Topic 3: Payment Methods

Question 1

Advantages and disadvantages of making payments:

Answer 1

• Convenience for the payer
• How acceptable it is to the payee (the person/organisation being payed)
• Speed
• Safety

Question 2

What is the transaction need?

Answer 2

The need to make payments is called the ‘transaction need’, with each payment being a separate transaction. People are likely to have several different payment options for any one transaction. The choice they make will be determined by the payment methods available to them and the one they perceive to be the most advantageous

Question 3

Paying with cash:

Answer 3

People tend to use cash for everyday, low-value transactions when they are in face-to-face situations with the sellers

Although payment cards are used in more transactions than ever before, cash is still used in just under a quarter of UK transactions - though this figure continues to fall. Cash is used by people at all stages in the life cycle, from young children buying inexpensive toys to pensioners buying fruit from a market stall

Question 4

Advantages of cash:

Answer 4

The advantages of using cash for low-value transactions are that it is:

• convenient for the payer (as long as they have enough notes and coins with them)
• readily accepted by people selling the goods or the service
• instant
• low risk at low values
• helpful to those trying to budget as it makes them more aware of the money they are spending and they know how much they can spend based on how much cash they have left

Question 5

Disadvantages of cash:

Answer 5

• The transaction is not made face-to-face with the seller (so you can’t online shop)
• The transaction must be made on the same or similar dates every month (it would be difficult to travel to pay your land lord or electricity bill in person each month - what if you couldn’t make it out on time one month?)
• Paying by cash is less convenient than other methods (this could be due to the location of the seller or the demand of what’s being bought)
• Carrying large amounts of cash can be risky (it can be lost or stolen- using cheques can be a useful alternative to carrying large amounts of money)
• Some sellers prefer other payment methods (and incentives can be given to encourage the use of other payment methods). This is because: the seller has the responsibility of looking after the cash until it can be deposited in their bank account; there is a risk that the money could be lost or stolen; sellers who are paid in cash have to pay wages to employees to process the cash (count it, record amounts taken, put it in bags, take it to the bank); larger retailers have to employ security services to transport the cash safely (in contrast to electronic payments); sellers may also be suspicious of customers who wish to pay for high-value items in cash, suspecting that the customer obtained the cash illegally - this can be an unfair assumption sometimes though

Question 6

Electronic payments from current accounts:

Answer 6

Topic 1 explained that the majority of the money in the UK is held in bank accounts as electronic balances. The most commonly used account for making and receiving payments is the current account. Banks, building societies and the Post Office all offer these accounts. There are different types of current account which are designed to be used by people with different needs, however most accounts have the same key payment features

People can give their provider instructions to transfer money electronically from their account to another account on a specific date. Instructions can be given on paper, online or over the telephone. Instructions given on paper or online involve the account holder completing a form for a one-off payment or to set up regular payments from their account. These forms are often called ‘mandates’, which is another term for an official authorisation or instruction. There are a number of different types of electronic payment, designed to meet different requirements

Question 7

Standing orders:

Answer 7

Standing orders are instructions to pay the same amount of money to another account on a regular basis, such as the 5th of every month. For example, Raj and Tamsin are saving for their holiday by transferring £50 a month from each of their cureent accounts into a savings account. Instead of transferring these funds manually, they went their branch and completed forms to set up a monthly standing order of £50 from each of their current accounts. Their bank will follow these standing orders until Raj and Tamsin tell them to stop making the transactions. Using standing orders means that these transactions happen automatically with no further action from Raj and Tamsin

Standing orders can be set up and cancelled by giving instructions to the current account provider in writing, over the phone or online They can be cancelled at any time and cost nothing, as long as the account holder has enough money in their current account to meet the payment

Question 8

Direct debits:

Answer 8

Direct debits are another type of automatic payment that can be set up for a current account. Standing orders are for payments of the same amount of money each time, with the money being sent from one account to another. When people set up direct debits, they are giving permission to their provider to pay the regular bills that an organisation will present for payment. This means that the payments can be for different amounts of money each time

John Martin, for example, has signed a direct debit mandate, giving his bank permission to pay his landline telephone company from his current account. Once a quarter (in January, April, July and October), the telephone company asks John’s bank to pay a specific amount. The amount varies each time, depending on how many calls John and his family have made

Just like standing orders, direct debits can be set up and cancelled by giving instructions to the current account provider in writing, over the phone or online, and they are free of charge as long as there are sufficient funds in the account to make the payment. Unlike standing orders, direct debits are protected by a guarantee. All providers that accept instructions by direct debit agree to refund the account holder if an error is made with a transaction

Question 9

Online banking:

Answer 9

Online banking enables account holders to give instructions for account transactions via the internet. To access online banking, an account holder must first register for the service. For example, last year Sanjay applied for online banking with his current account provider by completing an online form. He set up passwords and pass numbers that he can use to prove who he is. His provider sent Sanjay a unique customer number that he uses to sign on to the online banking service. The provider also encouraged him to download security software that stops fraudsters spying on his internet activity. Each time that Sanjay signs on to the online banking service, he uses parts of his password and pass numbers to identify himself

Online banking enables account holders to set up regular payments such as standing orders and direct debits, as well as making one-off transfers between their own accounts and paying organisations and individuals. For example, earlier this week, Sanjay used online banking to transfer money from his current account to his niece Rupalli’s current account on her 25th birthday. Rupalli lives in a different town from Sanjay so online transfer is a quick, safe and convenient way of making sure she receives the money on time

Question 10

Faster Payments:

Answer 10

Faster Payments is an electronic payment service offered by all UK banks and building societies. Prior to May 2008, electronic payments were made via a payment system called Bacs. This system could take up to 3 business days to transfer money electronically. The Faster Payments Service ensures that payments arrive in the destination bank account within 2 hours of the provider receiving instructions, either online, by phone or by standing order. It is free to use the Faster Payments Service and most online payments are sent via the service automatically

Many providers set a maximum value that can be transferred using the Faster Payments service, such as £10,000 per transaction, although a few providers permit transactions of up to £100,000

Sanjay used the Faster Payments Service via online banking to pay the bills he received from the builder, plumber and plasterer who have been working on his home

Question 11

CHAPS:

Answer 11

CHAPS (Clearing House Automated Payment System) is a same-day automated payment system used for very high value payments. John Martin used CHAPS when he was buying the family home. He needed to pay £150,000 to his solicitor’s business account as part of the purchase price. To make this transaction, John went to his branch and completed a form for his provider. The bank charged him £25 to make the CHAPS payment but John felt it was worth it as the transaction was guaranteed to be secure and guaranteed to be paid into the solicitor’s business account that same day

Question 12

Mobile baking:

Answer 12

Mobile banking enables account holders to give payment instructions on their mobile phone using the internet. Account holders download a mobile banking app from their provider that includes security measures. Banking apps let account holders check balances, pay in cheques digitally, set up direct debits and standing orders, and transfer money between accounts

Since April 2014, customers can also use the Faster Payments Service via their mobile, using a service called Paym. Account holders must nominate the account to which the Paym service will be linked, and register their mobile number with their provider (Paym, 2018)

Question 13

Online payment services:

Answer 13

Online payment services, such as PayPal, enable people to pay each other without exchanging current account details. For example, Debbie wants to use Payal to buy goods on eBay. She starts by setting up her PayPal account and links it to her current account. This means that she can instruct PayPal to make payments and PayPal will withdraw the money from her current account. PayPal enables users to link their PayPal account to a debit card or credit card as well. When Debbie wants to pay using PayPal she instructs PayPal to pay an individual’s or organisation’s PayPal account by giving the recipient’s email address or mobile phone number. Using payment services like PayPal is a very safe method of paying online because sellers never see the buyer’s personal financial details. The company also protects users from any unauthorised payments made from their account

Question 14

Advantages of electronic payments:

Answer 14

The advantages of electronic payments are:
- They are fast, safe and convenient to make.
- Most are free of charge as long as the account holder has enough money in their current account to make the transaction
- Automated payments can be set up to make recurring transactions; this ensures that transfers are made and bills are paid on time without further effort from the account holder
- There are different electronic payments to meet different customer needs

Question 15

Disadvantages of electronic payments:

Answer 15

The main disadvantage of electronic payments is security. Online fraud and identity theft mean that account holders have to be very careful to follow security procedures and keep their passwords and pass numbers safe. They also need to check their account statements to make sure only the transactions they authorised have been made. If they find any suspicious transactions they should contact their provider immediately

Another disadvantage is the risk that the account holder will make a mistake. When an account holder uses electronic payments they often enter all the payment details themselves. An error such as entering the decimal point in the wrong place could mean, for instance, that an intended payment of £50.14 becomes a payment of £5,014. There have also been reports of account holders typing in the wrong numbers for the account into which they are trying to pay money and accidentally paying the wrong person

Question 16

Cheques:

Answer 16

A cheque is a payment mechanism that enables an account holder to instruct their provider to pay a specific amount of money to a specific person or organisation. Providers give current account holders preprinted cheque books (unless the account holder has a basic bank account) to complete with their payment instructions. Cheques are often used to pay money to friends or family, or to pay bills from tradespeople such as painters and decorators. For example, Jocasta sent a cheque to her brother Phil at Christmas so he could choose his own presents. When Phil received the cheque he took it to his bank and paid it into his current account. His bank then processed the cheque by creating an image of it and claimed the funds from Jocasta’s bank, a process known as clearing. After Phil paid the cheque into his account, the money was taken from Jocasta’s current account. By 23:59 on the next business day Phil was able to withdraw the money from his current account to buy himself a present

