Bitesize Payments
Payments are one of things that we do every day - they just happen, really they are just like magic!!!! But we don't wake up and think today I want to make a payment - we just want to pay a bill or buy a coffee but payments make them happen.
Paradoxically we both know more about them than we think and yet at the same time very little about what they are and how they work.
I have spent a lot of time in our industry doing education and training sessions on Payments and I kinda thought it would be useful to record it. So, here we go.... In Bitesize Payments I try and explain the History of Payments, how they work and who does what. Also who get paid for what....that might surprise you!
Anyway hopefully in less than 20 mins, week after week you can become a payment experts....... or at the very least someone who can ask the tough questions :-)
Please let me have your feedback, input or question at bitesizepayments@gmail.com
Thanks for listening.......
Bitesize Payments
Episode 4 Who's who in the Payments Zoo
In our previous episodes, we delved into the early history of payments, explored the concepts of money and currency, and examined the influence of networks on payment evolution.
Today, we're going to navigate the Payments Zoo, identifying and understanding the various actors in this complex ecosystem. In my previous roles delivering training courses, I found that it was quite rare for people to comprehend more than one facet of payments. So, today, we'll shed light on these various actors and provide some context around them.
So, buckle up! I'm your host, Paul Thomalla, and we're off to the Zoo... well, metaphorically speaking.
Any questions comments please get in touch via bitesizepayments@gmail.com
Payments Industry Insights
History of Payments
Payment System Explained
Corporate Payments Strategy
Payment Regulations Impact
ISO20022 Standard
Digital Payments Evolution
CBDC Advancements
Cryptocurrency in Payments
Financial Technology Education
Welcome back, dear listeners, to Bite Size Payments, where I try and explain the history of payments, how they work, and of course, who does what. In our previous episodes, we delved into the early history of payments, explored the concepts of money and currency, and examined the influence of networks on payments evolution. Today, we're going to navigate to the zoo. Yes, to the zoo, the payment zoo, identifying and understanding the various actors in this complex ecosystem. So today we'll shed light on these various actors and provide some context around them. So buckle up. I'm your host, Paul Tamala. We're off to the zoo. Well, metaphorically speaking anyway. One of the fascinating and intriguing aspects of payments is that we are right in the mix as individuals. We're major stakeholders in how payments function because we are both payees and payers. But who are the other players and what are their roles? There are several. Really, there are so many, it's difficult to try and get a list of them. But they include central banks, merchants, citizens, banks, of course, governments, processors, regulators, supervisors, operators. I could go on. But of course, the main ones have to be you and I, dear listeners. However, to explain more, we really need to look at these various areas from the point of view of the key stakeholders. and some of the use cases that, of course, they need. So what we're going to centre around is effectively three different areas. Retail payments, corporate or wholesale payments, depend upon where you are in the world, and governmental bodies. Today, I'm joined by Roy Marsh, a good friend and a band member even. Roy has worked all around the world, both as a banker and as a payments guy. Welcome, Roy.
SPEAKER_01:Hi, Paul. Thanks for having me on your excellent podcast. It's great to be with you, as always.
SPEAKER_00:Thanks, Roy. I don't know what you think, Roy, but it strikes me that once somebody's worked in the retail side or the corporate side or the governmental side, they tend to stay in that ecosystem and they don't cross over. So typically they don't have a view or a perspective, perhaps, of how the other part of the business works.
SPEAKER_01:Yeah, it's true. Outside those of us who inhabit the provider space, most people, I guess, see the world of payments as primarily a function of getting the job done, making their life go forward. But it's a lot wider than that.
SPEAKER_00:Yeah. But, you know, I guess the one that's least understood, in my opinion, is the governmental bodies. What do they even do? Well, most countries around the world, or regions for that matter, have governments that determine their monetary policy, their tax laws, regulations, the manufacturing of paper money, the minting of coins, and of course, payment operations. These bodies are built upon layers and layers that we discussed in earlier podcasts, but essentially they control the brand of their currency, fiat money, be it the pound, the dollar, the euro, etc. And they ensure the supply of coins and paper money. They create the laws governing its use and manage it. They also govern the rules regarding commercial bank money.
SPEAKER_01:Yeah, that's right.
UNKNOWN:Yeah.
