In this article, we will look at push and pull payment transactions, two key concepts in payments. At first, let’s consider the definitions of the words pushing and pulling. Pushing means exerting a force on somebody or something in order to move it away from oneself. Pulling is applying force on somebody or something also, but in order to cause movement towards oneself. So both pushing and pulling require the usage of force, however the direction of the movement is different. In push and pull transactions, the force is “applied” when the originator sends a message and the direction of the movement is determined by the way money flows.
Below is the video I made on push and pull transactions.
A payment transaction involves two end parties: a debtor whose account is debited and a creditor whose account is credited. The payment message for the transaction may be initiated by either of the end parties. Read the next paragraphs to understand how push and pull transactions work. Look at the pictures carefully.
The diagram below depicts a push transaction. You can see how the payment message flows and how the money flows.
A push transaction is initiated by the debtor to send money to the creditor. The payment message flows from the debtor to creditor as well as the money. In the payments system, the Debtor bank is debited while the creditor bank is credited. The debtor bank takes that money from its customer and the creditor Bank credits his customer’s account with the funds received from the payments system. Examples of push transactions are SEPA Credit Transfer, Wire Transfer, Direct Deposit (also called Direct Credit) for payroll for instance, etc. In each case, the debtor instructs his bank to send money to the beneficiary.
Now let’s consider pull transactions. The below picture depicts how they work and the difference with push transactions.
A pull transaction is initiated by the creditor to take money from the debtor. The payment message flows from the creditor to the debtor. However, the money flows in the opposite direction. In the payments system, the Debtor bank is debited while the creditor bank is credited. The debtor bank takes that money from its customer and the creditor Bank credits its customer’s account with the funds received from the payments system. Examples of pull transactions are SEPA Direct Debit, Checks, Card payments, etc. In each case, the creditor instructs his bank to collect money from the debtor. When a merchant deposits a check, he is instructing his bank to collect funds from the check writer. Pull transactions are therefore also called collections.
Another important feature of pull transaction is the authorization that the creditor must get from the debtor to collect money from the debtor’s account. That explains why a check without signature cannot be collected and why a PIN code is needed for a card transaction, to name two examples. Obtaining debtor’s authorization is an important regulatory requirement for creditors in many countries today.
Non-sufficient funds risk for push and pull payments
Push payments are less risky than pull payments. In a push payment, the transaction is initiated by the party who has the money and wants to send it. The bank checks if there is sufficient funds on his account before executing the transaction. In case of non-sufficient funds, the transaction will not be accepted for execution. As a consequence, when a push transaction is executed, the beneficiary is almost certain that he will get his money. It is said that push payments do not bounce.
Pull payments are much riskier since they are initiated by the creditor. The Bank executing the transaction, does not know if the debtor account (with debtor bank) has sufficient funds. In case there is non-sufficient funds on the debtor account at due date, the payment will be rejected and the creditor will not get his money (at least not that time). It is said that pull payments bounce.
Card transactions are the exception. But this is possible because in card networks, there is a message called the authorization which ensures that there are sufficient funds on the debtor’s account when the transaction takes place at the merchant’s. When the merchant initiates the pull transaction later to collect the funds, he is almost certain that funds are available. It is said that card transactions are guaranteed pull transactions.
This ends our analysis of push and pull payment transactions. Now think of the payment instruments you know and ask yourself if it is a push or a pull transaction. Do it before our next post which will be about another fundamental concept in payments: The four corner model applied to SEPA Credit Transfer.