-commerce has created new financial needs that in many cases cannot be effectively fulfilled by the traditional payment systems. Recognizing this, virtually all interested parties are exploring various types of electronic payment system and issues surrounding electronic payment system and digital currency. Broadly electronic payment systems can be classified into four categories: Online Credit Card Payment System, Online Electronic Cash System, Electronic Cheque System and Smart Cards based Electronic Payment System. Each payment system has its advantages and disadvantages for the customers and merchants. These payment systems have numbers of requirements: e.g. security, acceptability, convenience, cost, anonymity, control, and traceability. Therefore, instead of focusing on the technological specifications of various electronic payment systems, the researcher have distinguished electronic payment systems based on what is being transmitted over the network; and analyze the difference of each electronic payment system by evaluating their requirements, characteristics and assess the applicability of each system.
Electronic commerce involves the exchange of some form of money for goods and services. Implementation of electronic payment systems is in its infancy and still evolving. Four technologies to be used: electronic cash, software wallets, smart cards, and credit/debit cards.
3. Payment System
3.1 Conventional Payment System
To get into the depth of electronic payment process, it is better to understand the processing of conventional or traditional payment system. A conventional process of payment and settlement involves a buyer-to-seller transfer of cash or payment information (i.e., cheque and credit cards). The actual settlement of payment takes place in the financial processing network. A cash payment requires a buyer’s withdrawals from his/her bank account, a transfer of cash to the seller, and the seller’s deposit of payment to his/her account. Non-cash payment7 mechanisms are settled by adjusting i.e. crediting and debiting the appropriate accounts between banks based on payment information conveyed via cheque or credit cards.
Seller’sBank Deposit
Payments
Info flows for national Goods & Services changes
Buyer,s Bank
Figure is simplified diagram for both cash and non-cash transactions. Cash moves from the buyers‟ bank to sellers‟ bank through face-to-face exchange in the market. If a buyer uses a non-cash method of payment, payment information instead of cash flows from the buyer to the seller, on-cash payment requires three separate elements. The buyer must have an agreed means of payment authorization and in structuring its bank to affect a transfer of funds. The seller’s bank and buyer’s bank need an agreed method of exchange payment instructions. This is referred to as payment clearing. And ultimate payments are settled between affected banks, who notationally adjust accounts based on payment information.