SPEAKER_01:It's as well to remember the governments are primarily concerned with two things. They have to ensure a stable economy, at least if they want to get voted back in again, and they allocate those public funds that they're responsible for. So typically what a lot of countries do now is they have a political side which looks at where those public funds are spent and independent side, like a treasury, central bank, bank of England, the UCB, the Fed, et cetera. Those countries who manage themselves that way effectively have a government that outsources the management of that economy to the central bank, who then has the right to call things like interest rates and liquidity, quantitative easing, these kinds of things. When the government itself then makes the decision political decisions on where tax receipts, reserves, borrowed funds, etc. are actually spent for the good of the nation.
SPEAKER_00:We also have regulatory bodies such as the PSR and the FCA in the UK, the Fed in the US, DG FISMA in the EU, who control the rules on what is allowed to do what with their currency. And we have supervisors to make sure that those rules are adhered to.
SPEAKER_01:The operators generally have a... are policy-based organizations and technical organizations. So again, the Fed, Stett in France, or what was Vocalink in the UK. These organizations sit outside and in between the government, the treasury, the central bank, and the commercial banks, and they run the systems that support the country and the currency and the flows of that currency in the form of payments. So They can manage and process everything on behalf of the central bank. And these are the organizations who physically settle and clear the transactions.
SPEAKER_00:Settlement, clearing, and finality. I can't imagine how many times people have asked me what these things mean. Perhaps it would be really useful, Roy, if you could just walk us through what they actually mean.
SPEAKER_01:Yeah, so settlement is an age-old concept. So in any contractual sense, it means the fulfillment of both sides of a contract. So at its simplest sense, a buyer receives goods and the seller receives money. So it's the same in the payments world. Now, apart from the payment itself being the method of settling an underlying contract, the payment itself undergoes its own settlement and clearance process to achieve that ultimate finality. So just briefly, For instance, if you were to settle a restaurant bill with a card, at the point of payment, the merchant receives your cash and your bank account is debited. So your bank then has to transfer that money to another organisation. So the transfer of those funds are in turn settled through central bank accounts. And that's how the finality of that overall transaction works. is ultimately achieved.
SPEAKER_00:And practically, that's the way it's done all around the world, right?
SPEAKER_01:Well, absolutely. I mean, it is very much the same all over the world. Probably it becomes a bit more complex in the EU, where there are EU-wide bodies like the ECB, whose job it is to regulate and support the EU the euro, which is, of course, a currency across a number of different countries. And then they work alongside the national banks of each individual country. So the national banks supervise those countries' systems, manage the flow of tax receipts, et cetera, et cetera, within their own country. But they rely on the ECB to supervise the European-wide systems for the flow of euros. So that's an added layer, if you like, in Europe. because you still have this political break the political makeup of individual countries but using one centralized currency so but still through a combination of those layers from the government down they control how the currency and country manages those money and payments so it's Apart from one extra layer of complexity, it's no different.
SPEAKER_00:There's a couple of things here. I mean, I will get into regulation, how it works and how central banks work specifically. And I'll put those into separate podcasts because I think it's worth doing that separately. However, you know, least we forget, governments are in fact super users as well. In any country, there can be 15% to 50% of all the transactions by volume are initiated to and from the government. So whether that's taxes coming in, pensions going out, social benefits, and of course, their businesses themselves. So they really are a very major user, arguably the super user. So if I was to try and pull this section together, effectively, governments set the political direction. Regulators set the rules, supervisors make sure that those rules are adhered to, and operators make the money move. That's about it, right?
SPEAKER_01:Well, yep, that's about it. And that's actually the how of how money makes the world go round, to draw on Liza Minnelli.
UNKNOWN:LAUGHTER
SPEAKER_00:Many, many, many. Indeed so. Okay. Well, look, let's move on to the second of the areas that I wanted to discuss. And that was something that is really focused around us, what we call retail payments. I think the best way to think about this section is about What do we want? This is about retail payments. It's about serving citizens in any country. And well, that's you and I. So this section is around the target use case of citizens. So hopefully we get paid. We want to buy things. We don't necessarily want to pay bills and taxes, but we do. It's also true to say that for whatever reason, typically, card payments are associated in the ecosystem of retail payments too. So in fact, this is a very broad judge. We have payments that we send and receive via our banks, via cards, and of course, with merchants. And the target here is you and I.
