Payments are one of the feasible systems for buying goods and services. These payments started from the Barter system. As people faced so much difficulty in the Barter system, physical money was introduced, also called as fiat money. This fiat money was then later transformed digitally, from which electronic payments have got their role. Generally, payments are mainly classified into two types, namely Large Value payments and Retail Value payments. In our before topic, we learned about the Large Value payment system and its process. In this article, we shall learn about Retail payments and their types.
Retail payments are the type of payments, which is used for transacting smaller amounts in a country. Even though it is used for transacting very smaller amounts of payment, it is used by a large number of people in shopping, paying utility bills, entertainment, etc. Now let’s see about the various categories of Retail payments.
Paper-based Payments
In paper-based retail payments, the amount is transferred via paper. Here the amount that is to be transacted is written on the paper. Even though the transaction is simpler, it has some security issues. This paper-based payment is classified in various forms like cash, cheque, DD, Banker’s cheque, warrants, etc.
Cash
It is the most usual form of payment made till now over the centuries. After trading with gold, people started to use these notes. Even though people get accustomed to the technology, they still prefer to use cash, as it is the simplest form of transaction. Though it has some merits, it has some demerits too. There is a heavy chance to produce counterfeit notes, which could cause a great problem in the country’s economy. Also transporting too much of cash is a risky one and paying for different amounts is a troublesome work.
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| Cash |
Cheque
A cheque is another form of paper-based payment. It avoids the usage of carrying cash in hand to all places. It is one of the simplest forms of transferring amounts, from one person to another one, via banks. The person who is issuing the cheque is called the drawer and the person who is receiving the cheque is called the payee. Each bank issues its own cheque book containing many cheque leaves. By writing the payee's name; the sum to be assured; and signing below, we are granting that person to get money from the bank. This credits the payee account and debits the drawer account. If both the drawer and the payee bank are the same, then the cheque is called the transfer cheque, which means the amount is simply transferred from one branch to another branch of the same bank. But if they are different banks, the payee bank sends the cheque to the clearing house, which collects the amount from the drawer bank and sends it to the payee bank, thus crediting the payee account. But this payment has some disadvantages of credit default by the drawer, which is overcome by another method called DD (Demand Draft). A cheque is valid only for a certain period and this period is varied from country to country. A cheque is also used in the digital form known as cheque truncation.
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| Cheque |
Demand Draft (DD)
It is also similar to a cheque, but unlike a cheque, it avoids the credit risk. Let’s understand it with an example. Consider a drawer is issuing a cheque, whose money is debited from his account after some time. Suppose, if the drawer doesn’t have enough money in the account, the cheque will bounce back, leaving the payee with no money. Thus to avoid this credit risk, DD was used. Here the DD issuer pays a sum of money to the bank at first and gets the slip (DD). Then the issuer issues it after to the specified person. So the payee can be sure, that the amount will be credited to his account; because here the bank directly transacts the amount, as it got the amount already. But in the cheque, this is not the case. This method is most commonly used where the issuer is unknown. Also, a cheque needs a signature, while a DD does not. Thus many security issues are overcome with this method. Even though it has fewer security issues, it is considered as a tiresome process. Banks do charge some amount for issuing DD.
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| Credit(Demand Draft): By Hitomi22 - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=12063016 |
Electronic payments (Electronic Fund transfer)
Electronic payments are the types, which carries out transaction electronically and through electronic devices such as mobile phones, etc. With the help of this system, paper-based fiat money is converted into digital fiat money by linking to a bank account. This system helped people to transact money without much effort and security issues. This includes Card payments, Clearing houses, ATMs and Internet Banking, Buy now Pay later, Real-time banking, Mobile payments, and Digital currencies.
