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Methods of payment

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Chapter 8 Methods of Payment
Chapter 8 Methods of Payment
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Methods of payment

  1. 1. Methods of payment Dott. Stefano Blanco Dott. Massimiliano Fontana New Literacy Set project 2015-2017 1
  2. 2. What’s money? 2 • We call “legal tender” any official medium of payment recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation. • The national currency is legal tender in practically every country.
  3. 3. What are money functions?  It provides a method to compare the value of dissimilar objects: 1. A medium of exchange – avoids the inefficiences of a barter system (coincidence of desires) 2. A unit of account – measurement of market value of goods and services. It is divisible into smaller units, fungible and has a specific weight 3. A store of value (but mind inflation!) 3
  4. 4. Payment instruments  Bank cheques  Bank drafts  Bank and wire transfers  Direct debit  Credit cards 4
  5. 5. Bank cheques 5 The check, as the promissory note, is a credit instrument as it has the following characteristics Credit instruments Characteristics Certify the existence of a right ensure the possibility of relying the right that incorporate allow you to transfer the right from a person to another
  6. 6. How bank cheques work 6 recipient drawee (Drawee bank) Tractor - issuer (Account holder) Pays the check on sight Delivers the check Orders the payment 1 23
  7. 7. Some technical aspects of the check 7 But mind that a cheque can be endorsed only if there are funds in the debtor’s current account. Sources of income for funds to endorse a cheque can be: • from money deposited prior to the issuance of it • from a credit line or overdraft granted by the bank to the debtor. If the bank cheque is issued without the presence of funds on the current account, then it is defined as a "blank cheque" or “overdrawn.". This is an illegal practice in some countries.
  8. 8. Main features of a cheque 1. Cheque is an instrument in writing 2. Cheque contains an unconditional order 3. Cheque is drawn by a customer on his bank 4. Cheque must be signed by customer 5. Cheque must be payable on demand 6. Cheque must mention exact amount to be paid 7. Payee must be certain to whom payment is made 8. Cheque must be duly dated by customer of bank 9. Cheque has 3 parties: Drawer, Drawee & Payee 8
  9. 9. How bank drafts work 9 Applicant issuing bank Beneficiary pours money delivers the check Promises to pay presents the check for paymentSends the check 1 2 3 4 5
  10. 10. The bank check and the draft check The bank check  three subjects appear: driving (issuer), the paying bank, the beneficiary .  It contains a payment order  To issue it you must have a c/ c at the paying bank  If the policyholder does not have on deposit at the bank the money is issued as "empty“  It may only be issued with the clause "not transferable" The draft check  It‘s similar to the promissory note and two subjects appear  It ‘s not necessary to be account holder to obtain the issuing.  It contains a promise of payment by a bank  If it has a lawful origin (not stolen or falsified) then it is certainly successful 10
  11. 11. The Bank Transfer 11 Debtor The one who orders the payment Debtor Bank Beneficiary Bank Beneficiary The one who has to collect The bank debits the bank account of the debtor and it transfers the funds to the beneficiary's bank the beneficiary's bank receives funds and accredits his bank account The Wire Transfer Debtor The one who orders the payment Beneficiary The one who has to collect Same Bank The bank collects the amount from the bank account of the debtor and pay the amount to bank account of payee Both have an account In the same Bank
  12. 12. Direct debit  A direct debit is when you allow a merchant to debit (take money from) your account on a regular basis to pay for goods and services  Steps are:  You agree to pay by direct debit for goods or services, for example, your electricity bills or gym membership.  You sign an agreement called a Direct Debit Request (DDR).  Money will be taken from your account until you cancel the Direct Debit. 12
  13. 13.  The credit card is a tool that configures the opportunity granted by the issuer to the cardholder to make purchases of goods and services at member stores.  Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank and it is transferred to the merchants account. 13 Credit and debit cards
  14. 14. Difference between credit and debit cards  The fundamental difference between a debit card and a credit card account is where the cards pull the money.  A debit card takes it from your banking account and a credit card charges it to your line of credit. 14
  15. 15. Credit cards 15 The two examples above relate to credit cards issued by specific companies They are at the same time payment instruments (as they replace the money in the payments) and credit instruments (as to the holder the amount is charged after a certain period of time). They are intended to also payments of some significance in shops, restaurants, affiliated hotels. At the end of the month it is sent to the client a statement of account with withdrawals made and the payments that the user is in balance. In case of loss it must be immediately notified to the issuer in order to block the use.
  16. 16. Debit cards/ATM cards 16 The debit or ATM card has become with time a multifunction card. Besides the possibility of withdrawing cash money from any ATM outside the bank, it has been enabled to many other functions: - Request for account statement and balance - Payment of spending at POS (point of sails); - Pay tolls; - Up to all of assisted payment functions guaranteed by the classic credit cards. Magnetic Band containing the card holder data Front Back
  17. 17. 17 Credit Card versus Debit Card comparison table Credit Card Debit Card About Credit cards are lines of credit. When you use a credit card, the issuer puts money toward the transaction. This is a loan you are expected to pay back in full (usually within 30 days), unless you want to be charged interest. Any time you use a debit card to buy something, money is deducted from your account. With a debit card, you can really only spend the money you have available to you. Connected To Not required to be connected to a checking account. Checking or Savings Account Monthly Bills Yes No Application Process Somewhat difficult, depending on one's credit score and other details. Easy, with basically no barrier to receiving a debit card. Spending Limit The credit limit set by the credit issuer. Limits increase or stay the same over time as a borrower's creditworthiness changes. However much is in the bank account connected to the card. Interest Charged If a credit card bill is not paid in full, interest is charged on outstanding balance. The interest rate is usually very high. No interest is charged because no money is borrowed. Credit History Responsible credit card usage and payment can improve one's credit rating. Credit cards typically report account activity to at least one of the three major credit bureaus on a monthly basis. Does not affect credit history. Overdraw Fees Low. Some credit card companies allow to overdraw amount over the maximum credit line with a fee. High "overdraft" fees. Possible to overdraw amount over the account limit. PIN This is uncommon, but PINs are being phased in. Usually yes
  18. 18. Online payments  Paypal is a worldwide online payments system that supports online money transfers and serves as an electronic alternative to traditional paper methods like checks and money orders  Bitcoin is a form of digital currency, created and held electronically.  It’s decentralized. No single institution controls the bitcoin network, it’s independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.  It isn’t physically printed.  It’s the first example of a growing category of money known as cryptocurrency.  https://www.youtube.com/watch?v=Um63OQz3bjo 18

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