Some “private” companies have developed payment system networks that facilitate commerce across international borders (Clearing House Interbank Payment System or CHIPS, the Society for Worldwide Interbank Financial Telecommunications or SWIFT[1], VISA, MasterCard, AmEx). Essentially, these companies facilitate transactions by agreeing to act as an intermediary between a seller and a purchaser. They add stability and certainty to the transaction by defining the rules that govern it. A seller knows what it has to do to be entitled to payment under the system, and a buyer knows what obligation it is assuming by using the system as a medium of payment. The value of this certainty is to allow an unknown buyer and seller to recognize that a known set of rules will govern the transaction, facilitating a broader acceptance on the part of both parties.
These common rules are established by contract. The seller must agree to abide by the system’s rules to be guaranteed of payment by following them. The buyer, or more commonly the buyer’s financial institution that acts as its agent in processing the transaction, agrees to abide by the same rules. Since the relationship is based on contract, the rights, responsibilities, and liabilities for all the parties are established. Again, this arrangement reduces the occurrence of disputes since the losses in such cases are allocated according to the terms of the agreement one signs to become part of the system.
To the extent that disputes do arise within the context of these payment systems, the contract defines the forum state and establishes the applicable law. The extent to which these contractual provisions may be enforceable is an important consideration in Internet commerce, but not a question unique to the banking and payment systems area. Consequently, it is not one that is resolved within the context of this discussion. However, to the extent that such forum selection and choice of law provisions may be enforceable in general as between sophisticated companies engaging in a significant amount of Internet commerce, the participants in the banking and payment systems world fit this model perhaps better than most industries.
While the principles governing these systems seem similar to the government-based systems described earlier, the term “private” must be carefully understood in this connection. These companies are private in the sense that they are owned by investors, and are not government agencies like the Federal Reserve Bank, or quasi-governmental constructs, like the Bank of England. These private companies are able to process and settle an enormous volume of transactions within and among themselves, as well as between themselves and other banking institutions. However, at some point transactions within these private networks intersect (and indeed, sometimes must intersect) with the governmental payments system. This case may arise because some party in the transaction chooses to involve the governmental system. Or it may be that monetary transactions involving a particular jurisdiction can only be processed through a governmental system (all banks in State X have been nationalized.) Or, in an extreme case, a central bank may step into the transaction to guarantee payment as a “lender of last resort” or “guarantor of ultimate settlement” to maintain system stability.
Thus, the private system and the government system are linked and, if the combination is viewed as whole, a kind of quasi-public/quasi-private operation is presented. Around the globe, most systems present some form of mixture in practice, with the exact admixture being a product of a variety of local historical and cultural factors. In addition, the dual nature of the overall structure is a source of continuing internal tension that is often healthy and often not.
