Investigating methods of making and receiving payments

Investigating methods of making and receiving payments

Making and receiving payments • A business makes payments for what it buys, • In return it receives payments for goods it sells or services it provides.

Exam information • In the exam you will need to assess the suitability ofa number of cash and non-cash payment methods, including: • cash; • cheque; • credit card; • debit card; • credit transfer/direct debit. • You will need to understand how each payment method works, what costsare involved for the buyer and the seller, and how much time each method ofpayment takes.

cash • Cash is normally used for transactions involving small amounts of money • Transaction is also a face-to-face transaction when the supplier and customer meet • A receipt is usually provided by the seller and proof that the transactions taking place in the money has been received

Cash: advantages • Money is received instantly • The risk of fraud is quite minimal

Cash: disadvantages • It is difficult to get hold of large amounts of money as customers (£250 from a cash machine) & customers usually have to give notice to the bank if they are going to withdraw large amounts of money • It is physically difficult to carry in store large amounts of money • There is a large security risk of carrying out transactions involving money

cheque • A cheque is a promise to pay a certain amount to a person – money is transferred from the customer’s bank to the supplier’s bank • Cheques can be used in face-to-face transactions that can also be sent through the post

Cheque: advantages • Can be used payments of large amounts of money with little risk • A receipt is not needed as the transaction appears on bank statements • Cheques can be sent through the post as they can only be paid into the payee’s bank account • The cheque system is efficient and rarely goes wrong

cheque: disadvantages • There is a delay between writing a check on the many appealing in a payees account – the bank does not show the money is a credit until the cheque has been cleared • If cheque-book stolen then there is a chance that the thief could use it to spend money • The mistake is made on the cheque, the bank will not accept it and it will be returned • Fees are charged on business accounts and many check transactions can cause these to be implemented

Credit card • When the card is used the statement is sent listing the transactions that particular month • Person involved had the option to pay off the amount in full will pay part of it and incur interest on the rest • This and therefore has a certain amount of credit for they have to pay the amount in full (usually 30 days)

Credit card: advantages • Allows the holder of the credit card to purchase a product immediately and defer payment for that product • No cash is involved • The supplier receives the money within 2 to 4 days • Payment can be made over the telephone or using the Internet • Once the transaction is confirmed payment to the supplier is guaranteed • Credit card holders can use cash machines although they pay interest on the money

Credit cards: disadvantages • Interest rates can be extremely high if the cash is on paid off in full • Cash withdrawals are very expensive in terms of interest rates • Interest rates are not always transparent as the method of calculating this is quite complicated • This costly for a supplier to install and pay for an electronic terminal • There is a risk of fraud involved for the credit card companies usually bear this risk

Debit card • Issued by banks in use by customers to make purchases • Many of debited automatically from a bank account • There is no interest charge and money is transferred quickly

Debit card: advantages • No need for cash • Transactions are quick • No interest is charged • Payment is guaranteed once the transaction has been validated • less vulnerable to fraud as use of the card is dependent on money being present in a customer’s current account

Debit card: disadvantages • There is a charge for processing transactions involving debit cards but this is less than for credit cards • Debit cards can be rejected if there is insufficient funds in the current account • There is a cost for the supply and install in the terminal for debit cards

Credit transfer/direct debit • This is the automatic transfer of money from one bank account to another • The system is called the Bank Automated Clearing System (BACS)which offers two main services: • Direct credit (credit transfer) • Direct debit

Direct credit (credit transfer) • Money is paid from a business bank account to another bank account using electronic transfer • This is the most common way of paying wages and salaries today • The government also uses credit transfer to pay housing benefit company dividends pension payments except • Document is usually sent through the post which confirms the transfer will take place • For supplies this is the remittance advice slips

Direct credit/credit transfer: advantages • No cash is involved so there are few issues regarding security • It is a cheaper system when using cheques which businesses used in the past • Accurate records kept of the transactions that take place

Direct credit/credit transfer: disadvantages • Is essential to check any credit transfer payments very carefully as minor errors can cost a large company or government millions of pounds • Banks usually need some sort of advance notification that the payments are to be processed to ensure that cash is available to be paid

Direct debit • People increasingly pay, electricity, gas, water, telephone, insurance, etc. by direct debit • Initially a form is filled in which gives the customer’s bank account details and authorises payments to a particular business • The then sends request for payment to the customers bank on a particular day of a month throughout the year ( or whichever time period they have selected) • The business must send a notification to the customer in advance of the payment due date, stating the amount and date on which it will be collected • Customers have the right to cancel the direct debit at any time

Direct debit : advantages • No cash involved • Guaranteed payment to businesses • Customers don’t have to remember to right-hand post cheques • there is flexibility in the system for customers to vary the dating amount of payment • The customer receives written notification of payments • Only authorised businesses can use the system which prevents fraud

Direct debit: disadvantages • Customers may fail to check bank statements and miss increases in prices or the continuation of payment service they do not use • Customers can set up lots of direct debits and run short of cash

Standing orders • Standing orders a very similar to direct debits • Standing orders are made at prearranged intervals and the date and time of the amount paid cannot be varied • Standing orders are a direct arrangement between two banks and do not involve BACS

Investigating methods of making and receiving payments