Cards
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| Dipping a card in PoS machine |
Prepaid cards
Prepaid cards are similar to debit cards, but not linked to a bank account. It should be preloaded with some amount of money and can be spent up to that loaded money. As it is not linked to a bank account, there is no need for a savings account to fund these cards. Even if it is not linked with the bank; it comes with the feature of debit and credit card features. These cards will be very much helpful in non-banking areas. These cards come in various categories and types, like salary cards, gift cards, travel cards, transit cards, etc.
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| Credit(Amazon Gift Card): https://www.flickr.com/photos/cindyshebley/ |
All these cards are specified for the different intended use. And some may share a common feature. These features are categorized by their categories like Open loop, Closed loop, Reloadable, Disposable, Personalized, Non-personalized, General purpose, and Specific purpose.
Open loop- Embedded with the card logo and can be used at any merchants where the company brand is accepted like VISA, MASTERCARD, RUPAY, etc.
Closed loop- This type of card is issued by the merchants where the card is only applicable at. Large merchants like Amazon and Starbucks issue, such types of cards. These cards come either with reloadable or disposable facilities based on the issuer.
Personalized- Name is imprinted on the card and the card is manufactured to our wish.
Non-personalized- No name or details of the holder is imprinted on the card.
Examples
Salary Card- Personalized, Reloadable, Open loop
Gift Card- Non-personalized, Non-reloadable, Closed loop
Travel Card- Non-personalized, Reloadable, Open loop
Transit card- Non-personalized, Reloadable, Closed loop
Some cards offer all the prepaid types in one card. For example, the NCMC (National Common Mobility Card) offered by the RuPay in India, offers all the different features in one debit card, such that we do not need to carry a travel card, gift card, and other cards separately. If the merchants accept the RuPay card, then we can use the NCMC card at all merchants. Some of the cards offer contactless payments too, through which payments can be made wirelessly. This wireless payment works through the process of NFC, and RFID technology. Some of the examples of contactless payments are Rupay PoS, through which payments are done via NFC technology, just by showing the card over the phone (acted as PoS) directly. Also, payments are made via, wearable devices such as watches, key chains, and other wearables (Example- RuPay On-the-Go). These are all integrated with the card company. Since the card process is one of the popular payments this time, we shall learn about the Card transaction process separately in another post.
https://sciencetopic03.blogspot.com/2022/08/how-card-transaction-works.html
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| Credit(Payment by NFC): By HLundgaard - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=19127370 |
Clearing houses
Clearing houses are another type of electronic system that helps in moving money in a domestic area securely. It is also helpful in cross-border payments when the money had reached a country. For example, the clearing house in the USA is called an Automated clearing house and in India, it is called an Electronic Clearing Service, etc. In this type of payment, the payments get approved between the sender and the receiver as an additional security. The clearing house also plays an important role in direct deposit like regular monthly bills and direct credit like pensions.
ATMs and Internet Banking
ATMs and internet banking are bank-produced electronic signatories. ATMs are the electronic form of paper-based systems (cash). Through this machine, we can get paper money, via the card. These ATMs are classified as Bank-owned, Brown label, White label, Green Label, Orange Label, Yellow Label, and Pink Label.
Bank Owned- Owned and serviced by Banks
Brown Label- Owned by NBFC (Non-Banking Financial Company)
but serviced by Bank (Like maintenance, cash management, and providing
connectivity). The logo of the Sponsor Bank is presented on the ATM machine.
White Label- Operated and serviced by NBFC. Banks just
provide the cash and transaction facility. The logo of the sponsor bank is not
displayed on the ATM machine.
Green Label- Used for Agricultural transactions.
Orange Label- Used for share transactions.
Yellow Label- Used for E-commerce (Online).
Pink Label- Designed specifically for women, to avoid waiting in queues.
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| ATM (Automated Teller Machine) |
Internet banking is the general application managed directly by the bank, for easy transactions among customers. It offers all the features that we carry out offline.
