1 Basics of Payment Systems Chapter 1 ABSTRACT This.chapter.gives.an.explanation.of.the.basics.of."payment.systems.".To.begin.with,.it.is.necessary. to.know.what.a.payment.is.and.what.a.payment.system.is..A."payment".usually.describes.a.transfer. of.monetary.value.between.two.parties,.(e.g.,.the.seller.and.the.buyer)..Thus.any.organized.arrange- ment.for.transferring.monetary.value.between.parties.can.be.defined.as.a."payment.system.".Payment. systems.are.an.essential.part.of.the.financial.infrastructure.and.their.importance.cannot.be.overstated. This.chapter.sets.up.the.basic.knowledge.of.payment.systems.to.help.the.reader.understand.the.discussions. in.the.later.chapters..The.background.knowledge.includes.the.several.aspects.of.settlement,.actors.in. payment.systems,.banks.as.a.payment.system,.process.of.payment.systems,.and.functions.of.central.banks. The.economic.natures.of.payment.systems,.such.as.the.network.externalities,.natural.monopoly.and. interdependencies.of.payment.systems.are.also.discussed.in.this.chapter. INTRODUCTION When a trade of goods or services is made, the buyer should pay "money" to the seller in exchange for them. In some cases, the money would take the form of banknotes and coins, and in other cases, the deposit money is used. This process is usually called "payment." When a payment is successfully made, the obligation between the buyer and the DOI: 10.4018/978-1-61520-645-2.ch001 seller is discharged. This act of discharging ob- ligations is described as "settlement." "Payment system" is a mechanism that enables such kind of settlement or a smooth transfer of funds between buyers and sellers, and/or between banks. In the modern society, no economic activities are possible without payments and settlements. In this sense, it could probably be said that pay- ment systems are one of the most imperative and significant social infrastructures. Copyright © 2011, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.