A payment system is any mechanism that is used to settle financial transactions by transferring monetary value. This comprises the institutions, payment instruments like payment cards, individuals, laws, procedures, standards, and technologies that allow it to be exchanged. An operational network is a popular form of payment system that connects bank accounts and allows for monetary exchange utilizing bank deposits. Credit mechanisms, which are fundamentally a separate component of payment, are included in several payment systems.
In both domestic and foreign transactions, payment mechanisms are employed instead of cash. This is a significant service offered by banks and other financial institutions. Negotiable instruments such as draughts (e.g., cheques) and documented credits such as letters of credit are examples of traditional payment methods.
Many alternative electronic payment systems have evolved with the advent of computers and electronic communications. A payment made from one bank account to another via electronic procedures and without the direct interaction of bank workers is referred to as an electronic payment. Electronic payment can be narrowly defined as e-commerce—payment for buying and selling products or services via the Internet—or it can refer to any sort of electronic funds transfer.
The key to good business finances is proper cash flow management. Cash flow issues can cause a variety of issues. Employees may not be paid on time, which will have an impact on production. Payment deadlines for suppliers may be missed, resulting in a degradation of your business relationship. A shortage of money may also hinder you from making capital investments that could boost the efficiency of your operations.
Even if your firm generates a significant amount of income, payment processing troubles can hinder cash flow and reduce profit margins. Small businesses can alleviate cash flow by identifying the most prevalent payment processing difficulties faced by their peers.
1. Integration issues
Your payment platforms need to integrate seamlessly with your existing operations and software. Otherwise, they may add friction to your processes and result in unnecessary processing time and costs. When your payment platform is fully integrated, it allows you to increase operational efficiency. So you don’t have to worry about tedious administrative processes like updating transaction records manually.
GoCardless partners with over 200 software providers, fitting straight in with your existing business processes.
2. Processing costs
Turnover is important. But unless you take steps to drive down operational costs, you risk placing a stranglehold on present and future margins. In today’s digital-first business climate, every business needs to be able to take payments online. But no business can afford to pay through the nose for the privilege.
If you’re paying a high proportion of your revenue to your payment platform provider, you may well find that there are alternatives that offer the same functionality at a much better price point.
3. Multi-channel payments
All businesses want to make it easy to pay in a way that’s convenient for them, whether they want to use a physical credit or debit card onsite, or pay online with an e-wallet. Some may even want to cater to customers who use cryptocurrency.
But if companies use different vendors for different payment channels, the cost and logistical considerations are multiplied exponentially. Fortunately, there are integrated platforms that allow for multi-channel payments. So you don’t need to rely on several vendors or pay several sets of setup and maintenance costs.
4. Security risks
Fraud protection is a serious consideration when choosing a payment partner. Customers expect to be able to make 100% secure transactions through you. Choosing the wrong payment partner could leave an indelible mark on your reputation if your customers fall prey to cybercriminals. Payment Card Industry (PCI) and Security Standards Council (SSC) compliance are absolutely essential. But given that your reputation is on the line, you may gravitate towards a payment platform that goes the extra mile. Point-to-point encryption, fraud management filters and tokenization are all extra security redundancies that can make transactions more secure.
Registered with the FCA and offering powerful security products such as Verified Mandates, GoCardless is first in line offering highly secure bank payment solutions for businesses of all sizes.
5. Lack of support
Most businesses no longer operate on a 9 to 5 basis. As such, it can be infuriating when their payment partners don’t provide accessible support when they need it most. Delayed or unprocessed payments can put a squeeze on your company’s cash flow and generate friction for customers. Payment processing should be quick, seamless and available 24/7. If you’re not getting support in and out of conventional business hours, you may need to choose a different platform.
Payment system policy is sometimes classified into two categories: those that increase efficiency and those that limit risk. This divide will be utilized to assist in narrowing the focus on specific efficiency or risk policies. However, from the perspective of both payment system designers and users, this can be an arbitrary distinction that prevents a thorough examination of the trade-offs and alternatives that influence the design, selection, and usage of various instruments and systems. As a result, risk considerations and other elements that influence choices and the overall efficiency of payment systems are addressed together.
Both customers and providers of payment services must be considered in the analysis of payment system efficiency. The benefits of utilizing a specific payment instrument must outweigh its expenses in order for it to be efficient for users. These benefits and costs include not just the explicit and implicit fees charged by banks or other payment service providers, but also the benefits and costs associated with several essential characteristics of different payment instruments.
For payment service providers, efficiency means that the benefits of supplying certain payment instruments, clearing services, and settlement operations to users must surpass the costs of providing the services, including a market-based return on investment.
In a competitive payment services market, the assumption is that banks and other financial institutions would provide the variety of payment services that users want and are ready to pay for at prices that cover their expenses. On average, the advantages will outweigh the expenses of using a specific payment instrument to transfer money for both the user and the provider.
Nonetheless, history has demonstrated that public policy plays an essential role in defining the institutional framework within which payment services are supplied, in stimulating payment system efficiency, and in assisting in the reduction of risks, particularly systemic risks.
The central bank and legislative authorities should seek to make payment legislation as clear as feasible in terms of legal policy. Payment system design, risk management, and use should be based on the rights of parties involved in making and receiving payments, including intermediate banks. To drive increases in payment system efficiency, it may be especially necessary to build both a statutory and regulatory environment that facilitates payment processing automation.
