• A business makes payments for what it buys,
• In return it receives payments for goods it sells or services it
provides.
• In the exam you will need to assess the suitability of a 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 costs are involved for the buyer and the seller, and how
much time each method of payment takes.
• 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
• Money is received instantly
• The risk of fraud is quite minimal
• 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
• 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
• 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
• 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
• 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)
• 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
• 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
• 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
•
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•
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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
• 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
• 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:
1. Direct credit (credit transfer)
2. Direct debit
• 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
• 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
• 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
• 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
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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
• 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 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