SPEAKER_01:Yeah, that's right. So for most of us, this all starts with having a bank account in a high street bank. Nothing much happens until you do that. So typically, a salary is paid into their fees that you charge for work that you do, gig economy fees, all these things end up in a bank account. So that bank is then the custodian of the account for you, and it also looks after your money, but it offers you services in order for you to be able to use that money more efficiently. So they issue cards, they facilitate bill payments. Historically, they're checks and sometimes yes checks are still in use um so if you want to add or take away money from the account you you are using any of those kinds of um capabilities uh you might be charged for some of those services but primarily at lower volume sorry at lower value levels there um they tend to be free now of course you might you might well have several bank accounts um several with one bank or across several different banks but These accounts all have individual codes. So globally, any bank around the world can identify your bank account with a specific code through an organization such as RIB in France or the sort code account number in the UK. They can identify exactly where your account is, which bank it's in, which country it's in, which currency it's being paid in. So whether you want to pay in or whether you want to use direct debits or their equivalent, Direct debits being a method of automatically paying regular monthly bills. In the UK, they're called BACs. In the US, they're known as ACH debits.
SPEAKER_00:And these direct debits are very convenient for those who have regular incomes. You don't have to think about it. It just happens. And they're effectively a great source of income too for the banks, typically around 1%. And so... You know, if you're the utility company, you know, with a phone company, a water company, et cetera, you love direct debits as they're a great way to get a reliable source of liquidity and you don't go having to chase the bills. You know the money's going to be there at the first of every month or the 31st of every month, whatever it is you set up. You may well have several bank accounts, but typically they're broken down into two areas, a current account and a savings account. Savings accounts pay you interest, while current accounts don't. And they're mostly just buckets for the transactions to come in and out of for our day-to-day activities. Typically, we get paid by ACHs. More on them later. But typically, they are automated clearinghouses. That's, in fact, what ACH means. And they're also known as bulk clearinghouses. payments and pretty much they're the way we get paid every month or every week whatever it is
SPEAKER_01:yeah bulk payments are very important so um first of all we first of all we receive payments by telling a payer uh our bank account code so our employer gets to learn our bank account code so that we can receive a salary and where we want to be the payer we have several ways of doing this, we obviously can withdraw the cash and give it, or we can write out a check, or we can send an immediate payment, or we can make a payment via an app, or we can apply our bank details to an Amazon account, or we can use our cards. So on the first side of this, cards are where a banker is issuing the cards. They may be debit cards or they may be credit cards. They are branded by the bank, but they're using the Visa and MasterCard capabilities networks. So they can be direct payments out of your accounts or credit card payments. And of course, credit card payments actually have an advantage in that you don't have to use your own money for 30 or 48 days, but they come at a cost and a very high interest rate. I think it's important to make a word on bulk payments as well. So For a large company needing to pay, say, 1,000 employees, it would be a very mundane and tricky job for an HR department to have to pay every individual person in their company, make an individual payment. So bulk payments means that they can provide one file of, say, 1,000 employees, send that to the bank, and then the bank has systems that break those payments up into sections into their 1,000 elements and move the money accordingly to the beneficiaries' bank accounts.
SPEAKER_00:And indeed, Roy, it was my very first role in payments was to take an eight-inch diskette, I know I'm showing my age, full of payroll data up to banks in the UK to test that it would work.
SPEAKER_01:Pretty much. In
SPEAKER_00:fact, that's true.