Monetary regulations may compel central banks to assess the effects of reserve requirement requirements and associated laws on bank liquidity and the use of central bank money for payment settlement. If required reserves, for example, must be retained in segregated accounts and cannot be utilized to settle payments, the monetary costs of settlement may be significantly increased.
This may increase the costs of providing payment services to a country’s banking system excessively, with no offsetting public policy benefits. The goal of all payment systems is the transfer of money balances; monetary restrictions that interfere with or increase the cost of money transfer would increase the expenses to banks of providing payment services and hence to bank clients of utilizing them.
The Issues and Challenges With Cross-border Payments
The modern payment landscape is ever-changing, and the sharp rise in online buying and e-commerce for both B2C and B2B sectors has characterized one of the most recent evolutions in transaction patterns. Along with this relentless expansion, international or ‘cross-border’ payments have steadily and consistently increased at a rate of 7 to 8 trillion USD each year, with a projected increase to about 156 trillion by 2022. According to the UK Bank of England (BoE), its value is anticipated to reach $250 trillion USD by 2027.
A cross-border payment is another term for an international financial transaction. It refers to both retail and wholesale payments where the buyer and seller are in separate countries. So, a simple consumer purchase of an item across borders qualifies as a cross-border payment. They also encompass complicated investments, mergers, and acquisitions involving companies in different countries, and as a result, can entail complex service and distribution contracts.
The different types of cross-border transactions can be categorized as follows:
Retail cross-border transactions: These usually refer to person-to-person, person-to-business, and business-to-business payments. Examples include e-commerce purchases, card payments, bank transfers, alternative payment methods (aka digital wallets and mobile payments) and remittances.
Wholesale cross-border transactions: Whole cross-border payments take place between financial institutions and are typically used to support customer needs or a business’s international activities – for example, foreign exchange, securities trading or borrowing and lending.
Governments and large non-financial companies: Institutions and organizations like these often use wholesale transactions to pay for financial market trading and the large-scale import and export of goods and services.
Given the volume of many external remittances, they are often taken seriously and several issues come into play, namely, cost, processing time, security, and legal concerns – among others.
1. Payment processing
Cross-border transactions can be a convoluted and time-consuming process, and can also be halted at any point – causing friction, delays and a suboptimal experience for all those involved. Often this is due to incomplete payment information, Anti-Money Laundering (AML) checks and other fraud screening measures. The transmission of international payments are not as digitized or standardized as other transactions, meaning that the solution is often manually intensive and can leave the payment in limbo for several weeks.
2. Legal issues
When companies expand across borders into foreign jurisdictions in order to achieve growth, the level of risk can increase due to the divergent legal systems in each country. Although most developed countries adhere to systems of civil law, these can vary wildly between different nations and as a result lead to drastically different interpretations in agreements for mergers and other B2B agreements. A notable example of this is intellectual property protection, which can diverge a great deal between foreign jurisdictions.
The language of the contract in question also leads to issues with enforceability, as either party may struggle to decide which interpretation should have authority in either domestic or international courts. Data protection laws also vary between different countries, resulting in both compliance issues but also the costs associated with seeking the relevant domestic or foreign counsel to interpret dense legislation and provide clarity.
3. Tax issues
As with legislation, taxation also differs between countries. A payment may have tax implications in its destination country, which requires the buyer or seller to consider which ones may apply and therefore affect the profitability or fairness of the deal. Taxation treaties have been devised throughout the years to avoid the scenario of double taxation, but these tend to be specific to each country – meaning that recipients or payees may not be entirely exempt under those same terms.
4. Data protection
As we touched on already, the provision of data is regulated in most countries, but the specific laws vary. Banks must adhere strictly to these regulations, as, for instance, in some countries, they are not permitted to share any personal or business information with their clients. In the UK and EU, General Data Protection Regulation (GDPR) applies to any company or financial institution that processes personal information for citizens, which has a serious impact on what data can or cannot be shared. Compared to the USA, for example, UK, Japan and EU member states have strict data privacy which incur severe penalties for the unlawful collection or disclosure of private information, and even prison time.
5. Operational systems
The conventional messaging format used to process cross-border payments – SWIFT MT103 – is rather limited in its capacity to transmit large amounts of information. For additional capacity, another non-automated messaging infrastructure (MT199) will communicate with the parties involved in the transaction. Processes like these are behind the majority of inefficiencies within the transaction.
The infrastructure of financial institutions can vary dramatically, but what compounds this issue is that often the legacy systems used are not compatible with changes in technology. This results in further delays for settlements and other obstacles that arise, for instance, from a lack of real-time monitoring, the reliance on batch processing and a low data processing capacity.
6. Fees & exchange rates
Payment systems that do not involve physical paper money usually incur additional costs of some kind. Payee entities (i.e. a business) often need to provide funds upfront in order to access foreign currency and begin the transaction. The more entities involved in a cross-border payment, the more bank fees are charged. While a great deal of these will apply to merchant banks, they can be passed along to the purchaser as well. Many consumers will be familiar with credit card companies charging them for paying for goods in a foreign currency – the same principle as exchange rates.
The value difference between currencies is prone to fluctuate, affecting both buyer and seller who may encounter deficits if there is a rate change in the time between the initiation of the transaction and the settlement. For this reason, merchants allow buyers to use payment service providers that calculate the best exchange rate possible.