PAYMENTS IN A NEW DEMOCRACY PAYMENTS IN A NEW DEMOCRACY

1 PAYMENTS IN A NEW DEMOCRACY PAYMENTS IN A NEW DEMOCRACY Payments in a new Democracy Student Name Email Address Institution Date Dave Maclawrence P.O.BOX 355464-22356 Devinson City Malu 21/05/2018 The head of State Malu People’s Republic P.O.BOX 3779842-22356 Devinson City Malu Dear Sir/Madam RE: FEATURES OF A PAYMENT SYSTEM Regarding the intended change in the nations payment system from the previous use

PAYMENTS IN A NEW DEMOCRACY
Payments in a new Democracy
Student Name
Email Address
Institution
Date

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Dave Maclawrence
P.O.BOX 355464-22356
Devinson City
Malu
21/05/2018
The head of State
Malu People’s Republic
P.O.BOX 3779842-22356
Devinson City Malu
Dear Sir/Madam
RE: FEATURES OF A PAYMENT SYSTEM
Regarding the intended change in the nations payment system from the previous use of
barter trade to a modern payment system, I have written this letter to assist you to
understand some of the basic features of a modern payment system.
1. Money
Purposes of money
A medium of exchange, money can be used to intermediate the exchange of goods
and services. This way the inefficiencies associated with the barter trade such as the
“coincidence of wants” can be minimised. Money can be applied when comparing
the values of goods with no similarities (Randall, 2012).
A measure of value, this is regarded as a unit of account in economics. Money is a
standard numerical value that can be applied in measuring the value of market
goods and services. This way it is a prerequisite for the formulation of commercial

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pacts that may involve debts. Money acts as the basic measure and uniform
denomination of trade.
Standard of deferred payment, this means money can be applied as an accepted way
of paying debts. Money has the status of legal tender an indication that it can be
applied in discharging debts (Mishkin, 2007).
Importance of a payment system
A payment system is a very important part of a country’s financial infrastructure. it
allows for the transfer of money as well as the financial instruments. Should a
payment system fail then the entire system may be in a crisis which leads to a
financial shock to the financial system. An efficient and safe payment system is
necessary for a financial stability that can facilitate smooth trading.
Importance of national payment system
The National Payment System (NPS) is regarded as one of the pillars of financial
stability in a nation’s economic system. The Reserve Bank is responsible for ensuring
the safety and soundness of the NPS and do put in place risk reduction measures in
the system payment so as to minimise systemic risks. Through the Reserve bank, an
inter-bank settlement service is put in place through the real-time electronic
settlement system such as a Multiple Option Settlement system. The multiple
settlement options is also responsible for settling obligations arising from the retail
payment clearing as well as equity and Bond markets.
2. Central bank
The role of central bank and the purpose of regulation
The central bank is an institution in a country that plays the management role in the
monetary system. The institution manages the nation’s currency, regulates the
supply of money and the prevailing interest rates. In addition, the central bank is the
overseer of the nation’s commercial banking system (Van Nieuwkerk, 2009).
The monetary system can easily be eroded by unethical activities. This way a nation
relying on it may be hit by either deflation or inflation which eventually destroy the

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value of money. This necessitates the need to regulate the sector and ensure the
value of money I retained in a credible manner.
3. Payment Clearing and settlement
Definition
Payment can be defined as the action of transferring one form of good, service or a
financial asset in exchange for another service, good or financial asset. This is done in
a proportion that had been agreed prior by the involved parties.
Clearing is regarded as the set of activities that takes place from the time parties
enter into a commitment for a transaction to the time when the pact is fully settled.
This process is what turns the promise of payment to the actual transfer of money
from one party to another. i.e. from one bank account to another. The
clearinghouses were designed to enhance such tractions among banks (Maddaloni &
Peydró, 2011).
Clearing and settlement networks and how they influence payment between parties
Payment, clearing, and settlement are a fundamental part of trade. The speed of
trade is normally faster than the cycle time needed to finalise the settlement of an
underlying transaction. Once the parties enter into a transaction that involves
payment, the clearing process sets in to manage the activities between payments
pact and the final settlement. Clearing manages the post-trading activities and the
pre-settlement credit exposures. This way trade pacts are settled within the pre-set
regulations even in situations where the buyer becomes insolvent before finalising
the settlement (BIS, 2015).
4. Payment management body (PMS)
Definition
PMS is a grant payment system and cash management system that is centralised and
operated by the HHS program support centre. The payment management system
was developed to create a central system that is able to pay majority of the federal
assistance grants, block grants or even contracts.
How it achieves its purpose through the clearing houses

