What Is a Payer? Types and Examples

What Is a Payer?

The term payer refers to an entity that makes a payment to another entity. While the term payer generally refers to someone who pays a bill for products or services received, in the financial context, it often refers to the payer of an interest or dividend payment.

The term is also specifically used when discussing swap agreements. In an interest rate swap, the payer is the party who wants to pay a fixed interest rate and receive a floating rate of interest.

Understanding Payers

The term payer has many applications across finance. In a purchase agreement, the payer can be the person or company purchasing an item or service. The payee is the one receiving payment and often delivering that good or service. In the case of a dividend-paying stock, the payer is the issuer of the stock who is paying the investor the stock dividend.

In the case of fixed-income instruments, the issuer of the debt is the payer of periodic coupon or interest payments to the investor. In the case of an interest rate swap, the payer is the party that pays a fixed interest rate throughout the life of the swap.

In return, they receive a payment based on a floating interest rate. Being the payer in an interest rate swap can be useful if you think interest rates are going to go up. As the payer, you pay a fixed rate to the counterparty and receive from them a payment that can increase if interest rates increase. This would lead to a profitable position.

Types of Healthcare Payers

In the healthcare industry, a payer is an individual or organization that pays for the care services that an administrator provides to patients. The most common use of this term is concerning private insurance companies that provide their clients with health insurance plans and coverage for health-related services.

The three main types of healthcare payers are commercial, private, and government/public payers. Commercial payers are insurance companies that are publicly traded, private payers are private insurance companies, and government/public payers are government plans such as Medicaid and Medicare.

Governments As Payers

In some cases, governments are payers, with various instruments, including the following types of vehicles:

• Treasury bonds. These are issued by the federal government to finance its budget deficits. These are considered to be risk-free, and consequently, the payer offers the smallest yields.
• Other U.S. government bonds. Issued by federal agencies like Fannie Mae and Ginnie Mae, yields are higher than Treasury yields, but interest on the bonds is taxable at both the federal and state levels.
• Foreign bonds. Payers promise to pay back the principal and make fixed-interest payments in another currency. Exchange rates thus tend to determine how a foreign bond fund performs; more so than interest rates.
• Mortgage-backed bonds. With a high face value of $25,000, their value drops when mortgage prepayments increase. Consequently, they don't benefit from declining interest rates, as other bonds do.
• Municipal bonds. "Munis" are issued by U.S. states and local governments, in both high-yield and investment-grade and high-yield forms.

Examples of Stock Dividend Payers

A dividend-paying stock is a stock that provides its shareholders with an income payment on each share held. Each company can have a different dividend payment period; however, most dividend stocks pay quarterly.

Apple is a stock dividend-paying company that pays its dividends every quarter. A shareholder will receive a dividend payment four times a year from Apple. Apple's last dividend payment of $0.23 per share was made on Nov 09, 2022.

The Bottom Line

A payer is an individual or organization that makes payments. In finance, a payer is an entity making payments on investment products, such as bonds or dividends on stocks. In the healthcare industry, payers are the organizations providing payment for medical services.