Payment systems PDF

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Summary

• ‘Payment’ - the tender and acceptance of some act which discharges a monetary obligation
• ‘Money’ – the quality of money is to attribute to all chattels which, issued by the authority of the law, and denominated concerning a unit of account, are meant to serve as universal means of exchange...

Description

• LAW OF FINANCIAL INSTITUTIONS AND SECURITIES BLO3405 •

Payment systems

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Definitions

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‘Payment’ - the tender and acceptance of some act which discharges a monetary obligation

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‘Money’ – the quality of money is to attributed to all chattels which, issued by the authority of the law, and denominated with reference to a unit of account, are meant to serve as universal means of exchange in the State of issue.

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Payment systems

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Payment contract

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Where the contract is silent on the payment method, it is presumed any legal tender will be valid (this could be displaced by presence of an EFTPOS machine)

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Payment may be conditional - for example, payment by cheque is conditional upon the cheque being honoured

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Most non cash payments are conditional payments

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Tender and acceptance

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Tender is an offer by the debtor to perform some act that will discharge the payment obligation

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A valid tender has legal consequences even if not accepted, that is, the law holds the payment obligation has been discharged

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The reason given for the refusal of tender may have serious legal consequences:

E.g. Paynter v Willems (1983) (p284) •

‘Legal tender’ is defined in the Currency Act 1965 (Cth) (p285)

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In commercial contracts, the court will often find an intention that payment be made by means other than legal tender:

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E.g. Tenax Steamship v Brimnes (1975) (p286)

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Common payment methods

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Cash

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Direct credits or debits

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Bpay

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EFTPOS

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‘pay anyone’ facility on internet banking

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Documentary letter of credit

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Concept of a payment system

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Having discussed payment and various payment methods, what then is a payment system?

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A payment system is any commercial and legal structure that facilitates payments by a large number of payers to a large number of payees: see also Payment Systems (Regulation) Act1998 (Cth)

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Payment systems

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Elements of payment systems

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Funds transfer systems contain several basic elements (list p.292)

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It is not the case that these technologies are unregulated. There are a number of default common law rules that apply to payment systems utilised by financial institutions (list pp2934)

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E – signatures

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Signatures are a means of identification and authentication

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S10 Electronic Transactions Act 1999 (Cth) deals with electronic signatures. The Act requires a reliable and appropriate method but it does not specify any particular method

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This leaves it open to the parties to agree on an acceptable method, such as ‘Regards, Joe’: Mahta v J Pereira Fernandes SA (2006)

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A key aspect of payment systems is Clearing and Settlement

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Clearing is a sorting and accounting procedure for various types of payments

(traditionally the cheque) •

Settlement usually occurs by a funds transfer

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Technology has improved to the point that under the New Payment Platform (2017), nearly all payments can be cleared and settled instantaneously

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International payments

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There is no global payment system so that each international payment must be processed separately, identifying the receiving financial institution

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The legal relationship between parties to an international funds transfer was considered in Royal Products Ltd v Midland Bank Ltd (1981)

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In Royal Products, it was held that in an international funds transfer the transferring bank acts as the payer’s agent and the correspondent bank acts as the payee’s agent

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Banks as agents therefore have a corresponding fiduciary duty to their customer to pay the right person the right amount in a timely fashion and to follow instructions

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So the agent bank must follow the principle (customer’s) instructions. But it can be difficult to determine the scope of the authority given to a paying bank: e.g. Dovey v Bank of New Zealand (1999)

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Most international payments are settled in the following way:

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The PFI advises the RFI to credit the account of the payee. The RFI does so and obtains reimbursement, either by the credit of its account held with the PFI, or by debiting the account that the PFI maintains with the RFI.

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Where financial institutions do not maintain a senior correspondent relationship, it is necessary to involve an intermediary financial institution

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Domestic Payments

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Unlike international payments, for domestic payments, the clearing and settlement rules are clearly established

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Bulk payments (by companies) may be either direct debits or direct credits

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Individual customers can offer electronic payments in 3 ways:

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EFTPOS – this is a debit payment, the PIN serving as identification and authorisation of payment

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Internet payments – where customer enters the payee’s name, account number and the amount

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BPAY – owned by a consortium of banks, the bill payment system is a direct credit funds transfer system (has advantage of reducing risk of mistaken payments)

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Completion of payment

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Generally payment is complete when:

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The receiving bank accepts the funds for the payee

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Payee has an unconditional right to the funds

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The terms of the payment contract are complied with

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Damages

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If a funds transfer fails to proceed as expected by the parties loss may occur in four categories:

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Principle

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Interest

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Exchange rate fluctuations

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Consequential losses (most litigation has been for late payment made under contracts)

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Credit Cards

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These allow customers to access credit funds

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Consumer credit card accounts are subject to the National Credit Code

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There are four parties involved in a credit card payment – issuer, the cardholder, the merchant and the merchant acquirer

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The credit card creates 3 basic contractual relationships:

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1. Between the issuer and the cardholder which authorises the cardholder to use the cards at authorised merchants

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2. Between the merchant acquirer and the merchant

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3. Between merchant and the cardholder (p320)

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Computer money

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The 3 main forms of computer money are: digital cash, smartcards and cryptocurrency

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Since digital cash and stored value smartcards are really account keeping mechanisms that represent a customer account, they are therefore subject to ordinary banking law

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Cryptocurrencies

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These are different to digital cash in that there is no issuing institution and therefore no liability

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Can be thought of as a commodity such as gold (can be traded on an exchange)

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See Tyree (2012), ‘Bitcoin’, Journal of Banking and Finance Law and Practice 23(2) for further discussion...