Buy Now Pay later
It is a type of installment payment system that is offered by many online platforms. It is merely like a credit card, with or without interest. One of the popular platforms is Amazon Pay later. Using this system, customers can precede the purchase with ease. But if we failed to pay the money back, it will create a great problem and decrease our credit score severely.
Real-time Banking
Real-time
Banking otherwise called Instant payments helps retail
payers to pay merchants in real-time, without any delay. Many countries have
developed a system to implement such a system. Some examples of Real-time
Banking are UPI in India, RTP in the United States, and Union Pay in
china. These payment methods are also operated through the clearing
houses.
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| Credit(UPI): By NPCI - http://www.npci.org.in/Brand-centre.aspx, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=58252454 |
Mobile payments
These are mobile applications designed to transact money through mobile phones. These apps directly integrate with our bank account and Card Company. Many applications such as Google pay, Union Pay, etc offer direct bank-to-bank transfer (Instant payments), payment to utility bills, movie tickets booking, and many more. Payment to offline merchants can also be done via bank accounts or by using the wallet feature. This is done via NFC, Quick Response (QR) codes, and payment links (SMS).
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| Payment through QR code |
Mobile wallets are the type of physical wallets that are converted digitally which are otherwise called as digital wallets. These wallets are similar to the operation of prepaid cards, which needs to be loaded with some money to get functional. There are currently numerous apps that provide these features, like Paytm, Google pay, Amazon Pay, etc. These mobile wallets are of many types like closed, semi-closed, and open.
Closed- Funds cannot be taken out (E.g. Amazon Pay)
Semi-Closed- Funds can be taken out and transferable to any bank account. But cannot be taken as cash unless transferred to a bank account (E.g. Google Pay)
Open- These are financial institution apps with more features, and can be withdrawn as cash. (Banking apps)
Nowadays, the PoS machines are also upgraded, which can work on QR codes and payment links.
Digital Currencies
Digital currencies are the future technologies. Even though it has come into effect in some places, many people haven’t gotten accustomed to it. Digital currencies will be helpful in faster and trouble-free transactions. This digital currency is classified in many forms, such as Virtual currency, Cryptocurrency, and Central Bank Digital Currency. Unlike other electronic payments these currencies are not backed by any bank account.
Virtual currency
Virtual currencies are unregulated currencies that are issued by certain private organizations. These currencies are managed within the network of that organization. It cannot be converted into paper currencies and coins. It is totally handled virtually. One example of virtual currency is the gaming purchase, where virtual currencies are used to buy some products within that network.
Cryptocurrency
Cryptocurrencies are also the type of virtual currencies but it is globally traded. It is structured using a cryptography (a highly secured encryption) method. These currencies also do not have any centralized system to manage, making it to be protected from inflation. It is contributed together by a community, which makes it to be more secure. One of the important cryptocurrencies is Bitcoin, which functions using blockchain technology. As the data are chained (linked), it is impossible for a person to change a character. If it happens then other persons can detect it. The cryptocurrencies are denoted by tokens and coins. These coins are created by mining (recording and verifying the transactions). By approving and creating a block, the verifier is rewarded with a Bitcoin. Currently, there are 21 million Bitcoins mined around the world. Even though this system is a fast, secure, and cost-effective mode of transaction, the price volatility in cryptocurrencies is very much higher, which may pose a greater risk for investors. We will learn about cryptocurrencies and their market in a separate post.
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| Bitcoin |
Central Bank Digital currency (CBDC)
It is the process by the central bank, which aims in producing digital currencies under its own regulation. The main purpose of the CBDC is, to spread digital transactions to every corner of the country, such that everyone can be able to make transactions at ease. It will also lead to a decrease in the production of counterfeit notes. These digital currencies are directly linked to the value of fiat money. Unlike digital fiat money, the CBDC can’t be exchanged as cash in ATMs. It is handled digitally. Countries like the Bahamas and Nigeria have implemented their own digital currency.
You can see the different retail payments used in different countries in the below article,
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