Retail Payment Systems

This section provides an overview of the various payment instruments and clearing and settlement processes used for different retail payment systems.  Although the diagrams reflect the general flow of transactions and participants, in many cases, other third parties may facilitate one or more processing functions.

Legend: Solid lines represent the flow of information and dashed lines represent the flow of funds.

Figure 1: Four-Corner Payments Model

Figure 1 displays the clearing and settlement process for retail payments using a standard four-corner payments model.  While the flow of information and funds is different for each payment instrument, there is a common set of participants for retail payments.  The initiator of the payment, typically a consumer, is located in the upper left-hand corner of the diagram.  The recipient of the payment, typically a merchant, is in the upper right-hand corner of the diagram.  The lower two corners of the model represent the relationship of the consumer and merchant with their financial institutions.  The payments networks or clearing house organizations that route the transactions between financial institutions are in the middle of the chart.  In subsequent model figures, solid lines represent the flow of information, and dashed lines represent the flow of funds.  This generic figure can be applied to all retail payments.

More financial institutions are engaging third-party service providers to act on their behalf rather than keeping all payment functions in-house.  In some instances, such as in check clearing, a financial institution may exchange check items directly with another financial institution without using an intermediary.

There are a variety of retail payment clearing and settlement systems.  These include; check clearing systems, ACH networks, ATM networks, and bankcard networks.  Check clearing systems can be paper-based or electronic.  Check 21 is facilitating the expanded use of electronic imaging technologies in check processing, enabling the banking industry to improve the efficiency and cost-effectiveness of check processing operations.

ACH payments also have grown significantly as consumers are using more direct bill payments through the ACH.  More recently, retail firms have employed check-to-ACH conversion processes to obtain the efficiencies of electronic processing, reducing the number of checks that flow through the payment system.

Internet-based bill payment systems are transaction origination platforms that allow customers to initiate bill payments through existing payment systems.  Depending on the bill payment software implemented, the payment transaction may be processed through ATM, ACH, or check systems. This booklet addresses the risks and controls associated with the bill payment transaction.  See the IT Handbook E-Banking Booklet for the risks and controls associated with the front-end bill payment application used to initiate bill payments. The following sections describe these systems in more detail.

Debit and credit cards, particularly signature and PIN debit, have driven much of the growth in electronic payments.  The recent introduction of contactless payment cards is expected to contribute to the increase of merchant acceptance and financial institution issuance of cards and investment in contactless payment infrastructure.

Retail payments often move through multiple channels, which results in data being processed and stored on multiple systems that are typically outside of the direct control of the customer's financial institution.  There are two primary challenges for financial institutions in managing these complex payment systems.  First, the lack of interoperability Interoperability refers to the ability of diverse retail payment systems to exchange data with a minimal loss of integrity.  Many retail payment systems lack consistent protocols defining the data and the data fields in each system.  Consequently, data cannot be readily moved from one system to another without manipulation. that often characterizes these systems and the associated lack of optimal data protocols may result in data integrity issues.  Second, the complexity of systems increases the difficulty of the management of data security and system availability.