What does the Payment System Ecosystem Look Like?

What does the Payment System Ecosystem Look Like?

A great question, but difficult to answer. I had initially answered this Question on Quora (See my answer here), and then decided it was time to upgrade the answer here on my own website.

What is a Payment System?

First, let us start with the definition of what it is…

a payment system consists of a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money.

Source: This definition was taken from: Glossary definition from the Committee on Payment and Settlement Systems (BIS – Bank of International Settlements). See glossary at: http://www.bis.org/cpmi/glossary_030301.pdf (PDF file)

Supplementing the above definition graphically, and you would get this:

What is a Payment System?

The entire concept or functioning of a Payment Systems is to enable the exchange of payment (i.e. value) between two entities, the Payer and the Payee.

So now that we know the purpose of a payment system, what does the core of a payment system look like? Well, this can be argued in many ways, but as of today, the majority of the cores of most payment systems, would have the bank at the very center:

Core of a Payment System

*Barring Bitcoin (and other non-fiat value transfer systems), Government issued (regulated) money which accounts for perhaps 99.999% of what we use today, requires banks.

Without banks, the concept of money that we have today, more specifically, fiat money, our current financial system would collapse (perhaps that would be a good thing, so we can start all over). Anyhow, bank is not necessary to move money, but a bank is at the very epic center, where your money resides.

For physical cash that is exchanged, it does not necessarily show up at the bank, until it is deposited (or withdrawn) from a bank.

Bank Indonesia (Central Bank of Indonesia) published a report (no longer online, but you can download it from here), has a great definition of how this bank led payment system looks like:

Bank led Payment System

Expanding the Payment Instrument section above, and it would look something like this:

Payment Systems Payment Instrument

Because a bank is central to the payment system, it is important to understand how a bank interacts to various entities within itself that in turn interact with the world. A breakdown of a commercial bank would be something like this:

Breakdown of a Commercial Bank

The above essentially represents the eco-system in which a commercial (non-investment bank) is operating in. The ovals in purple, represents the various verticals a bank can choose to associate themselves with and work in/with.

A slightly wider view of the same would be:

Breakdown of a Commercial Bank by Department

Credit: Above visuals are extracted from the presentation “An Introduction of Payment Systemsby Dyah N.K. Makhijani, Bank Indonesia. You can download the presentation from here).

Now that you have an understanding of a Commercial Bank, it would be a good idea to see how many other type of banks exist in the world, here is a glimpse below. (You can view more of this on Mind Map of Money)

Different Types of Banks