Payments concepts: Bilateral settlement, Push/Pull payments, R-transactions
In our comprehensive Payments Concept Series, we'll equip you with the essential vocabulary and definitions to confidently navigate rulebooks and technical literature independently
In this first article of a series we will explore the key concepts of payments, providing you with a foundational understanding of the basic jargon and definitions that you often encounter in payments discussions. Whether you're a seasoned pro or just starting out, understanding the basics is crucial to navigate this exciting industry. So, join us as we unravel the mysteries, simplify the complexities, and equip you with the knowledge to conquer the payments landscape with confidence.
Let's get started on this enlightening journey together!
Bilateral vs Multilateral settlement
One important concept in payments is the difference between bilateral and multilateral settlement. When two parties exchange funds, it is known as bilateral settlement. This could happen, for example, in a peer-to-peer payment scenario. However, in a more complex payment system involving multiple parties, such as in e-commerce or online marketplaces, multilateral settlement is employed. Imagine you owe your friend David £10, and he owes you £5. In a bilateral settlement scenario, you and David settle your debts directly between the two of you. You give him £5, and he gives you £5. It's a simple back-and-forth exchange, just like splitting a bill at a restaurant.
Now, let's bring in a few more friends. You also owe Emma £7, and she owes you £3. In a multilateral settlement setup, all the debts are considered together. Instead of everyone settling their individual debts, the amounts are netted out, and only the final balances are settled. So, in this case, you owe David £10, but he owes you £5, and you owe Emma £7, but she owes you £3. When you consider the overall picture, you owe a total of £9 (£10 - £5 - £7 + £3). The multilateral settlement allows you to settle the net amount of £9 instead of multiple individual transactions.
In simpler terms, bilateral settlement is like directly paying each person you owe, while multilateral settlement is like combining all the debts and settling the overall balance. It's like simplifying a group outing where everyone owes each other some money.
For a comprehensive exploration of bilateral and multilateral agreements, we highly recommend delving into our two insightful articles: Payments Monetary Mechanics and CSMs: A Closer Look.
Push vs Pull payments
Understanding the difference between push and pull payments is important in the world of payments. Let's understand the difference with an example. Let's say you're buying a cool new gadget from an online store. In a push payment scenario, you initiate the payment and push the funds directly from your account to the merchant's account. It's like taking money out of your pocket and giving it to the cashier. You're in control, initiating the payment and pushing the funds to the recipient.
On the other hand, in a pull payment setup, the merchant pulls the funds from your account. It's like handing your credit card to the cashier, and they swipe it to charge the appropriate amount. The merchant takes the initiative to request the payment, and you provide the necessary authorization for them to pull the funds. To illustrate further, imagine you're dining at a restaurant. In a push payment scenario, you pay the bill by handing cash to the waiter or using a mobile payment app to transfer money directly to the restaurant's account. You're actively pushing the funds from your side to settle the payment. In a pull payment scenario, you provide your credit card details to the waiter, and they take the initiative to charge the bill to your card. They "pull" the funds from your account with your authorization, just like when you pay for the meal using a credit card.
So, push payments are like you initiating and pushing the funds, while pull payments are like the recipient initiating and pulling the funds from your account. It's a way to understand who takes the active role in the payment process.
R-transactions: Recalls and Returns
Recalls, returns, and reversals—these are the R-transactions, the superheroes of the payments world, swooping in to fix mistakes and bring balance back to the financial universe. They may sound like a fancy bunch, but at their core, they are all about undoing transactions gone wrong. R-transactions are crucial in the payment process, as they provide a safety net for both buyers and sellers. R-transactions are common scenarios in the payment process that involve undoing a previously executed transaction. This can happen due to several reasons, such as an error in the transaction amount or unauthorized payments. In these situations, the payment system or payment rulebook allows for the recall, return, or reversal of funds to rectify the mistake and restore the financial status quo. Have you ever experienced a situation where you made a payment, but then realized there was an issue? Maybe you accidentally paid the wrong person or entered the wrong amount. That's where payment recalls come into play, acting as a safety net for those moments of "Oops!". Imagine you're splitting the bill with your friends at a restaurant, and you accidentally send more money than your share. In this case, you can request a payment recall. It's like hitting the rewind button on the transaction, allowing you to get your extra money back. The recall process involves reaching out to your bank or payment provider and explaining the situation. They will then work to reverse the transaction and return the excess funds to your account.
Returns act when the beneficiary cannot be credited with the amount due to various reasons, the account is embargoed or closed, or the account type is not allowed to receive funds like in a savings account. In these scenarios, the beneficiary bank will return the funds to the originator via a return instruction.
In the next articles, we will deep dive into SCT and SICT recalls and returns and what are their business rules like for its proper execution.
In the upcoming articles, we will take a deep dive into the world of SCT (Sepa Credit Transfer) and SICT (SEPA Instant Credit Transfer) recalls and returns, ensuring that you have a crystal-clear understanding of how they work. Also, Stay tuned for the exciting second installment of our Payments Concept Series, coming soon!
