The Payments System

Question 1

What does the payments system do?

Answer 1

The payments system performs the settlement of commercial transactions function
It comprises:
1. Payment instruments
2. Financial institutions
3. the RBA

Question 2

How are payments settled?

Answer 2

Through cash and non-cash payment instruments.

Question 3

What are Banknotes and Coins?

Answer 3

Legal tender produced by the RBA and sold to banks
the profit from this is called ‘seigniorage’
Used by the public as a means of payment and store of wealth

Question 4

What is a non-cash payment order?

Answer 4

Payment orders are instructions to a payment service provider (usually a bank/ADI) from their customers (the drawer of the order) to pay the specified amount to a nominated payee

Question 5

What is a cheque?

Answer 5

Cheques are a dated, paper-based instruction to the drawer’s bank to pay the stated party the stated sum from the drawer’s bank account

Question 6

Why have cheques been replaced?

Answer 6

Cheques are expensive to process and so have largely been replaced with direct debits and credits, particularly for regular payments

Question 7

What are direct debits and credits?

Answer 7

Direct entries allow businesses and other organisations to make payments to, and receive payments from large groups (through arrangements made with their bank)

Question 8

What are debit cards?

Answer 8

Debit cards are issued by banks to their depositors to enable them to withdraw funds and make payments from their bank accounts

Question 9

What are credit cards?

Answer 9

Credit cards are used to make payments, initially from the credit card company’s account (Visa or MasterCard) with the option of borrowing funds to cover the unpaid balance on the due date

Question 10

What are charge cards?

Answer 10

Cards issued by a company for use in settling transactions on the condition that the full amount owing is paid on the monthly billing date. (these are mainly American Express and Diners Club)

Question 11

What are online Payments?

Answer 11

Online payments and purchases can be made in a number of ways (depending on the merchant):
BPAY
Internet-banking transfers
Non-bank payment service providers such as PayPal
Debit, credit and charge cards
Online payments are less secure than other payments

Question 12

What are the most commonly used payment order?

Answer 12

Debit cards.

Question 13

What is the second most used payment order?

Answer 13

Credit Cards.

Question 14

Which payment order is dominant?

Answer 14

Direct debits and credits dominant in terms of value, with 87% of the total value of retail payments
they have largely replaced cheques because of their lower cost and greater convenience

Question 15

What is payment in fin-tech?

Answer 15

Bitcoin is a privately created currency that uses ‘blockchain’ technology
can be accepted as a means of payment, or used as a speculative investment
its price has been unstable making it a poor store of value or unit of account
Fin-techs (like Kenya’s ‘M-Pesa’) provide payment services in countries with underdeveloped banking systems
it uses mobile phones and a network of agents

Question 16

What are high-value payments?

Answer 16

The main sources of these
payments are:
Payments between banks,
including the RBA
The settlement of trades in foreign exchange and debt markets, with payment instructions from:
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) regarding FX trades
Austraclear, the clearinghouse for money and bond market transactions

Question 17

What is trading?

Answer 17

Trading is an agreement between the buyer and seller that specifies the terms of the trade (item, price)

Question 18

What is settlement?

Answer 18

Settlement occurs a specified number of days later when payment is made and ownership of the asset transferred

Question 19

What are the RBA’s settlement arrangements?

Answer 19

The settlement system for high-value payments consists of:
The Reserve Bank Information and Transfer System (RITS)
receives payment instructions from banks, SWIFT and Austraclear
The real-time gross settlement system (RTGS)
clears each payment by establishing the payer has sufficient ESA funds
Exchange settlement accounts (ESAs)
accounts that banks have with the RBA

Question 20

What are Exchange of settlement accounts?

Answer 20

ESAs are funds that financial institutions hold with the RBA to settle the payments they make to each other and with the RBA

Question 21

What are the benefits of ESA’s?

Answer 21

The benefits of ESAs are:
they enable banks to make payments to each other
they are safe
the RBA pays interest on the end-of-day balance at the cash rate minus 25 basis points
but the accounts cannot be overdrawn

Question 22

What is Real-time gross settlement?

Answer 22

Payment instructions are placed in a queue and RTGS settles each payment individually one after the other during the day. Each payment is:
cleared – by checking the paying bank has sufficient ES funds and if so the instruction is
settled immediately after clearing by a transfer of ES funds and the ownership of the traded securities (or currencies) is transferred from the seller to the buyer by the clearinghouse.

Question 23

How did payments used to be settled?

Answer 23

retail payment orders are net cleared and settled as a batch throughout the day or at 9am next business day

Question 24

What is NPP?

Answer 24

The New Payments PLatform
-arranges the real-time transaction-by-transaction settlement of retail payments on a 24/7 basis
-facilitates more remittance information and provides scope for further innovations

Question 25

Describe the management of ES funds.

Answer 25

• Each day banks must have sufficient ES funds to cover their net daily RTGS payment obligations
• From their trading records, they know payments to be paid and received, but do not know in what order they will occur in the queue
• If they have to make a series of payments before collecting receipts, they could suffer a shortage of ES funds
  (these intraday ‘liquidity problems’ could cause gridlock in RTGS)

Question 26

How does the RBA assist banks to manage their ESA balances?

Answer 26

The RBA assists banks to manage their ESA balances in three ways:
1. Design features within RTGS
2. RBA repos - intraday loans of ES funds to banks
3. Encouraging banks to hold their reserve ES funds in the interbank overnight market

Question 27

How does RTGS minimise minimise problems posed by the random ordering of high-value payments?

Answer 27

The system:
monitors upcoming payments and reorders when necessary to ensure the payer has sufficient ES funds
looks for offsetting payments between banks

Question 28

What are RBA repos?

Answer 28

An agreement by a bank to sell eligible securities to the RBA on the condition it will buy them back later in the same day

Question 29

What allows banks to lend and borrow from each other for terms of one-day?

Answer 29

Also known as the ‘cash market’, the interbank overnight market allows banks to lend to and borrow from each other for terms of one-day, so funds can be withdrawn the next day

Question 30

What is System Cash?

Answer 30

The total of the end-of-day balances in ESAs is known as ‘system cash’