Understanding Modern Payment Systems: Definitions, Processes, and Key Components

1. Payment and Related Basic Concepts

1.1 Definition, Development, and Process of Payment

This section briefly introduces the definition, development, and process of payment to provide an overall understanding.

1.1.1 Definition of Payment

Payment can be defined as the transfer of receivable assets from the payer to the payee that are acceptable to both parties. Key points include:

"Payer" and "payee" are the participants in a payment. Broadly, they can be individuals, enterprises, banks, etc.

"Acceptable to both parties" means the payment asset is recognized by both sides for exchange.

"Receivable assets" usually refer to legal tender, including cash and bank deposits.

"Transfer" is the result of payment, i.e., money moves from payer to payee via tools such as cash, bank cards, bills, or mobile payment.

The definition reveals the basic principle of payment, which is the foundation for deeper understanding and system design.

1.1.2 Development of Payment

Payment development is closely linked to the evolution of money. With continuous technological progress, many payment tools have emerged, forming diverse payment forms that meet various scenarios and evolve into a "large collaborative" payment system.

Key development perspectives include the evolution of money, payment tools, payment systems, payment organizations, and technology.

Money development moved from barter to shells, metal coins, paper money, and now electronic accounts and digital currency, reducing storage and transaction costs while improving efficiency.

Payment tools have expanded from cash, bank cards, bills, prepaid cards, etc., enabling a multitude of payment methods.

Payment organizations such as banks (providing settlement services), clearing institutions (e.g., UnionPay), and central banks (e.g., People's Bank of China) cooperate to build the current payment ecosystem.

Modern payment relies on payment systems like the second‑generation system of the People's Bank, UnionPay's cross‑bank clearing system, and third‑party payment platforms.

Thus, modern payment development depends on the synergy of money, tools, systems, and organizations.

1.1.3 Payment Process

The payment process can be divided into three stages: transaction, clearing, and settlement.

Transaction: user initiates payment, authenticates, and generates a transaction record.

Clearing: based on the transaction record, data exchange, aggregation, and net amount calculation occur.

Settlement: final transfer of funds according to the clearing results.

Example: buying water at a store involves transaction (selecting product), clearing (using a POS card), and settlement (funds move from the buyer’s bank account to the merchant’s account).

Therefore, payment can be defined as: using money as a medium, transferring it via payment tools, and completing the value exchange between goods/services and money.

1.2 Analysis of Payment‑Related Terminology

Figure 1 shows an O2O enterprise’s payment‑settlement workflow, covering collection, clearing, settlement, payout, and internal systems.

The upper‑left area of Figure 1 displays the payment link. After a user places an order, the front‑end opens a checkout page, the internal payment system validates the request, and finally sends the instruction to external channels to complete collection.

Key terms in the payment link:

Payment Application : web or software directly used for payment, e.g., WeChat App, Alipay App, UnionPay Cloud QuickPass App.

Payment Scenario : specific mode or context of payment, including online (e‑shopping, mobile top‑up, utility bills) and offline (scan‑code, POS card).

Payment Type : categories such as payment, refund, recharge, withdrawal, transfer, allocation, collection, etc.

Payment Method : means chosen by the user, e.g., WeChat Pay, Alipay, bank card, balance, credit line.

Online Checkout : user‑facing payment entry, including PC checkout, H5 checkout, API checkout, hardware checkout (POS, mPOS, cash register), and SDK checkout.

Payment Channel : interfaces provided by institutions to receive and process payment requests, including third‑party channels, bank channels, and clearing‑institution channels.

Channel Cost (Rate) : fee charged per transaction, e.g., 0.6% per transaction.

Channel Access Method : direct connection (e.g., directly to WeChat) or indirect connection via an intermediary.

Payment Routing : service that selects the optimal channel based on predefined rules.

Payment Limit : amount limits (single transaction, daily, monthly) to control risk.

1.3 Analysis of Transaction‑Related Terminology

Transaction is the prerequisite for payment. After product/service matching, price negotiation, and contract signing, payment proceeds. A typical transaction flow includes selection, pricing, and order submission, as shown in Figure 2.

Key transaction concepts:

Shopping Cart: temporary storage of items awaiting checkout.

Pricing: calculation of discounts and payable amount.

Order: business document recording user, product, and transaction details.

Fulfillment: delivery of goods/services after payment.

Bill: payment document recording order info and payable amount; one order may generate multiple bills.

