Bank Services and Payment

System
Lecture 5
Objectives
• To explain the various services provided by the banks.
• To identify methods of the payments through the banking system.
• Describe the Banks clearing system.
• To explain roles of Central Bank
• To explain the Interbank Settlement Systems or Real Time Gross
Settlement System.
Services provided by the banks
1. Advancing of Loans: Banks are profit-oriented business organizations.
They advance loans to the public and generate interest from them as
profit.
2. Overdraft: Sometimes, the bank provides overdraft facilities to its
customers through which they are allowed to withdraw more than their
deposits. Interest is charged from the customers on the overdrawn
amount.
3. Check/Cheque Payment: Banks provide cheque pads to the account
holders. Account holders can draw cheque upon the bank to pay money.
Banks pay for cheques of customers after formal verification and official
procedures.
Services provided by the banks
4. Foreign Currency Exchange: Banks deal with foreign currencies. As the
requirement of customers, banks exchange foreign currencies with local
currencies, which is essential to settle down the dues in the international
trade.
5. Consultancy: Modern commercial banks are large organizations. They can
expand their function to a consultancy business. In this function, banks hire
financial, legal and market experts who provide advice to customers regarding
investment, industry, trade, income, tax etc.
6. Bank Guarantee: Customers are provided the facility of bank guarantee by
modern commercial banks. When customers have to deposit certain fund in
governmental offices or courts for a specific purpose, a bank can present itself
as the guarantee for the customer, instead of depositing fund by customers.
Services provided by the banks
7. Remittance of Funds: Banks help their customers in transferring funds from
one place to another through cheques, drafts, etc.
8. Credit cards: A credit card is cards that allow their holders to make purchases
of goods and services in exchange for the credit card’s provider immediately
paying for the goods or service, and the cardholder promising to pay back the
amount of the purchase to the card provider over a period, and with interest.
9. ATMs Services: ATMs replace human bank tellers in performing giving
banking functions such as deposits, withdrawals, account inquiries.
10. Debit cards: Debit cards are used to electronically withdraw funds directly
from the cardholders’ accounts. Most debit cards require a Personal
Identification Number (PIN) to be used to verify the transaction.
Services provided by the banks
11. Online banking: Online banking through traditional banks enable customers to perform all
routine transactions, such as account transfers, balance inquiries, bill payments, and stop-
payment requests, and some even offer online loan and credit card applications. Account
information can be accessed anytime, day or night, and can be done from anywhere.
12. Mobile Banking: Mobile banking (also known as M-Banking) is a term used for performing
balance checks, account transactions, payments, credit applications and other banking
transactions through a mobile device such as a mobile phone
13. Accepting Deposit: Accepting deposit from savers or account holders is the primary
function of a bank. Banks accept deposit from those who can save money.
14. Private banking: Personalized financial and banking services that are traditionally offered
to a bank’s digital, high net worth individuals (HNWIs). For wealth management purposes,
HNWIs have accrued far more wealth than the average person, and therefore have the means
to access a larger variety of conventional and alternative investments.
Classification of Payment Methods

