A payment system, as defined by the Bank for International Settlements1 (BIS), consists of a set of instruments, banking procedures and interbank funds transfer systems that ensure the circulation of money.
A national payment system is one of the principal components of a country’s monetary and financial system and is, therefore, crucial to a country’s economic development, since almost all economic transactions involve some form of payment. Payment and settlement systems thus play a crucial role in a market economy, and central banks have always had a close interest in them as part of their responsibilities for monetary and financial stability.
Well-designed and managed payment systems help to maintain financial stability by preventing or containing financial crises, and help to reduce the cost and uncertainty of settlement, which could otherwise act as an impediment to economic activity. Financial instability may be characterised by banking failures, intense asset price volatility, interest and exchange rate volatility, liquidity problems, and systemic risk, which are often manifested in the disruption of the payment and settlement system.
Payment systems not only entail payments made between banks, but encompass the total payment process, including systems, mechanisms, institutions, agreements, procedures, rules and laws. Modern payment systems also involve the settlement of substantial trade in financial instruments such as bonds, equities and derivatives.
Collegiality, co-operation and inter-operability are vital elements of a world-class payment system.