Explain the payment system in context of Electronic Commerce.

A payment system is a system for the transfer of money. What makes it a "system" is that it employs cash-substitutes; traditional payment systems are negotiable instruments such as drafts (e.g.,checks), credit cards and other charge cards, documentary credit (such as L/C) and electronic funds transfers. Some payment systems include credit mechanisms, but that is essentially a different aspect of payment. Payment systems are used in lieu of tendering cash in domestic and international transactions and consist of a major service provided by banks and other financial institutions. In the US, they are regulated by different state statutes (UCC) and Federal regulations.

Additional forms of payment systems (including physical or electronic infrastructure and associated procedures and protocols) are used to settle financial transactions in automated teller machine networks, stored-value card networks, bond markets, currency markets, and futures, derivatives, or options markets, or to transfer funds between financial institutions. Due to the backing of modern fiat currencies with government bonds, payment systems are a core part of modern monetary systems.

The term electronic payment can refer narrowly to e-commerce - a payment for buying and selling goods or services offered through the Internet, or broadly to any type of electronic funds transfer.