Definitions of payment, payment instruments, and payment systems

Using the right words is important in any field. Let's begin with definitions of the key terms: payment, payment instrument, and payment system. So what is a payment? According to the Bank of International Settlement, a payment is the payer's transfer of a monetary claim on a party acceptable to the payee. Typically, claims take the form of cash or deposit balances held at the financial institution or at a central bank. Put simply, a payment is a transfer of value from one party to another. The value transfer can be monetary, like 10 units of currency, or it can be of digital form, like a cryptocurrency. A payment transaction, therefore, involves two end parties: on one side, the debtor or payer who sends the funds, and on the other side, the creditor or payee who receives the funds. In payments, an end party can refer either to the sender or to the receiver of payment. It is a party involved in any side of a payment transaction. Payments are generally made in exchange for the provision of goods or services between end parties or to meet legal obligations, like the payment of taxes. Let's consider the next term: a payment instrument. Payments are carried out with the help of payment instruments. An instrument is defined as a means whereby something is achieved, performed, or furthered. It can be compared to a tool that facilitates the execution of a task. Tools make things easy. For example, you can do gardening or cooking without tools, spending huge amounts of time and energy to eventually achieve pretty limited results. But how easy things are when you have the proper tools. Likewise, payment instruments facilitate payments and make fund transfer easy between the end parties involved. Payment instruments are tools invented to move monetary or digital value efficiently. They are cash payment instruments like banknotes and coins, and non-cash payment instruments like checks, cards, credit transfers, direct debits, or cryptocurrency. Finally, what is a payment system? A payment system consists of a set of payment instruments, processes, IT systems, people, standards, and usually interbank fund transfer systems that enable and guarantee the circulation of monetary or digital value. In other words, a payment system consists of everything that enables the transfer and circulation of value. Payment systems are part of our daily lives. And we usually take them for granted, but a lot of endeavor is required to set up, run, and maintain those systems. The provider of payment services, like banks, connect to various interbank payment systems in order to process and settle payments on behalf of their customers and also for themselves. Now you understand each term. Take a moment to reflect on which of those instruments and systems you work with on a regular basis.