From the course: Fundamentals of Payments
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Models of payment systems
From the course: Fundamentals of Payments
Models of payment systems
Payment systems operate on two models: open-loop and closed-loop. An open-loop system is like a hub-and-spoke model. The system connects banks, payment service providers, or similar institutions as intermediaries, and the payment service providers connect to the senders and receivers of funds. Only intermediaries can become members of an open-loop payment system. Open-loop models allow payment service providers to transact without direct relationships. Without the system, each PSP will need a direct connection to each other; PSP, which is unsustainable and costly. Thanks to the system, a new intermediary can exchange transactions with all existing payment service providers, allowing rapid scaling. Open-loop systems include many interbank systems and a central bank system. Interbank transfer systems implement clearing mechanism and connect to the central bank systems. They're called ancillary systems, while Central bank systems are at the heart and play a key role in settlement…
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