Banking Payment Systems can be broadly classified into Large Value Systems
and Retail Payment Systems. For the purpose of making things easy to
understand we have classified the various payment methods
1. Large Value Payment System:
typically process high-value critical payments. It is an essential payment system
that ensures the smooth functioning of the economy and the financial system.
If this system fails, it could trigger disruptions or transmit shocks within the
economy. These systems mostly relate to interbank / inter-financial institutional
transactions. Generally, these large value systems are strictly regulated by the
Central Banks of respective countries and are electronic-based. . These systems
enable payments to be made electronically and instantly in real-time. They
offer speed, reliability, safety, convenience, cost, and accuracy.
2. Retail Payment System:
2(a) Cash Payment: Cash payment is the oldest, most common payment system which is well known and is
the most preferred method for small payments because it involves no credit. Carrying too much cash is risky
as it can lead to theft and other problems. However, people still carry cash for its convenience and flexibility.
From the payee’s point of view, transactions are completed immediately, and this cash can be re-used for
other transactions. This system is suited for small amounts of payments.
2(b) Paper-Based Payments:
2(b)(i) Cheques: an order to transfer funds from the payer’s bank to the account of the payee. Cheques are
simply a payment instruction from the account holder to his/her banker directing that a certain sum of
money should be paid to a specific individual or to the bearer of the instrument.
2(b)(ii)Demand Drafts: used when one person wants to send or transfer money (remit) to another person
who is in another city. The person wanting to send money deposits cash in a bank or issue a cheque in favor
of the issuing bank, which issues him a demand draft. The demand draft is sent to the person who is to
receive the money. The receiver gives it to the branch/bank where he holds an account and receives the
payment. Banks normally charge a commission for issuing demand drafts.
2(b)(iii) Payment Orders or Banker’s Cheques: Payment orders or Banker’s Cheques are similar to demand
drafts but are usually issued for payments within a city. These are usually valid for a shorter period of time
compared to other instruments. Banks may charge a commission for issuing Payment Orders and Banker’s
Cheques.
2(c) Card Based Payments:
2(c)(i) Credit Card: a credit facility extended to a user who is issued a
plastic card that can be used in place of cash for making any type of
payment/purchase. Credit Card enables its holder to buy goods and
services with a credit line given by credit card issuer.
2(c)(ii) Debit Card: a payment card where the transaction amount is
deducted directly from the card holder’s bank account upon
authorization. Debit cards can be of two types, one which is linked to
an account and is issued by banks to account holders only. Second
could be pre-loaded cards where a certain amount is stored in the card.
Generally, debit cards are also ATM cards. The mode of using debit
cards and credit cards is generally the same.
2(d) Electronic Payments and Remittances:
2(d)(i) Electronic Clearing Services: money is transferred automatically from a payers to payee’s
bank accounts. Many customers can receive their dues electronically directly into their accounts
on due dates without using paper cheques/instruments. The payer instructs their bank to make
direct debit payments and the payee provides amounts and dates of the payments. The system
provides the convenience of paperless payment on due dates by direct debit to the customer’s
account. This facility can be used for paying different amounts and is useful for paying regular bills.
2(d)(ii) Electronic Funds Transfer: The amount sent from the sender’s bank branch is credited to
the receiver’s bank branch on the same day or at the most the next day. This facility saves the
effort of sending a demand draft through the post and the inherent delay in reaching the money
to the receiver. Banks may charge a commission for using this service.
2(d)(iii) Real Time Gross Settlement: facilitates the instant transfer of money from one account to
another across cities. This is basically a large value remittance system where funds are required to
be transferred quickly. While all the above payment and remittance systems are settled between
banks on a net basis, this system is settled on a gross basis which means that each transaction is
settled independently. This facility is useful to banks for their fund's management, for companies
to transfer large amounts for individuals who require urgent payments.
Electronic Payments and Remittances
• 2(d)(iv) Internet Banking: allows customers of a financial institution to conduct financial
transactions on a secure website operated by the institution. This is a very fast and
convenient way of performing banking transactions such as transferring funds from your
savings to the current account or to a third party account. The major advantages are that the
payments are made at the convenience of the account holder and are secured by the user
name and password. This facility can be used at any time and from anywhere in the world
with internet access. The only disadvantage is that for making this payment access to
computers and internet services is required and the internet comes at an additional cost.
• 2(d)(v) Mobile Banking: a service provided through the combined effort of a bank and a
mobile service provider, to perform common banking transactions. An active bank account is
needed and a mobile phone equipped with features required by the bank. The advantages of
this system are that it is secured and available to user at all times, a very fast and convenient
way of making payments as the payments can be made from anywhere that has mobile
network coverage. Some disadvantages are security as mobiles need to be kept safely,
otherwise, misuse may occur.
Bank Clearing

