Understanding Financial Services: Banking & Payment Methods

2. Chapter 8

3. Financial Services for Individuals and Households

4. Learning Intentions • Upon completion of this chapter you should be able to: • Describe the services offered by Ireland’s major financial institutions • Distinguish between a current and a deposit account • Explain the various methods of making payments from a current account • Analyse a current account statement • Outline the benefits of online banking • Recognise the security issues of banking online • Explain the use of credit and charge cards

5. Financial Institutions • A financial institution provides financial services for its customers. These services include: • Storing money • Managing payments • Providing loans • Examples of financial institutions in Ireland include: • Commercial Banks • An Post • Credit Union • Building Societies

6. Services Offered by Financial Institutions • Current accounts • Deposit accounts • Loans (see Ch. 10) • Bill payment and money transfer facilities • Credit cards • Internet and telephone banking • Foreign exchange services

7. Deposit Accounts vs. Current Accounts • Deposit Account • Used to save money • Savings earns interest • Interest subject to Deposit Interest Retention Tax (DIRT) • Current Account • Used for daily banking and bill payment • No interest is earned • ATM and debit cards available • Chequebook available • Overdraft facility available • Can make direct payments to other accounts by Standing Order (SO), Direct Debit (DD) and Credit Transfer (CT) • Allows for receipt of wages via Paypath

8. Opening a Current Account • When opening a current account, you will need to provide: • Identificationshowing a photo e.g. passport or driving licence • Proof of address e.g. recent Electric Ireland bill or phone bill • A Personal Public Service Number (PPSN)

9. Moving Towards a Cashless Society • Financial institutions offer a range of services which enable customers to make payments without the need for cash and often without the need to visit the financial institution. • On account of the increased use of these services, customers have less need to carry cash or use it to pay for goods and services. • This is helping to create a ‘cashless society’ where the use of ‘plastic money’ and ‘electronic fund transfer’ is increasingly common.

10. Automated Teller Machines (ATM) • Services available at an ATM: • Withdraw cash • Check your balance • Order a cheque book • Pay some bills • Top up your phone credit • Lodge money • Request a statement

11. Debit Cards • These cards allow consumers to pay for goods and services without using cash. • Debit cards contain a small electronic chip and the account holder enters their 4 digit Personal Identification Number (PIN) into the card machine to authorise its use. This is called a ‘Chip and PIN’ system. • Once the payment is approved, the money is electronically transferred from the cardholder’s current account to the retailer’s account. • Unless an overdraft has been arranged in advance, cardholders can only spend money which they actually have in their account. • For small amounts, a contactless payment system can be used and a PIN is not required.

12. Credit Cards • Buying on credit means ‘buy now, pay later’. • Credit cards allow cardholders to buy goods and services even when they don’t currently have enough money to pay for them. • Each credit card has a specific credit limit, depending on the cardholder’s income and ability to repay. • The purchase is authorised using a chip and PIN system and the cardholder receives a bill at the end of each month. • Activity • How is this different from a debit card?

13. Credit Cards • If the bill is paid in full, no interest is charged. • A relatively high rate of interest is charged on any unpaid balances. • Credit cards are particularly useful for making online purchases. • VISA and Mastercardare examples of well-known credit cards.

14. Charge Cards • A charge card is similar to a credit card since it involves buying goods now but paying later. However, unlike a credit card the account must be settled when the statement arrives. • Well-known charge cards are American Express and Diners Club.

15. Money Transfer Facilities from a Current Account • Standing Order: The account holder instructs the bank to automatically pay a fixed sum of money from a current account on a specified date. It involves a recurring payment and is used to pay bills which are regular and fixed, e.g. rent. • Direct Debit: A current account holder gives permission to another person or business to request the withdrawal of variable amounts from a current account. It is also a recurring payment but is used to pay bills where the amount may vary, e.g telephone, gas and electricity. • Credit Transfer: This transfers money from one current account to another. It involves a once off payment. • Paypath:The employer pays wages directly into the bank account of employees.

16. Cheques A cheque is a written instruction from a current account holder to their bank. It tells the bank to pay a specific amount of money to a named person or business. With the growth in electronic payments, cheques are used less frequently than in the past.

17. Bank Statements A current account holder will receive a bank statement from his or her bank on a regular (monthly or quarterly) basis. This statement shows all account transactions during the time period (i.e. the money going into and out of an account). The balance column of the statement shows a continuous (or running) balance. It decreases when payments are made (debit) and increases when there are lodgements (credit). Turn to pg.73 of your Time for Business textbooks to see an example of a bank statement.

18. Internet and Telephone Banking • This convenient service allows customers to access their accounts all year round and at any time of the day or night. • It enables customers to pay bills, transfer money and check their account balance. • The financial institution issues customers with a registration number and a personal access code (PAC) for accessing their account online or over the telephone.

19. Be Secure When Using Online Banking When you log into your bank account, check that you see the little padlock to the side of the web address. The address will change to start with https://. The ‘s’ stands for ‘secure’. You will see these security alerts on payment sites for retail websites too. Criminals use fake emails and fake websites in order to trick people into giving away passwords and bank details. This is known as phishing.

20. Abbreviations • ATM:Automated Teller Machine • PIN: Personal Identification Number • PAC: Personal Access Code • DIRT: Deposit Interest Retention Tax • SO: Standing Order • DD: Direct Debit • C/T: Credit Transfer

21. Abbreviations • IBAN:International Bank Account Number • BIC: Bank Identifier Code • SEPA: Single Euro Payments Area • EFT: Electronic Fund Transfer • POS: Point of Sale • EFTPOS: Electronic Fund Transfer at Point of Sale

22. Foreign Exchange • Commercial banks, building societies, An Post and credit unions all sell foreign currency to households and businesses. This foreign currency is used to pay overseas suppliers or to spend on holidays. • An exchange rate is the price at which one currency can be exchanged for another. • When converting euro to foreign currency, multiply by the bank ‘sell’ rate. • When converting foreign currency into euro, divide by the bank ‘buy’ rate.

23. Foreign Currency Activity • Use the table above to convert €500 to Pound sterling • Use the table above to convert 3,000 Yen to Euro

24. Foreign Exchange: Suggested Solutions To convert 500 Euro to Sterling Multiply 500 by the ‘bank sells’ Sterling rate: To convert 3,000 Yen to Euro Divide 3,000 by the ‘bank buy’ rate:

25. Recap and Review • Can you do the following? • Describe the services offered by Ireland’s major financial institutions • Distinguish between a current and a deposit account • Explain the various methods of making payments from a current account • Analyse a current account statement • Outline the benefits of online banking • Recognise the security issues of banking online • Explain the use of credit and charge cards