So what payment instrument did you use?
Was it cash, card,
or bank transfer? Does it matter?
Yes. From a payment system perspective,
it has a large implication.
We will return to this.
In this lesson, we're going to learn about
the different payment instruments that exist including cash and card.
The most common distinction between payment instrument is cash and non-cash payments.
Cash payments are usually face-to-face flow value
between individuals or between individuals and merchants.
Cash payments are anonymous, immediate, and final.
And in most countries, cash is a legal tender.
So non-cash payments involve the transfer of money between accounts.
Every payment instrument includes a set of
procedures enabling the transfer of money from the payer to the payee.
For instance, a wire transfer needs to include sender and receiver information.
But there are many different payment instrument,
each with its own characteristics depending on
the type of a relationship and transaction between the payer and payee.
The first thing you need to learn is that we have two broad types of
non-cash payment instruments depending on who is
submitting the payment or into the banking system.
The first is credit-based,
also called direct credit or wire transfers.
These payments are initiated by the payer.
While the second type is debit-based,
also referred to as direct debit and initiated by the payee.
Let's look a little bit deeper into direct credits and direct debits.
Direct credits or wire transfer are instructions sent by the payer to its bank
requesting that a defined amount of money to be transferred to the account of the payee.
For example, when you send money to
a friend or paying an invoice through your online bank.
Direct debits, on the other hand,
are submitted by the payee on the basis of authorization given by the payer.
One illustration of this is when I pay my utility bills in Denmark.
I have an agreement with my utility provider which allows them to
fetch money from my account on a monthly basis. Sounds strange?
But remember that national rules vary a lot,
but we will not go into those details.
There are some other important direct debit payment instruments.
The most important one is the payment card.
Payment cards are accessed devices that you can use to pay for goods or services,
either at the point of sale or remotely.
For example, online shopping or to withdraw money at ATMs.
Payment cards are used to authorize a debit from
the cardholder's account or to draw on a line of credit granted by the card issuer.
The most common payment cards are debit and credit cards.
Debit cards are link to a bank account and allow the cardholder to
charge purchases or ATM withdrawals directly and individually to his account.
Credit cards provide the cardholder with
a credit and the possibility of delaying payments.
There are also other cards such as single and multipurpose prepaid cards,
gas cards, and store cards.
These cards are issued by
non-banking institution or by banking institution on behalf of merchants.
Every card, regardless of type,
is issued based upon a schema,
and all transactions are cleared and settled via that schema.
In addition, there are special purpose payment instruments.
One such is money order,
which is a payment product based on the credit transfer instrument,
and it's used to transfer money remotely.
It is often used when the payer and/or
the payee does not have an account with the same financial institution.
It can be used for domestic and foreign currency payments.
It is commonly used by immigrants to send money home.
And finally, we have something that we call electronic money or e-money.
There is a claim on the issue which is stored
on an electronic device and accepted as a mean of payment.
An example of e-money is if you have a prepaid bus card.
E-money can either be hardware-based,
typically on a card, or software-based on your mobile phone.
So there are some important learnings from this lesson and they are,
there are many payment instruments.
There are two important types of non-cash payment instruments,
credit based submitted by the payer.