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 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• 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:

1. Direct credit (credit transfer)2. 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