By Albertus Mutonga Matongela
This is the first article in a series, on payment systems in Namibia. The focus of the articles is education on certain aspects of the payment system infrastructure. Understanding these infrastructures or systems will make you a better informed person in the process of fulfilling your banking and payment needs. The present article describes what is meant by payment systems. Enjoy the reading.
PAYMENT systems are as old as human beings. They have been in existence alongside human beings. During ancient times payments used to be settled in a more traditional way. The barter system, which is the exchange of goods without involving money, prevailed. The mechanics of the system were fairly simple: one who has bread but in need of meat could exchange bread for meat and the opposite was true. Basically, each party must be able to supply something required to conclude the transaction.
The barter system had its own problems that included timing constraints and coincidence of wants. If you wish to trade bread for meat, you could only do this when the bread and meat are both available at the same time and place (and, additionally, only if someone wishes to trade meat for bread). The problem of the barter system led to the emergence of the contemporary way of making and settling payments. Nowadays purchases of goods and services are settled through cash and non-cash means, in paper and electronic means.
Payment instruments like paper and electronic gadgets are all part of the broad term called payment system. In order to help understand the nature of payment systems, two basic descriptions – informal and formal – are provided here. At an informal level payment system analysts associate a payment system with a pipeline that is used to transport liquid or gas from one point of the pipeline to another.
A good example is the distribution of water from the supplier to communities. In Namibia, water is distributed by Namibia Water Corporation (NamWater) to communities and regional and local authorities. In certain villages where water infrastructure is not developed, people get water from wells or water points in buckets that they carry on their heads. This is not the case in urban and peri-urban areas, where water is distributed through a complex pipeline network. To get water in order to prepare dinner, one just opens a tap and water is quickly dispensed through a water pipeline. This happens in a matter of seconds without having to go through the hassle of walking into the forest to look for water.
Two important words are used above. They are water and pipeline. These two terms can be associated with payment systems.
It is important at this point to mention that in payment system language, we talk about systems and funds. Funds therefore flow in systems to enable the payment of goods and services. In our example, a pipeline can be construed to refer to a system and water can be taken to imply funds.
This brings us to a more formal definition of payment system, with special reference to the Namibian situation. According to the Payment System Management Act, 2003 (Act No. 18 of 2003) for Namibia, a payment system means a system that enables payments to be effected between a payer and a beneficiary. A payer is a person who makes a payment and a payee is a person who receives a payment. Consider John who goes for dinner at a restaurant at Maerua Mall in Windhoek and pays for food on a cash basis. In this transaction John is a payer and the merchant receiving cash at Maerua Mall is a payee.
Payment system and the Namibia (National) Payment System (NPS) are totally different with the latter encompassing the former. The NPS means the payment system as a whole, and includes any payment system, settlement system, clearing system and payment system arrangement used in the process of effecting payments from payers to beneficiaries.
While the term payment system in the definition of NPS is provided above there is a need to explain briefly the remaining three components. A settlement system means a system established and operated by the Bank of Namibia to facilitate the transfer of funds for the discharge of payment and settlement obligations between system participants. Clearing system means a system whereby system participants can exchange data, documents and payment instruments and instruments related to funds or securities transfers to other system participants. Payment system arrangement means procedures and services for the processing of payment transactions. The foregoing components are discussed at great length in subsequent articles.
The field of payment system is one of the least understood parts of any given economy. This is also the case in Namibia. The limited understanding of payment system issues could be as a result of several reasons.
First, while the literature on general payment system is available, it is not provided and structured in such a way that people can understand. In most cases the literature is prepared and provided in a technical manner such that an average person in Namibia can hardly comprehend or relate to it.
Second, there is no complete source of information on payment system matters. Unfortunately a rational economic man has a desire to maximise satisfaction or utility from consumption of a good or service based on available information. In a situation where information on payment system is scant, consumers of financial services are unable to satisfy their wants and needs reasonably well.
Third, there is lack of general financial literacy. Financial illiteracy is a general problem acute in developing countries compared to highly advanced economies. Unless people are educated in financial matters in general and payment system issues in particular, they will be unable to make better economic choices in their daily lives.
Fourth, the impact of payment system on economic development is not well appreciated. As mentioned already, payment systems are as old as human beings. It is important to underscore here that contemporary payment systems are just becoming fashionable in several countries.
In short, payment systems are important in an economy to enable payment of goods and services to take place. The next article focuses on the importance of payment systems in any economy including Namibia.
Albertus Mutonga Matongela is an economic and payments analyst based in Windhoek. Opinions in this article are his own and should not be associated to his employer or this paper. Comments on this article should be directed to email@example.com or 0811293467.
– Albertus Mutonga Matongela is an economic and payments analyst based in Windhoek. Opinions in this article are his own and should not be associated to his employer or this paper. Comments on this article should be directed to firstname.lastname@example.org or 0811293467.