SPEAKER_01:Other than walking the disc
SPEAKER_00:in it. No, I mean, you know, we talked a little bit about immediate payments and cards and we'll talk more specifically and break them down. But, you know, it's not just about cards and their physicality anymore. It's often about apps, isn't
SPEAKER_01:it? Yeah, very much. Particularly since COVID, the huge rise in the use of apps has meant that For example, now something like 30% of all payments are made using apps, made using mobile phones. I mean, you see you go to a coffee shop or a bar these days, primarily people whip out their mobile phone and they make a payment. It's still the underlying card that's being debited. It's still the underlying bank account that's being debited. But now there's much more modern ways of doing it. So that kind of covers the retail small payments area that a bank does for us. The other side that we as individuals use less, but SMEs and corporates use much more, is where there is a major value transaction in, say, a house purchase. So if you're lucky enough to be buying a house, you typically have a, A payment for your deposit, your building society would be making payments for the mortgage element of the purchase, and everybody's got to settle the transaction with the seller of the house. So these much larger payments are not made by... cards or by immediate payments these days still. They're made by what's known as real-time gross settlement systems. So it's a completely different form. So in the UK, it's known as CHAPs. In the US, it's known as CHIPs. Similar things exist around the world. And here, fees are charged. So in this case, they are individual payments. They are specifically not, therefore, bulk payments at all. They are single payments. And as in the name suggests, a gross settlement means they're made individual payments are settled individually. So all of those retail payments are centered around us. And we use our banks to hold those funds and administer the credits and debits for us. And there's essentially two ways that they have of making payments, small value ones and high value ones. But there's a distinction between what banks do and what the merchants are there for. And because the banks have cards that are branded by, say, Visa or MasterCard or Amex, it's not easy to see what the difference is. But we use these cards, credit cards, charge cards, to do exactly the same process of buying goods from merchants. But these are issued and operated and run by the likes of Visa and Amex. I'm just slightly confused that merchants often have their own bank, but in reality, that's a very small subset of what they do. And they're actually providing their networks to the banks to support the bank's own ability to make payments. I think it's worth talking a little bit about what merchants are there to do as distinct from banks, Paul.
SPEAKER_00:Yeah, I think so. I think we'll talk more about how cards work because it's truly fascinating how that's gone on. But the truth of the matter is, you know, we all work with merchants, whether they're coffee shops or they're Amazon or whatever they are. And merchants will, you know, frankly take money just about any way that they possibly can. Cash, check, cards, Bitcoin, anything really that they can. Clearly, it's mostly cards now. And if it's online e-commerce, then the cards can either be stored or manually presented. They can be physically presented in store or via an app, as we discussed a few minutes ago. However, typically, merchants pay somewhere in the region about 2.5%, 3% of the cost of purchase. And these fees are effectively paid to the bank, to the payments presser, and of course, the network provider, Visa or MasterCard. And while we do not see those fees separately, we did for a while, a long time ago, but we don't anymore. They're built into the price that we pay. Now, just to give you some context of this, cards processed just in the EU alone is somewhere in the region of 2.3 trillion every year. And they represent 50% of all non-cash transactions. So this is a very, very major area. But people also talk about cash. Well, you know, cash is on the decline, has been for a long time now. And in some country, Scandinavia, it's almost obsolete. But there is a hard core of cash lovers. But to be fair, cash is just no longer available. king anymore it's very costly the use of cash somewhere in the region of seven percent okay so not many people understand that but you know cash is really on the decline so this segment commercial high street banks provide the services effectively of holding our money for us they allow overdrafts etc they facilitate bill payments and if we're lucky they will pay us interest Merchants effectively facilitate the purchasing of goods and services. Is that a good summary of it, Roy?
SPEAKER_01:Yeah, I think it's a very good summary, actually. I think cash, we say, is perhaps no longer king, but liquidity really still is. And on that basis, we probably should have a look at how payment systems work for corporates, because there we're dealing with a rather different animal. So
SPEAKER_00:now we've talked through the government as the major stakeholder. We've talked through citizens ourselves as the major stakeholder, and that's around the retail banking piece. We're now going to look at the third stakeholder here, which is the corporates and what their needs are. So corporates are, in fact, a very major user and typically within a bank, they will be a separate division, a sole separate entity just focused in on corporate payments, wholesale payments, transaction banking, call it whatever you like. But typically, these are businesses making payments online. to other corporates or to other organizations. Sometimes they're very large. They can be on a recurring basis. They typically will be using RTGS, ACHs, and of course, our friends, checks, and now immediate payments as well. But effectively, they're just paying the bills, right, Roy?
