What Is a Payment Scheme?

We use digital payments every day: swiping a card, sending money through an app, or paying a bill online. But have you ever wondered what makes these transactions work so seamlessly behind the scenes? The answer lies in payment schemes.

Payment schemes are the backbone of modern finance. They’re the invisible structures that allow banks, businesses, and consumers to transfer money securely and efficiently domestically or across borders. 

In this article, we’ll unpack what are payment schemes, why they matter, and how they impact everything from your morning coffee purchase to billion-dollar international transfers.

Definition and Purpose of a Payment Scheme

At its core, a payment scheme is a set of formal rules, processes, and technical standards that make digital transactions possible. Think of it as the traffic system for payments: just as road signs, speed limits, and signals govern how cars move through intersections, payment schemes ensure that money moves safely and predictably from one account to another.

They serve as the legal and operational framework that connects banks, payment processors, and other financial institutions. Without these schemes, your bank wouldn’t know how to communicate with a merchant’s bank or how to handle disputes, refunds, or fraud.

Key Components of a Payment Scheme

Every payment scheme is built around a few essential components:

1. Governance Body – This is the organization that owns or manages the scheme. For instance, SEPA is governed by the European Payments Council, while Visa and Mastercard manage their own networks.
2. Technical Standards – Standards like ISO 20022 dictate how payment data should be formatted and transmitted.
3. Operational Rules – These outline how and when funds are settled, who bears the risk, and what protocols are followed during a dispute.
4. Compliance & Risk Guidelines – Rules around fraud detection, anti-money laundering, and data privacy help keep transactions safe and legal.

Scheme owners (like card networks) create the rules, while participants (like banks and payment service providers) follow them.

Types of Payment Schemes

There are several types of payment schemes, each serving different use cases:

Card-Based Schemes

These include Visa, Mastercard, American Express, and Discover. They allow cardholders to make purchases from merchants globally.

Bank-Based Schemes

These involve direct transfers between bank accounts. Examples include ACH in the U.S., SEPA in Europe, and Faster Payments in the UK.

Mobile & Digital Wallet Schemes

Apps like Apple Pay, Google Pay, and WeChat Pay operate under their own frameworks to facilitate mobile transactions.

Closed-Loop vs Open-Loop

• Closed-loop: The issuer and acquirer are the same (e.g., Starbucks Card).
• Open-loop: Transactions go through external financial institutions (e.g., Visa).

Domestic vs International Payment Schemes

Domestic schemes are limited to a single country or region. For example, ACH (Automated Clearing House) handles bank-to-bank transfers within the U.S.

International schemes, like SWIFT and SEPA, facilitate cross-border transactions, handling complexities like currency conversion, regulatory compliance, and time zone differences.

This is where terms like nostro account vs vostro account come into play. These accounts help banks manage international funds from different perspectives. Simply put, a nostro account is “our account with you,” and a vostro account is “your account with us.” They work together to support global settlements.

How Payment Schemes Affect Businesses and Consumers

The type of payment scheme behind a transaction affects many aspects of your experience:

• Transaction Speed: Some schemes offer real-time payments; others may take days.
• Fees and Costs: Different schemes charge varying fees to merchants and banks.
• Settlement Times: Businesses may have to wait hours or days for the money to actually arrive.
• Risk and Liability: Payment schemes outline who is responsible if something goes wrong.

Businesses often select payment schemes based on where their customers are, how much they’re willing to pay in fees, and what type of risk management they need.

Examples of Major Global Payment Schemes

Here’s a quick look at popular payment schemes around the world:

• SEPA (Europe): Enables easy euro-denominated transfers across EU member states.
• ACH & FedNow (U.S.): Handles both batch and real-time domestic bank transfers.
• UPI (India): A real-time payment system used by millions daily.
• SWIFT (Global): Used for interbank messaging and transfers worldwide.

Each system is tailored to its region’s banking infrastructure, regulations, and consumer behavior.

Regulatory Considerations and Standards

Payment schemes don’t operate in a vacuum. They are closely regulated by national and international authorities. For instance:

• PSD2 (Europe): Requires banks to open access to third-party providers via APIs.
• AML/KYC Rules: All payment schemes must comply with anti-money laundering and customer identification laws.
• Data Protection: Payment schemes must also ensure GDPR and local data privacy compliance.

These rules are why it’s crucial for businesses using international payment services to choose compliant schemes that won’t land them in legal trouble.

The Future of Payment Schemes

Payment schemes are evolving rapidly to keep pace with technology and consumer expectations. Key trends include:

• Real-Time Payments: Services like FedNow and UPI are making instant money transfers the norm.
• API Integration & Open Banking: Banks now offer APIs that let third-party apps connect directly to accounts, creating new payment experiences.
• Blockchain and Decentralized Finance (DeFi): These technologies could eventually replace or complement traditional schemes with transparent, peer-to-peer systems.
• AI and Fraud Detection: Machine learning is now being integrated into schemes to spot suspicious activity in real time.
• Programmable Payments: The next generation of schemes may allow conditional or automated transactions based on smart contracts.

As these technologies mature, schemes will need to adapt, just as they did when online payments first emerged.

And if you’re wondering how schemes fit into international transfers, don’t forget that tools like SWIFT, what is an intermediary bank, and nostro and vostro accounts all play important roles. Together, they form the network that powers global payments every second of every day.

Frequently Asked Questions (FAQs)

What is a payment scheme in banking?

A payment scheme is the set of rules and infrastructure that enable secure money transfers between banks or institutions.

Are payment schemes different from payment systems?

Yes. A payment scheme governs the rules and processes; a payment system is the actual technology and platform executing the transaction.

Can businesses join a payment scheme directly?

Some can, depending on the scheme. Others must go through a licensed payment service provider or bank.

Do all countries use the same payment schemes?

No. Most countries have their own schemes, but many also participate in international systems like SWIFT or SEPA.

How do payment schemes reduce fraud?

Through strict compliance rules, transaction limits, encryption protocols, and real-time fraud detection tools.

References

Bank for International Settlements. (2022). Correspondent banking mechanisms and the role of intermediary banks. Retrieved from https://www.bis.org/cpmi/publ/d200.pdf 

Investopedia. (2022, April 18). Intermediary bank: What it is and how it works. Retrieved from https://www.investopedia.com/terms/i/intermediary-bank.asp Swift. (n.d.). Understanding correspondent banking and its impact on cross‑border payments. Retrieved from https://www.swift.com/about-us/correspondent-banking