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The main responsibility of the system is to act as the fiscal intermediary between
recipients of grants and contacts and the awarding agencies. The PMS emphasises
on an expedition of cashflow between Federal government and the grant recipients,
transmission of recipients’ disbursement data to the agencies awarding the grants
and finally managing the flow of cash advanced to grant recipients.
5. Possible payment systems that the government should consider
A payment system is defined as any system that is put in place for assisting traders
settle financial transactions via the monetary value. The system consists of
instruments, rules, people, standards, technologies and instruments that make
financial transactions possible. Payment systems are categories into modern systems
and traditional systems (Schueffel, 2017). The traditional payment systems include
Cashier cheque and letters of credit. The emergence of computerisation and
electronic communication have led to the emergence of diverse number of
alternative payments systems. These are the systems classified under modern
payments systems. They include debit cards, electronic funds as well as credit cards.
It will be necessary for the government to consider incorporating both the traditional
as well as the modern payments systems to cater for the needs of the, majority of
the citizens in the country (Bossone & Cirasino, 2001).
6. Conceptual description of the operations of the payment systems
Cashier cheque; this is a cheque guaranteed by a bank, the bank draws the funds
from its account as it is the one responsible for the payment. The cashier cheque
once deposited into a bank are normally cleared after a day. During the deposition
period the consumer is in a position to request for a next-day availability. The
cheque does feature the name of the bank issuing it in a prominent location
normally at the left-hand corner. Furthermore, the cheques are embedded with an
advanced security features such as watermarks, colour-shifting ink as well as security
thread. In a bid to curb fraudulent activities its recommended for banks to wait for
the cashier cheque to clear the institution of origin before availing funds for
withdrawal (Macias & Fennelly, 2018).
Letters of credit, this a letter from the bank which is meant to guarantee that the
buyer’s payment to a seller will be done in time and the value will be the precise one

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as agreed upon by the parties. In scenarios where the buyer is not able to fulfil the
settlement then the bank is given the liability of settling the remaining amount. This
payment system is very effective for the international payment system as it
guarantees security to the seller. The document may be transferable of which the
beneficiary is permitted to assign a third party the right to draw it.
Debit card, is aplastic payment system that is usable in a position of cash. The money
is directly withdrawn from the buyers account during the time of the transaction.
Some of the cards possess stored value from which the payment is made though
others relay information to the buyers account to withdraw the designated amount
(Martin, 2010).
Credit card, this is a card issued to holders to allow them pay merchants for products
and services based on the card holders guarantee to settle the full amount plus the
interest at a designed date. The issuer of the card occasionally the bank develops a
revolving account and allow a line of credit to the holder. This allows the holder to
borrow money used to settle merchants. All this simply mean that the credit card
combines the payment services with credit extensions. The credit card fees are
regulated by legislatures which are implemented by the central bank (O'Sullivan &
Sheffrin, 2003).
Electronic funds transfer, this an electronic transfer of money from an account to
another. This can be done by a single financial organization or several institutions.
The payment takes place through the computer-based systems with no direct
involvement of the bank and their staff. The transactions are defined by unique
names (FIRPO, 2009).
4 party models, card schemes are payment links that are linked to payment card e.g.
debit or credit cards. A bank or any other eligible financial organization is permitted
to be a member. In a four-party scheme the acquirer and the issuer are different
entities. Its is though open and other institutions can join and issue their cards
examples are the Visa and UnionPay

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Figure 1: A diagrammatic representation of a 4-party model (BROWN, 2014).
It’s my believe that the above information will assist your government as you strive to make
Malu country a better place.
Sincerely,
Dave Maclawrence
Citizen, Malu country

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References
BIS, 2015. Central clearing: trends and current issues. [Online]
Available at: https://www.bis.org/publ/qtrpdf/r_qt1512g.htm
[Accessed 21 May 2018].
Bossone, B. & Cirasino, M., 2001. The Oversight of the Payment Systems: A Framework for
the Development and Governance of Payment Systems in Emerging Economies, s.l.: The
World Bank.
FIRPO, J., 2009. E-Money – Mobile Money – Mobile Banking – What’s the Difference?.
[Online]
Available at: http://blogs.worldbank.org/psd/health/e-money-mobile-money-mobile-
banking-what-s-the-difference
[Accessed 21 May 2018].
Macias, R. & Fennelly, J., 2018. Certified Check or Cashier's Check -- Which Is Better for You?.
[Online]
Available at: https://www.credittoday.net/public/Certified-Check-or-Cashiers-Check-Which-
Is-Better-for-You.cfm
[Accessed 21 May 2018].
Maddaloni, A. & Peydró, J., 2011. Bank risk taking, securitization, supervision, and low
interest rates: evidence from lending standards. Review of Financial Studies, 24(6), pp. 2121-
65.
Martin, A., 2010. How Visa, Using Card Fees, Dominates a Market, New York : New York
Times.
Mishkin, F. S., 2007. The Economics of Money, Banking, and Financial Markets. Alternate
Edition ed. Boston: Addison Wesley.
O'Sullivan, A. & Sheffrin, S. M., 2003. Economics: Principles in action, New Jersey : Pearson
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Randall, W. L., 2012. Modern money theory: a primer on macroeconomics for sovereign
monetary systems, Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

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Schueffel, P., 2017. The Concise Fintech Compendium, Switzerland: School of Management
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Van Nieuwkerk, V. M., 2009. The Bank of Amsterdam: On the Origins of Central Banking.
Amsterdam: Sonsbeek Publishers.