The Payment System

 The  payments  system  is  the  set  of  institutional  arrangements  through  which purchasing  power  is transferred from one transactor in exchange to another. Forefficient exchange, a common medium of exchange or means of payment is necessary.The payment system is organized around the use of money. An efficient organizationof the monetary system is the sine qua non of an efficient payments system.

 An efficient payment system should permit all kinds of payments to be made withutmost convenience, expeditiously, safely and at very low costs to the economy andthe transactors.

 

For making small local payments (mostly arising in retail trade and daily wagepayments), currency has proved to be the best means of payment. For making largeand out-of-town payments, the use of checking deposits and bank drafts is morepopular. For faster payments, telegraphic transfers of money are also made. Othermodes of payment used are money orders and postal orders sold by post offices andJuiodis of indigenous bankers. For making foreign payments, banks again come intothe picture. Thus the banking system plays a dominant role in the organization andrunning of the payments system. The spread of banking in the country is important notonly for the mobilization of savings and for allocation of credit but also as a dominantcomponent of the payments system.

 

Given the public's demand for each kind of means of payment, an efficient paymentsystem must meet this demand in full. Interestingly, the importance of the smoothfunctioning of the payments system is recognized only when such a system isdisrupted.The speed with which payments are completed is also important. Speedy paymentsmake for more efficient utilization of funds and thereby of resources. As a result, thespeed (or rate) of production also goes up. This kind of intangible benefit of anefficient payment system is generally not well appreciated.

 

The organization and running of the payments system involves costs - costs to transactors and to the economy. The more efficient the payments system, the lower the cost of transfer of funds per. The gain of lower costs accurse to the whole economy.

 

There is another kind of cost of maintaining the payments system which the economy as a whole incurs. This concerns the production and maintenance of currency. In regimes of full-bodied metallic currency such costs were quite high. The paper currency system, in this sense, is much more economical.