To complete a cheque, the payer writes the name of the person or organisation they wish to pay (Phil Johnson in this example), the amount in words and figures, and the date. They must sign the cheque, otherwise it will not be accepted

Question 17

Advantages of using cheques:

Answer 17

The advantages of cheques are that they are a secure way of paying money (they can only be paid into an account with the same name as the person/organisation specified on the cheque). They are also easy to carry and to use. For some small businesses, cheques are the most common way that they receive payments

Question 18

Disadvantages of using cheques:

Answer 18

Although cheque imaging has significantly sped up clearing, people or organisations that accept cheques still cannot be certain that they will receive the money immediately. Providers cannot honour cheques (that is, make the payment specified on the cheque) if the person who wrote the cheque does not have enough money in their current account to pay the transaction. In these circumstances the provider marks the cheque ‘unpaid’ and sends it back to the person who was expecting to receive the payment (the payee). This is known as the cheque ‘bouncing’ and is very rare, with only around 0.5% of all cheques returned unpaid each day

Until 30 June 2011, providers offered a cheque guarantee card that ensured cheques up to a specific value of £50, £100 or £250 (depending on what was written on the plastic card) would be paid, even if the person writing the cheque did not actually have enough money in their account to cover the transaction. Since this scheme was withdrawn in 2011, there is no guarantee of payment, so people are only willing to accept payment by cheque from people they trust

Some businesses, including many large retailers, refuse to accept cheques. This is because of the risks that cheques will be returned ‘unpaid’ and because the cost of processing cheques is far greater than the costs of processing payment card transactions.

Question 19

Decline in use of cheques:

Answer 19

The disadvantages of cheques and the advantages of alternative ways to pay mean that the numbers of cheques written and received has been falling every year since 1990. The Cheque & Credit Clearing Company (C&CCC) reports that 11 million cheques were written every day in 1990 and that by 2013 this number had fallen to 2 million cheques each day. Given the decline in the use of cheques, the UK Payments Council announced in 2009 that cheques would be phased out by 2018. However many individuals and organisations protested against this proposal; the plan was also criticised by Parliament’s Treasury select committee. Critics argued that cheques were still a useful and important payment method, for example for those running small businesses, and for the many older people who don’t feel comfortable using methods such as electronic payments. In 2011 the Payments Council decided that the use of cheques would continue for the foreseeable future

Question 20

Banker’s Drafts:

Answer 20

Banker’s drafts look similar to cheques and are processed through the clearing system. However, they are signed by the provider rather than an individual. This means that the payment is guaranteed. Banker’s drafts tend to be used for paying large sums of money when a personal cheque is not appropriate. For example, Claire is buying a new car with the money she inherited from her grandmother. The car dealer will accept a banker’s draft for the full amount and let her drive the new car away. If Claire wanted to pay by personal cheque, the car dealer would ask her to wait for 10 days to ensure the money had transferred before she could take possession of the car. Claire’s provider will charge her for issuing a banker’s draft but she is prepared to pay this additional cost for the convenience of taking ownership of the car immediately

Question 21

Payment cards:

Answer 21

Plastic payment cards are another payment mechanism that enables account holders to give their provider instructions to pay money from an account. This topic looks at cash cards and debit cards, as these are used for paying money directly from an account. The topic on borrowing discusses credit and store cards because these cards make a payment from the credit card or store card companies to the seller, which the cardholder repays at a later date

Question 22

Cash cards:

Answer 22

Cash cards allow account holders to withdraw cash from their account at a branch or using an ATM. They cannot be used to pay sellers in face-to-face situations (paying for goods in a shop, for example), over the internet or by telephone. Providers offer current account cash cards to people under 18 years old or those on low incomes to enable them to access their cash easily, 24/7 from ATMs. For example, Pete Martin, who is 16, uses his cash card to withdraw money every week from a ATM. He very rarely goes into his bank branch because there is an ATM at his local shopping centre. Cash cards are also offered on some savings accounts

Cash cards are branded as Visa or MasterCard. These two payment systems operate computer networks that enable payments to be taken from cardholders’ accounts

Question 23

Debit cards:

Answer 23

Debit cards allow account holders to access cash from their accounts and also to pay for goods in stores, over the internet, by telephone and by post. They work like electronic cheques because the payment is taken directly from the account. Unlike cheques, however, the payment is made immediately

Debit cards are branded as Visa Debit or MasterCard Maestro or Solo. Sellers advertise which brands of debit card they accept by displaying the brand logos at till points and on websites

