The Role of Payment Systems in the Economy

Except under a barter economy, an exchange of money is necessary to settle any purchase of goods or services, whether in fiduciary (cash) or in scriptural money. In the latter case, the bank can choose to settle via a payment system or directly with the creditor’s bank. This practice, where banks held correspondent accounts with each other, has largely disappeared for domestic payments within the same currency, but was widespread until technology enabled the introduction of electronic payment systems during the second half of the twentieth century. The correspondent account system would have in any case become unmanageable because of the necessity to reconcile all the accounts and the opportunity cost of maintaining idle balances scattered around the banking system. Payment systems have enabled banks to centralize the settlement of liabilities and reduced demands on liquidity and processing costs through economies of scale and the networking effect.