Payment Related

What is payment in the first place? What will happen to the form of payment? [Financial basic knowledge]

I have come to hear the terms smartphone payment, electronic payment, and cashless payment frequently. Smartphone payment is a service that allows you to shop if you have a smartphone, and you can make “payments” with your smartphone.

So why ” smartphone payment to not say,” ” smartphone settlement do you call it?” Thinking that way raises the question of what payment is in the first place.

We will explain it in an easy-to-understand manner, so let’s take this opportunity to upgrade your basic knowledge of payment.

Definition of payment

The definition of settlement is clear, and the Bank of Japan explains as follows (* 1).

” Settlement is the actual receipt and payment of money and the elimination of receivables and debts. ”

For example, in an economic transaction where a customer buys rice balls at a convenience store, the customer has a “right to receive rice balls” and a “duty to pay money”, and a convenience store has a “right to receive money” and a “duty to hand over rice balls”. increase. Rights are called receivables and obligations are called debts.

Settlement is the elimination of receivables and debts, so if the customer receives the rice ball and pays the money, and the convenience store receives the money and hands the rice ball, the payment is completed.

From here you can see the following:

Definition of payment

The task of payment is one of the actions of payment.

(※1)Bank of Japan “Public Relations / Public Relations”

Money is the means of payment

Money is the “hero” of settlement because settlement is the elimination of receivables and debts with money. So why is it possible to eliminate the receivables and debts of shopping at convenience stores with smartphone payments that do not use money?

That’s because money and smartphone payments are linked. To understand this, you need to know what money is.

Introducing the definition of money of the Bank of Japan.

Money is the means used for payment. And money has the property that “everyone is willing to exchange it if they can get it.” The reason why the customer receives the rice balls from the convenience store and the convenience store receives the money from the customer is because the convenience store thought, “If you can get the money, you can exchange it for the rice balls.”

Money has another definition.

Bank of Japan notes and money are called cash currency, and this is money. Bank of Japan notes are 10,000-yen bills and 1,000-yen bills, and coins are 500-yen coins and 100-yen coins.

The money is issued by the Bank of Japan and the Government of Japan, so it is very credible. Therefore, when you pay or receive money, you can “close the payment immediately”. This “immediately” is the point of payment, so we will explain it in detail in the next chapter.

Isn’t smartphone payment a “payment” from the definition of payment by the Bank of Japan?

The fact that money can be used to close payments “immediately” also means that it is difficult to close payments immediately with payment methods other than money.

So what about smartphone payments? Consider smartphone payment when shopping at a convenience store.

The convenience store gives the customer rice balls, but the customer does not pay the convenience store. However, smartphone payments leave data that “customers will have to pay for rice balls to convenience stores in the future.”

According to the data, the smartphone payment service company receives the money from the customer’s account and deposits the balance after deducting the commission into the convenience store’s account. This completes the delivery of money.

Since the Bank of Japan states that “settlement is to eliminate receivables and debts with money”, the settlement has not been completed because the exchanges at convenience stores in smartphone settlement have not been completed yet. After some time has passed since the exchange at the convenience store, the payment will be completed only when the money is transferred from the customer’s account to the convenience store’s account.

When will the “payment” of smartphone payments end?

Payment can be completed “immediately” by using money, but if the payment procedure is performed by means other than money, such as smartphone payment, the payment will not be completed immediately.

There are risks associated with settlement

There are risks to settlement.

For example, suppose a convenience store gives a rice ball to a customer, and the customer gives money to the convenience store. This completes the payment. But if suddenly the government and the Bank of Japan decide to “zero the value of the Bank of Japan notes and money,” money becomes just a piece of paper and just metal.

At this time, the convenience store will lose the rice ball because it will receive a piece of paper or metal of no value. This is the risk of settlement.

Of course, it is virtually impossible for the government and the Bank of Japan to decide to “zero the value of Bank of Japan notes and money.” In other words, as long as you settle with money, the risk of settlement is zero.

However, it should be noted that settlement risk includes credit risk and liquidity risk.

What is settlement credit risk?

Company A may deliver the goods to Company B first, and Company B may later pay Company A. The product moves first, and the payment is postponed.

At this time, if the company B that received the product goes bankrupt, the company A that delivered the product cannot earn money. Company A accepted postpay (deferring payment) because it trusted Company B.

This is the credit risk mechanism. Post-settlement will increase credit risk.

What is liquidity risk of settlement?

Liquidity in finance means the ease with which money flows. Liquidity risk in payments means that payments can impede the flow of money.

Suppose Company A hands over the goods to Company B first, and Company B later pays Company A. Company A can get the money later, but now it isn’t. In other words, Company A now has the right to earn money, but does not have the actual money.

Suppose Company A now has to pay Company C. However, Company A cannot pay to Company C because it has not yet obtained money from Company B.

If Company C tells you to pay immediately because it is a promise, Company A must borrow money and pay for it. If you borrow money, you have to pay not only the principal but also the interest rate.

You have the right to get money, but you don’t have the actual money, which can lead to illiquidity and loss. This is the liquidity risk of settlement.

Risk of non-money settlement

Unless the government and the Bank of Japan decide to “zero the value of Bank of Japan notes and money,” the risk of settlement with money is zero. However, other payment methods carry the risk of payment.

For example, in cashless payment, suppose that the cashless payment service has some trouble and all the buying and selling data is lost. At this time, you may not be able to deliver the money even though the delivery of the goods has been completed. There are risks associated with non-money payments.

Current and future payments and money

Smartphone payments and credit card payments are sometimes called cashless because they do not use money.

Cashless is steadily expanding, even though there should be a risk of settlement because the delivery of money is delayed. That’s because measures are taken to reduce the risk of settlement. And above all, cashless is a very convenient payment method.

Currently, the ratio of cashless payments to all payments in Japan is about 20{5f3ac39ba1b9031997b955ac72c92bb5456d725b06fa10f02cdda1ab745591c7}, but the government plans to increase this to about 40{5f3ac39ba1b9031997b955ac72c92bb5456d725b06fa10f02cdda1ab745591c7} by 2025 and aim for an additional 80{5f3ac39ba1b9031997b955ac72c92bb5456d725b06fa10f02cdda1ab745591c7} (* 4).

E-commerce such as online shopping is inevitably cashless because it is not possible to exchange goods for money in real time.

Also, if crypto assets such as virtual currencies become widespread, it may not be necessary to take the action of “exchange money later”. If you get points and can shop with points, you may think that you may not need money.

(※4)Current status and significance of cashless society

Summary-Economic activities that never disappear

With the spread of cashless payments and the evolution of crypto assets, there will still be a desire to end transactions by handing over money.

If you make a lot of money with cryptocurrencies or earn a lot of points, at some point you will want to convert them into money. In that sense, the BOJ’s “settlement that actually receives and pays money to eliminate debts and debts” can be said to be an eternally immortal economic activity.