SPEAKER_01:Well, yeah, they do. They have bills to pay like everybody else, but And those bills tend to be both very high in value and very low in value in terms of maybe salary levels, but very high in value. But there is a lot more around the corporate side for a bank because of the values involved in terms of high security, compliance and regulations. Maybe a lot of cross-border currencies are flowing here. requiring foreign exchange, et cetera, et cetera. So a corporate itself is really just one of the elements of wholesale that a bank will need to concentrate on. They charge fees for a lot of that work. So it's seen within the bank as being a very lucrative part of the business. And it's clearly lucrative for a corporate to be able to prosecute its transactions and its business. There is, however, another large area, which I think is typically not known about at all. And that is the processing that goes on between banks. It's the interbank processing. So, for instance, if a corporate requires a foreign exchange account, Let's say, for instance, if you are a major German car manufacturer and you are about to send 10,000 of your cars to Australia, at some point you will need to exchange. You want to receive euros for your cars because you're making them in Germany, but the Australian franchises want to buy them using Australian dollars. So a foreign exchange transaction is necessary. And banks step in there and make that foreign exchange happen. Now, banks themselves don't always have the right amounts of foreign exchange available to them to do that. So they buy in that foreign exchange from other banks. And that begets an absolutely huge interbank global payment flows over the likes of SWIFT, where these foreign exchange transactions, which run to trillions and trillions a day, just to support the need for currencies for these underlying transactions. So a lot of the payments that go around the world in this wholesale piece are actually between the banks themselves facilitating these other much larger payments that corporates make. So a big part of what a corporate banker will do is– look at how the relationship that they have with those corporates is managed, because it's a very profitable relationship.
SPEAKER_00:Yeah, and in fact, one of the biggest events in the world, CYBOSS, is really focused just upon this segment. I mean, you know, it's coming up in September this year, I think, you know, and you and I have been to, I don't know, a lot. I think I've been to about 20 of them. I'm sure you've even been to more, frankly. But let's put it another way around. What do the corporates actually want from the bank? What are their needs?
SPEAKER_01:Yeah, so, you know, primarily a corporate has, at its heart, has the same kind of needs as we all do of collecting its cash together and making payments. But equally, corporates are dealing with very high costs. Value payments, very much lower value payments, depending on what kind of corporate you are or your payrolls or whatever. And their relationship with the bank is such that the banks themselves then use that flow of payment capability to provide working capital relationships. And I think really, you know, this is such an important area for a bank. It's certainly a very lucrative area and a very coveted area. of a bank's business, that we probably need a separate podcast to talk about the various, these are corporate, from its bank.
SPEAKER_00:It's a fascinating world in its own right, but it's under attack, right? Because it used to be a case, there was a package of consultancy, there was fees, transaction fees, and it was all bundled together, but now it's just separated out and, you know, consultancy firms come in, do the consultancy, you know, it's under attack, right?
SPEAKER_01:Yes, I mean, you know, I spent a number of my years in banking as in correspondent banking. And in the time that I was there, before there were things like fintechs and other methods of making payments, the assumption was very much that, you know, the bank that I worked for needed the outlet of the other bank. And we would typically– I worked for a major UK bank, and we typically would have 100-plus correspondent bank relationships around the world. Usually we would have maybe two or three in any major country to provide the best possible service that we could. And we did that in order to be able to– Well, first of all, obviously, to provide our corporate customers with a wide range of possible outlets for the flow of payments and funding and finance, trade finance in particular. But in those days, you could rely on the fact that that business was yours because only banks could do this. Nowadays, it's possible. We're seeing now much more in the way of fintechs. People... People like the names like Wise and Revolut and even Western Union and others who have the capability or are developing the capability to offer directly to corporates the ability to make low-cost payments. So the whole story at the moment of low-cost cross-border payments where banks typically will be able to make high fees is coming under attack, as you say.
SPEAKER_00:I think it's fascinating. to see how that once very lucrative marketplace is really unpacking. But in summary, corporates do at some levels, as I say, very similar things to you and I, but they do them in many countries, in many currencies. They have much larger amounts and much, much more scrutiny on what the transactions are for and all of the compliance that goes along with it. So three major groups to think about, retail, the corporate world, governmental bodies, all parts of the huge ecosystem of payments. They have their own different focus, their own different needs, and frankly, very, very different cultures. And latterly in the series, I'll dive into the various payment types and how they work. And we'll also dig into what central banks and regulators do, et cetera. But for now, Roy, thank you very much indeed.
SPEAKER_01:Yeah, I think it's been a great session. Thanks a lot, Paul.
SPEAKER_00:You're more than welcome. Thank you. Well, dear listeners, I really hope you've enjoyed the episode. If you'd like to contact me or ask me any questions, please do so, as many of you have already done, via bitesizepayments at gmail.com. And if I could ask one favour, just one favour, that would be if you've enjoyed the episode, I'd be ever so grateful if you could tell a friend and recommend it to them. That's by far and away the best way to get the message out. Cheers now.