A1: Function and role of money Flashcards
What is unit of account?
The function of money that enables the use to keep accounts, value transactions
What is means of exchange?
An open, organised marketplace for commodities, stock, securities, derivatives and other financial instruments
What is store of value?
An asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without deteriorating in value. - the value of the product can neither lose the amount its currently worth but will rather stay the same amount or will gain more worth
What is legal tender?
Legal tender is legally recognized money withing a given political jurisdiction
What is Risk, Rewards, Borrowing, Spending and Saving?
Risk -
Rewards - This can be winning money
Borrowing - This is when someone takes a loan from someone or the bank
Spending - This can be spending your own money or spending money from a credit card
Saving - Saving up money - this could be in a bank account or saving up cash
What are the different ways of paying and what are their definitions as well as one advantage and disadvantage?
Part one - Cash, Debit, Credit, Cheque, Electronic, Direct, Standing order.
Cash - Note and coins. Advantage - Most widely accepted form of exchange. Disadvantage - Can be lost or stolen
Debit card - Issued by banks with payments for goods and services being deducted directly from a current account. Advantage - Secure method of payment with low risk of theft. Disadvantages - Short time lapse between making the transaction and the money being withdrawn from the customer’s account may result in overspending.
Credit card - Issued by financial institutions allowing customers to delay payments for goods and services. Advantages - Allows a period of credit that is interest free, e.g one month. Disadvantages - Interest is charged on balances not paid off within a month.
Cheque - A written order to a bank to make a payment for a specific amount of money from one person’s account to another account. Advantage - Low risk form of payment as the cheque can only be cashed by the named payee. Disadvantage - Expensive for the consumer if the bank refuses to clear the cheque, i.e it ‘bounces’.
Electronic transfer - Payment is transferred directly from one bank account to another. Advantage - Provides a record of payment. Disadvantage - Risk of loss if the transfer is incorrectly set up.
Direct debit - An agreement made with a bank allowing a third party to withdraw money from an account on a set day to pay for goods or services received. Advantages - An easy way to make regular payments. e.g. utility bills. Disadvantages - If the payer makes a mistake and takes too much it is the payee’s responsibility to claim back the money.
Standing order - An agreement made with a bank to transfer a fixed sum of money to a third party account on a set date on a regular basis. Advantages - The same amount is paid each time making it easier for the payee to plan and budget. Disadvantages - Payments are taken regardless of the customers balance which could lead tot eh unplanned use of an overdraft facility.
What are the different ways of paying and what are their definitions as well as one advantage and disadvantage?
Part two - Pre-paid, Contactless, Charge, Store, Mobile, Banker’s Automated Clearing Services, Clearing Houses Automated Payment Systems.
Pre - paid card - Money is uploaded onto a card with transaction then being withdrawn to reduce the balance. Advantages - Can set a budget in advance to avoid overspending. Disadvantages - No protection if lost.
Contactless card - Cards containing antennae allow money to be transferred when the card touches a contactless terminal. Advantages - Secure method or making payments. Disadvantages - Often only accepted for relatively small transactions.
Charge cards - Issued by financial institutions allowing customers to delay payments for goods and services for a short period of time. Advantages - Reduces risk of running up debts. Disadvantages - Must be paid in full each month, often an annual fixed fee is applied.
Store card - Issued by a retail outlet so that customers can delay payments for goods and services. Advantages - Allows a short period of credit that is interest free, can also often offer loyalty schemes, discounts and special promotions or privileges. Disadvantages - Only accepted in issuing store in issuing store or linked associations.
Mobile banking - The ability to carry out financial transactions using mobile devices such as phones or tables. Advantages - Convenient as can be used at any time and place, as well as being secure. Disadvantages - Features are still limited and hence mobile banking does not offer all of the functionality of interest banking.
Banker’s Automated Clearing Services (BACS) - A system that allows the transfer of payments directly from one bank account to another. Advantages - Faster payment allows almost instant transfers that are guaranteed within 2 hours. Disadvantages - Faster payment is not offered by all banks or branches and the customer may therefore have to default to BAC’s which van take three days to transfer payments.
Clearing House Automated Payments (CHAPS) - A system that allows the transfer of payments directly from one bank account to another. Advantages - Transfers can be made the same day assuming instructions are received prior to a set time.
What is a current account and what are the features?
A current account is an account with a bank or building society that is designed for frequent use. Money can be paid in and withdraw on a daily basis without the need to give notice.
- Rate of interest paid on any positive balance
- Rate of interest charged in a negative balance
- Overdraft limit
- Charged on unauthorised overdrafts
- Additional incentives
What are the different types of a current account?
Standard - This is a normal account offered to customers with a reasonable credit rating it includes standard features such as the ability to pay and withdraw money, cheque book, debit card, interest payments on positive balances and a pre - agreed overdraft limit
Packaged, premium - Offers additional features to a standard account. for example car and house insurance, credit card protection, breakdown cover and cash back on certain transactions. Bank may charge additional fees, could be hidden costs
Basic - Offers only limited features designed for those customers who may otherwise find it difficult to open a bank account due to poor credit ratings. This does not offer a overdraft for customers as well as it wont offer to pay interest on a positive balance.
Student - This is designed to meet the needs of learners. Some features on this account includes, overdraft limit, incentives to join the bank, for example a student would be able to get a free rail card or cash.
What are the advantages and disadvantages to the different current accounts?
Standard - Advantages - Offers the holder a wide range of facilities including a cheque book, debit/cash card and possibly an overdraft facility. Disadvantages - Potentially high charges on the use of an overdraft facility.
Packaged, premium - Advantages - Convenient for receiving regular payments, e.g. wages and making regular withdrawals. Disadvantages - The package offered may not offer value for money or meet the needs of the individual account holder.
Basic - Advantages - Offers an easy first step for individuals to gain access to basic banking facilities, e.g. the ability to pay in and withdraw cash. Disadvantages - Limited facilities, e.g. no debit card or overdraft facility.
Student - Advantages - Bonuses offered are designed to meet the needs of learners, e.g. discounts on travel or small lump sum cash payments. Disadvantages - Overdraft facilities could encourage overspending.
