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Before learning about payment systems, ISO 20022, SWIFT, or Fedwire, we should first understand what payment actually is. Everything else is built on this simple concept.
What is a Payment? (The First Concept Every Payments Professional Should Learn)
Many people are trying to transition into the Payments domain, which is great. I also believe we need more professionals because the Payments industry is expanding rapidly to cater to the growing needs of customers.
However, one thing I have observed while talking to many aspiring professionals is that they often lack the fundamental concepts.
When you are starting something new, always begin with the very first step, no matter how simple it may seem. A strong foundation helps you connect all the concepts much more easily as you continue learning.
So, let’s start with one of the most basic questions.
What is a Payment?
A Payment is simply an exchange of value between two parties.
Notice that I didn’t say “exchange of money.” Money is only one form of value. This is one of the biggest misconceptions beginners have.
One party must be willing to buy, and the other party must be willing to sell.
The value exchange is agreed upon by both parties involved in the transaction.
That value can be:
- Money
- Services
- Goods and Materials
- Knowledge and Time
This is probably the simplest definition of payment.
Some Simple Examples
Let’s understand this with a few everyday examples.
Example 1
You visit a grocery store.
You buy groceries and pay money in return.
Here, goods are exchanged for money.
Example 2
You conduct a free knowledge-sharing session.
You are not receiving money, but you are exchanging your knowledge and time for self-satisfaction or goodwill.
That is also an exchange of value.
Example 3
Assume you are a trader.
You exchange copper for zinc.
Here, goods are exchanged for other goods.
Example 4
You work for a company.
You provide your knowledge and time, and in return, your employer pays you a salary.
Again, it is simply an exchange of value.
There are countless examples in our daily lives. That is why I always say that a payment is nothing more than an exchange of value between two parties.
What Does “Domain” Mean?
There are many definitions of the word domain. But this is how I like to think about it.
A domain is an area that focuses on solving the growing needs and challenges of a specific industry.
If we apply this definition to the Payments domain, there are many areas where the industry is continuously evolving.
For example:
- Enabling faster payments
- Reducing cross-border payment costs
- Supporting richer payment data
- Improving compliance processes
- Modernizing legacy payment systems
- Introducing new payment methods such as tokenized payments
To achieve these goals, many entities work together, including:
- Banks
- Central Banks
- Regulatory Bodies
- FinTech companies
- Governments and policymakers
Together, they continuously improve the payment ecosystem.
Why is the Payments Domain Important?
Payments are one of the backbones of a country’s economy. Every country needs reliable payment infrastructure that supports different types of payment requirements. The faster and more efficient payments become, the faster money circulates within the economy, contributing to economic growth.
A great example is India’s digital payment ecosystem, which has transformed how people and businesses make payments.
What is the Role of a Bank in Payments?
From the examples we discussed earlier, you may have noticed something interesting.
Not every payment requires a bank.
If you pay a shopkeeper using cash, the payment happens directly between you and the seller. No bank is involved.
So does that mean banks are not necessary?
Not exactly.
Banks are facilitators of payment transactions.
Whenever the buyer and seller cannot exchange value directly, banks provide the infrastructure that makes the payment possible.
Imagine sending money to someone living in another city or another country.
You cannot physically hand over the money.
This is where banks and payment systems become essential. They provide the infrastructure that securely transfers value from one party to another.
Key Takeaways
- A payment is simply an exchange of value between two parties.
- The value can be money, goods, services, or even knowledge and time.
- The Payments domain focuses on solving the challenges of payment processing and continuously improving payment infrastructure.
- A better payment infrastructure contributes to a stronger economy.
- Banks are facilitators that enable payments when the buyer and seller cannot exchange value directly.
