Payments concepts: Credits/Debits, Payment corridor
Learn about the underlying principles of payments
In this second article of a series we will explore more concepts of payments, providing you with a foundational understanding of the basic jargon and definitions that you often encounter in payments discussions and articles. If you missed the previous post on payments concepts, we highly recommend that you give it a read before moving on to this one. Let’s jump in and review three more concepts.
Credit/Debit
An important concept to understand in payments is the distinction between credit and debit transactions. In payments jargon, a credit operation is an inbound operation where money enters the beneficiary account and therefore leaves the originator account. Every credit operation on the beneficiary side has a debit operation on the originator side. This could be within the same bank or different banks. A debit, on the other hand, refers to an outbound operation where money leaves the originator account and will be deposited in the beneficiary account. A credit operation generates a positive booking and a positive increment in the beneficiary customer balance. On the other hand, a debit operation generates a negative booking and a negative increment in the originator customer balance. Every payment transaction involves the simultaneous occurrence of a debit and a credit, representing the movement of funds between accounts. When a payment is initiated, funds are debited from the payer's account, indicating a decrease in their balance, while an equivalent amount is credited to the payee's account, resulting in an increase in their balance. This dual nature of payments ensures the proper transfer of value from one party to another. For a deeper understanding of the mechanics behind payments as a value transfer, check out our article on the monetary mechanics of payments. Credit and debit are often used to describe types of payment cards as well.
Payment corridor
In the context of cross-border transactions, a payment corridor refers to a specific route or channel through which funds are transferred between two countries or regions. It represents the established infrastructure and network that enables the movement of money across borders, including the necessary financial institutions, payment systems, and regulatory frameworks. A payment corridor is typically defined by the originating and destination countries involved in the transaction. It outlines the specific requirements, processes, and intermediaries involved in facilitating cross-border payments between these two locations. Each payment corridor may have its own unique characteristics, such as settlement timelines, currency conversion mechanisms, fees, and compliance regulations. For example, let's consider a payment corridor between the United States and Mexico. When a business in the United States needs to make a payment to a supplier in Mexico, the payment corridor between these two countries comes into play. The transaction may involve the use of correspondent banks, payment service providers, or cross-border payment platforms that facilitate the transfer of funds from the US dollar to the Mexican peso. The payment corridor ensures that the funds are securely and efficiently transferred across the border, complying with the relevant regulations and processes governing international transactions between the US and Mexico. The establishment of payment corridors is crucial for cross-border commerce and enables businesses and individuals to conduct international transactions smoothly. By having well-defined payment corridors, it becomes easier to navigate the complexities of cross-border payments, including currency exchange, regulatory compliance, and intermediary relationships. Payment corridors contribute to the efficiency and reliability of cross-border transactions, fostering international trade, investment, and economic growth.
Get ready for the upcoming article in our payments concepts series as we will uncover the 4 corner model and ACH participation models: direct and indirect participation.