• It is the process of settling transactions between banks. Because so many

transactions take place between banks on a given day, bank clearing exists to
process what each party owes or is owed in a central location so the least
amount of money changes hands. For example, suppose Bank A owes $1
million to Bank B in cleared checks, but Bank B owes Bank A $1.5 million.
Bank clearing is the process of determining that Bank B must only pay Bank
A $500,000.
• clearing denotes all activities from the time a commitment is made for a
transaction until it is settled. This process turns the promise of payment (for
example, in the form of a cheque or electronic payment request) into the
actual movement of money from one account to another. Clearing houses
were formed to facilitate such transactions among banks.
Rules governing bank clearing operations
• See Botswana’s clearing rules and regulations (Make research)
Roles of central banks in clearing systems
1. Establishing public policy to govern the structure of clearing and
settlement arrangements in the payment system
2. Supervising the payment systems
3. Providing settlement across its own books
4. Operating large-value payment mechanisms
Real-time gross settlement
• Real-time gross settlement is the continuous process of settling
interbank payments on an individual order basis across the books of a
central bank.
• This system's process is opposed to netting debits with credits at the
end of the day.
• RTGS is generally employed for large-value interbank funds transfers.
• RTGS are increasingly used by central banks worldwide and can help
minimize the risks related to high-value payment settlements among
financial institutions.
 The Botswana Interbank Settlement System
(BISS)
• The Botswana Interbank Settlement System (BISS) is an electronic interbank payment system
that allows funds to be transferred between participating institutions on an irrevocable and
real time basis. It is also commonly known as the Real Time Gross Settlement (RTGS) system.
Settlement occurs in a continuous fashion on a transaction by transaction (gross) basis,
provided there is sufficient cover in the sending bank’s account. There is no netting of debits
against credits. Payments are routed through participants’ settlement accounts held at the
Bank of Botswana.
• BISS is managed and operated by the Bank of Botswana in its capacity as settlement provider.
Membership of BISS is open to all clearing banks operating in Botswana as well as the Bank of
Botswana.
• Primary objectives
• The primary objective of BISS is to facilitate safe and secure payment; reduce payment system
risks (including liquidity, credit and systemic risks) that enable Botswana to meet international
payments and settlement standards as recommended by the Committee for Payment and
Settlement Systems (CPSS) of the Bank for International Settlements (BIS).
Benefits of BISS to the national economy

• Mitigates the national payment systems risks, especially risks which, should they
occur, would result in significant disruption to the whole payments and settlement
system, leading to disturbances occurring in economic activity;
• Provides faster access to high-value and time-critical payments (i.e., payments that
have to be effected same day) by financial institutions, either on their own behalf or
for their customers;
• Lowers the risks associated with the accumulation of uncleared payments at the
end of each day;
• Facilitates the settlement of Government securities in central bank money; and
• Enables Botswana to adhere to best international practice which, in turn, serves to
enhance the country’s position through operating a modern financial infrastructure
commensurate with international norms.
To local banks:

• Provides real time gross settlement and, therefore, mitigates interbank

risks, i.e., credit risks due to settlement lags are eliminated;
• Enables monitoring of liquidity flows and to respond accordingly;
• Enables continuous on-line monitoring of banks’ settlement accounts with
the Bank of Botswana, on a real time basis;
• Enables banks to avail all payments related to interbank exposure to the
Bank of Botswana as an overseer of the BISS; and
• Provides world class technology and a future platform for Botswana to
effect cross-border payments and settlements, in accordance with the
Southern African Development Community (SADC) vision for modern
payments infrastructure in the region.
To individual customers:

• Provides immediate settlement and timely payment of high value and

time critical payments;
• Operates on the basis where a person initiating the payment must
have funds in his/her account prior to issuing a payment instruction.
Subject to availability of funds in the sending bank’s account, and on
instruction to pay, payment is immediate, final and irrevocable;
• Curbs the need for people to write high value cheques or carry large
amounts of cash to effect high value payments; and
• Processing or sending instructions is cost effective.
Operating schedule

• The Bank of Botswana operates the BISS at specified times during a

working day for purposes of undertaking payments and settlement.
EVENT TIME PAYMENT TRAFFIC
BISS System Start 0745-0800 BoB beginning of day processes.
Settlement Start 0800-1530 Interbank and third party payments are
allowed during this settlement window.

Final cut-off 1530-1700 System closed for third party payments.

Only interbank payments are permitted.

BISS End of Day 1700-1730 BoB end of day processes.