Payment Detail: breakdown of a bill (e.g., 60 CNY via WeChat, 20 CNY coupon, 20 CNY discount).

Third‑Party Transaction ID: unique identifier returned by the channel after successful payment.

1.4 Analysis of Clearing‑and‑Settlement Terminology

From the moment a transaction starts, the interests of all parties (who brings the customer, who provides goods, who provides services) must be allocated. The clearing‑and‑settlement system handles post‑transaction profit distribution, accounting, and fund settlement, adhering to the principles of “clear, record, settle”.

Figure 1’s upper‑right area shows the clearing stage, which calculates receivable/payable amounts for each participant and records them.

Figure 1’s lower area shows the settlement stage, which transfers funds from the platform account to the merchant’s bank account.

Clearing: compute amounts each participant should receive or pay.

Fee Item: name for a monetary item in a transaction (e.g., transaction fee, merchant income, commission).

Posting Rule: rule that determines which account a fee item is posted to, direction, and whether it is frozen.

Posting: the act of recording clearing results into the appropriate account.

Distribution: splitting a receipt into multiple parts according to preset rules.

Settlement Cycle: frequency of settlement (real‑time, next‑day, monthly).

Clearing File: detailed transaction record file provided by banks or third‑party institutions.

Settlement File: account movement file provided by banks or third‑party institutions.

Netting: offsetting opposite‑direction amounts (e.g., 100 CNY receipt minus 6 CNY fee results in 94 CNY net).

2. Foundations of Payment Accounts

Electronic accounts are the basis of electronic payment. Accounts can be classified by usage (user payment account, settlement transition account, clearing counterpart account, settled receivable/payable account, etc.) or by institution (central bank clearing account, bank settlement account, third‑party payment account, enterprise virtual account).

2.1 Comprehensive Account System

Financial supervision differentiates accounts based on institution and purpose. For example, personal and corporate settlement accounts of banks are subject to different regulations. This layered account system provides a solid foundation for payment clearing and settlement, enabling smooth fund flow across institutions and users.

2.1.1 Central Bank Clearing Account

The People's Bank’s clearing and reserve accounts hold the highest‑level credit, storing deposits of banks and payment institutions.

These funds are used for inter‑bank clearing, payment institution‑bank clearing, and payment institution‑payment institution clearing, achieved by debit/credit operations on the institutions’ accounts.

2.1.2 Bank Settlement Account

Bank settlement accounts store monetary assets of individuals or enterprises. They can be personal or corporate, as shown in Figure 4.

Bank settlement accounts enable payments between individuals, enterprises, or mixed parties by debiting one account and crediting another (e.g., salary payment).

2.1.3 Third‑Party Payment Account

Third‑party payment accounts are electronic ledgers opened by payment institutions for customers, recording prepaid balances and transaction details. They cannot be overdrawn or transferred. Accounts are classified into Class I, II, III with different functions and limits (see Table 1).

2.1.4 Enterprise‑Built Virtual Account

Enterprises may create virtual accounts based on their credit to record various funds (e.g., deposit account, red‑packet account, merchant collection account). These accounts have lower credit and security compared to bank or third‑party accounts.

2.2 Account Collaboration

Accounts across institutions are not isolated; they cooperate. Example: Alipay balance withdrawal to a China Merchants Bank card.

User initiates withdrawal in Alipay; Alipay deducts balance and sends a payment request to UnionPay.

UnionPay forwards the request to China Merchants Bank, which credits the user’s personal settlement account.

UnionPay then requests the central bank to settle between Alipay’s reserve account and the bank’s clearing account, completing the final fund settlement.

3. Payment Tools

Payment tools (cash, bank cards, bills, prepaid cards, etc.) are carriers that convey payment instructions and settle debts. They can be cash‑based or non‑cash (new‑type) tools.

3.1 Card‑Based Payment Tools

Card‑based tools include bank cards and stored‑value cards, as shown in Figure 6.

Bank cards (debit and credit) are issued by commercial banks and support consumption, transfer, and cash withdrawal. Stored‑value cards are issued by non‑financial payment institutions and act like wallets.

3.2 Bill‑Based Payment Tools

Bills are negotiable securities promising payment on sight or at a specified date. They include drafts, promissory notes, and checks (see Figure 7).

3.2.1 Draft

A draft is issued by the drawer, instructing the drawee to pay a fixed amount to the payee on sight or a specified date. Drafts can be bank drafts or commercial drafts.