Authorisation means that the seller is guaranteed to receive the payment. Sellers therefore encourage customers to pay by debit card, even though the seller has to pay their bank a small fee for accepting debit cards

Many of the larger supermarkets offer a cash back service of £50 (or £100 in some stores) for debit cards. For example, Ian is at a till in his local supermarket. He realises that he is low in cash so when he pays for his shopping, he asks for £30 cash back. The transaction made in his debit cards if for the cost of the shopping plus the £30 cash back. As the transaction is fully authorised the supermarket is guaranteed to receive the full payment. The supermarket cashier gives Ian £30 in cash from the till. Using cashback means Ian doesn’t need to go the ATM for cash

Question 24

Pre-payment cards (e.g. Oyster card)

Answer 24

Pre-paid cards are like electronic purses. Cardholders load the card with money and then use it to pay for goods and services. For example, Petra lives and works in London. She has a pre-paid card called an Oyster card for payment for journeys in the London bus or Tube system. To top up her Ouster card she taps the Oyster card reader at the ticket machine and decided how much money to load onto it. She inserts cash it her debit card into the payment machine and the money is added to her Oyster card. Each time Petra travels by bus or Tube she touches her Oyster card to a card reader and the cost of the travel is deducted from her card. The Oyster card works out the cheapest rate to charge for whatever journey Petra takes. When the balance gets low she repeats the process of loading money onto her Oyster card, or she can set up an auto top-up, so that the balance is topped up when it falls below a certain amount

Question 25

Contactless cards:

Answer 25

Some debit or pre-paid cards can also be used for contactless payments of up to a specified limit per transaction. This service allows cardholder to make transactions by holding their card near a reader, rather than by inserting bit into a device and entering a PIN. The advantage of contactless technology is that transactions can be made very quickly. Occasionally the system will request a PIN as a security check to reduce fraud. Both Visa and MasterCard offer a contactless service on their cards and there are over 100 million contactless cards in the UK.

Contactless cards were introduced as an alternative to cash. By 2017, billions of pounds were being spent each month using contactless technology

Smartphones can also be used to make contactless payments. For example, Apple Pay uses mobile technology that allows customers with an enabled iPhone to make contactless payments, in place of credit and debit cards. Smartwatches can also be set up to make contactless payments, such as through Apple Pay or Google Pay

Question 26

What are the different payment methods for making payments abroad?

Answer 26

When people travel to different countries they can pay using:

• cash in the local currency
• a debit card
• a pre-paid travel card
• travellers’ cheques

Question 27

Using debit cards for payments abroad:

Answer 27

Debit cards can be used in stores, hotels, restaurants, etc, that display the logo of the card company, such as Visa or MasterCard. The transactions will be made in the local currency and the provider will use an exchange rate to translate this amount into pounds. Cardholders may be charged a fee for using their debit cards abroad. Debit cards can also be used in ATMs to withdraw cash in the local currency

Question 28

Using Pre-paid travel cards for payments abroad:

Answer 28

These are plastic payment cards that can be loaded with money and then used to make payments in other countries, wherever sellers accept the brand (Visa or MasterCard). They can also be used to withdraw cash at ATMs. Travelex and Caxton FX are two of the main providers of this type of card

Pre-paid travel cards operate like an electronic purse and can be topped up with additional money. People can choose which currency to load onto their travel card and are not restricted to paying in this currency because the currency can be converted to the local currency at the point of sale. Travel cards are quick and easy to use. They are also a safe way of carrying money when travelling. If the card is lost or stolen the card can be blocked and the remaining balance refunded

Question 29

Using Travellers’ cheques for payments abroad:

Answer 29

These are pre-printed cheques for set amounts of currency, such as 50, 100 or 500 US dollars. They can be used to pay in shops and hotels, for example, and can be exchanged at banks for local currency. When someone buys travellers’ cheques they must sign each one. When they want to pay using a traveller’s cheque they counter sign the cheque. Sellers can make sure the two signatures match before accepting the cheque

Travellers’ cheques are easy to use, accepted by a wide range of sellers and safe. If they are lost or stolen, the issuing company (such as American Express) will replace them

People usually need to show photographic identification when buying travellers’ cheques. This is to guard against money laundering, as criminals could buy travellers’ cheques with stolen banknotes that can be traced through their serial numbers, then exchange the travellers’ cheques for banknotes with different serial numbers

Question 30

Comparing methods of payment:

Answer 30

The choice of payment method usually depends on:

• how convenient the payer finds different methods
• which methods the seller accepts
• how quickly the transaction can be completed
• how safe the method is perceived to be

The Cheque & Credit Clearing Company survey conducted in 2014 asked what people considered 5e most convenient method of making various transactions, as alternatives to using cheques