Let's speak the same language: a formally defined model to describe and compare payment system architectures

Summary

Focus

Proposals for new payment system architectures abound. To understand the opportunities and challenges of these architectures, we need to describe and compare them in a consistent and standardised manner. We therefore propose a formally defined model to represent three key functions of payment system architectures – issuance/withdrawal, holding and transfer of funds – using payment diagrams.

Contribution

To the best of our knowledge, this is the first paper to develop a formal model for describing payment system architectures, using an interdisciplinary approach with authors from the fields of computer science and economics. Our model provides a tool for central banks, regulators and the payment industry to better understand and compare existing and proposed payment system architectures.

Findings

We illustrate the application of our model for domestic and cross-border account transfers, as well as cash, card, e-money and stablecoin payments. However, the payment diagrams can be used for any type of funds and can be applied across different payment system architectures.

Abstract

Proposals for new payment system architectures abound. To understand their opportunities and challenges, it is paramount to be able to describe and compare them in a consistent and standardised manner. This paper therefore proposes a formally defined model to represent three key functions of payment system architectures: issuance/withdrawal, holding and transfer of funds. The model defines payment diagrams, using a precisely defined syntax. We illustrate the application of these diagrams for domestic and cross-border account transfers, as well as cash, card, e-money and stablecoin payments. However, the payment diagrams can be used for any type of funds and can be applied across different payment system architectures. We also demonstrate how the diagrams correspond to the balance sheet approach commonly used in economics, and that it offers added value by providing an end-to-end visualisation of every stage of the payment journey. Our model provides a tool for central banks, regulators and the payment industry to better understand and compare existing and new payment system architectures.

JEL classification: E42, E58, G21

Keywords: payments, cash, bank accounts, correspondent banking, interoperability, two-tier banking system, cross-border payments, e-money, stablecoins