3.2.2 Promissory Note

A promissory note is issued by a bank after a customer deposits funds, used for transfers or cash withdrawal within the same clearing zone.

3.2.3 Check

A check is issued by the drawer, instructing a bank to pay a fixed amount to the payee on sight. Checks can be cash checks or transfer checks. Insufficient funds result in a “bounced check” with penalties.

4. Payment Organizations and Systems

The smooth operation of the entire payment ecosystem relies on a large organizational ecology (see Figure 12).

4.1 Diverse Payment Organizations

Key organizations include third‑party payment institutions, clearing institutions, commercial banks, and the central bank.

4.1.1 Third‑Party Payment Institutions

These institutions hold a payment business license from the People's Bank and provide services such as WeChat Pay, Alipay, and Huifu Tianxia. They are divided into acquiring‑side institutions (serving merchants) and account‑side institutions (serving individual users).

(1) Acquiring‑Side Institutions

Provide merchants with online payment, card acquiring, prepaid card collection, etc. Merchants sign contracts for suitable solutions and can integrate via APIs or redirect pages.

(2) Account‑Side Institutions

Provide personal “wallet” accounts (e.g., WeChat Pay, Alipay). Users bind bank cards, recharge wallets, withdraw to bank accounts, and pay merchants directly.

Currently, most institutions are not mutually interoperable, but increasing interconnection (e.g., JD Pay and WeChat Pay) is reducing friction.

4.1.2 Clearing Institutions

Clearing institutions hold a payment clearing business license and provide data exchange, clearing, and settlement services. Examples:

China UnionPay: operates nationwide card cross‑bank information exchange network.

NetsUnion Clearing Corporation (NUCC): operates the non‑bank network payment clearing platform.

City Commercial Bank Clearing Centers: handle clearing for city commercial banks.

Rural Credit Union Clearing Centers: provide clearing for rural financial institutions.

Other clearing organizations: e.g., China Securities Depository and Clearing Corporation.

Figure 13 illustrates a scenario where both UnionPay and NetsUnion participate in a cross‑institution payment flow.

4.1.3 Commercial Banks

Commercial banks act as credit intermediaries, providing deposit, loan, and bill discount services. Their payment processing includes:

In‑house Payment System : handles online transactions, drives core banking for account movements, and processes requests from external channels.

Core Banking System : manages ledger, accounting, and user account balances.

4.1.4 Central Bank

The People's Bank of China (PBC) oversees all cross‑institution payment activities, holds 100% of payment institutions’ reserve funds, and operates systems such as large‑value real‑time payment, small‑value batch payment, online cross‑bank clearing, and more.

4.2 Payment Information Systems

Modern payment relies on systems that process data and exchange payment instructions. Core systems can be categorized into:

Transaction System : handles order creation, pricing, and billing.

Payment Clearing System : processes payment instructions, interacts with channels, and records internal accounting.

Accounting System : manages various accounts and financial records.

Figure 15 shows the composition of payment organizations and their internal systems.

5. Payment Products

Choosing a payment solution essentially means selecting a payment product. Payment products are packaged capabilities offered by payment institutions or banks, covering application scenarios, regulatory requirements, and integration methods (e.g., WeChat H5 Pay, online banking Pay, QR‑code Pay).

5.1 What Is a Payment Product?

A payment product is a solution provided to enterprises for collection, disbursement, and related payment activities. It includes use‑case, compliance, and integration details. Figure 16 shows examples from Huifu Tianxia.

5.2 Classification of Payment Products

Common categories include:

Collection Products : enable merchants to receive payments (e.g., WeChat Pay for JD).

Disbursement Products : allow merchants to withdraw funds (e.g., WeChat “withdraw to wallet”).

Withholding Products : automate periodic deductions after a signed agreement (e.g., subscription renewals).

Cross‑Border Products : handle international currency payments with distinct qualifications and clearing models.

Bank‑Enterprise Direct‑Connect Products : let enterprises manage bank settlement accounts directly (balance query, transaction history, payment initiation).

Wallets : personal balance management tools offering recharge, withdrawal, payment, identity verification, card binding, and password settings.

Installment Products : enable split‑payment financing (e.g., Alipay “Huabei”).

Split‑Payment Products : distribute collected funds among multiple parties according to predefined ratios.

Industry‑Specific Solutions : tailor payment features for verticals such as utilities, travel, education, etc.