These classifications are not mutually exclusive. Rather, one can use a combination of these classifications in order to describe the feature of a payment system. For example, a payment system may be managed by a central bank, make settlements on a gross and real-time basis, and be mainly used for large-value payments.
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Operator Of Payment System
Payment systems can be classified into the “central bank payment system” and “private payment system” on the basis of the operator of the system. In many countries, these two payment systems co-exist and share the roles.
Central Bank Payment System
The “Central bank payment system” is a payment system which central bank owns and operates. The Fedwire in the US, TARGET2 in EU, and BOJ-NET in Japan are the examples of this category. Generally, the central bank payment system consists of deposit accounts at a central bank and a funds transfer system.
The degree of involvement of each central bank in payment systems is different from country to country. For instance, the US is a typical example of deep involvement. To be more precise, the Federal Reserve System (Fed) operates the Fedwire for large-value funds settlement and government bond settlement as well as operates the Automated Clearing House (ACH) for retail payments. In the UK and Canada, on the other hand, payment systems are mainly owned and operated by the private sector and the involvement of central banks is rather limited.
Private Payment System
The “Private payment system” is a payment system owned and operated by private sector. Typically, the operator is an association of banks or a user-owned company, which is sometimes called “clearing house”. Though, due to the public nature of payment system, it is fairly rare that the operator is a pure business corporation for profit-taking. In many cases, the private sector operator tries to take on a public nature by adopting various measures in ownership and decision-making structure. Such measures include admitting membership to the central bank, giving a seat on the board of directors to the public sector, and making the central bank the shareholder.
The CHIPS in the US, EURO1 in EU, and Zengin System in Japan are the examples of private payment systems.
Clearing System and Settlement System
According to the three stages of processes in payment systems mentioned in Chapter 1, the private payment systems are sometimes called the“clearing systems,” and the central bank systems are referred to as the “settlement systems.” This is because the private payment systems cover the clearing process and the settlement process is carried out by the central bank payment systems in many cases.
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Settlement Method
Payment systems can be classified into the “net settlement system” and “gross settlement system” on the basis of settlement method. In the former system, settlement is made based on a “net position”, which is calculated by the sum of the received amount less the sum of the paying amount. In the latter system, settlement is made on the gross amount of the individual payment order.
Net Settlement System
“Net Settlement System” is a payment system in which payment orders are settled on a net basis. In this system, a net credit or net debit position for each participant is calculated. “Net position” is the sum of the value of all the payments received less the value of all payments sent. If the difference is positive, the participant is in a “net credit position,” and will receive the net amount. If the difference is negative, the participant is in a “net debit position” and should pay the net amount.
An arrangement, in which a net position is calculated between two parties, is called “bilateral netting.” Meanwhile, an arrangement, in which a net position is calculated between a participant and the rest of the participants in the payment system, is called “multilateral netting.” The net credit or debit position at the settlement time is called the “net settlement position.”
