Functions of Money & Methods of Paying

Question 1

What are the 4 functions of money?

Answer 1

Unit of Account

Means of Exchange

Store of Value

Legal Tender

Question 2

What is ‘Unit of Account’

Answer 2

It allows us to place monetary value on goods and services.

The price of goods and services show the unit of account, for example a chocolate bar is 60p or a new car is £30,000.

Question 3

What is ‘Means of Exchange’

Answer 3

It allows us to trade.

Businesses and customers can buy and sell goods and services using money, for example when you purchase lunch or clothes.

Question 4

What is ‘Store Value’

Answer 4

It allows us to use it in the future as it keeps its value.

You might have money saved in a bank account which you can then use to buy goods and services in the future.

SITUATION: Imagine you have a chicken, but nobody wants the chicken at the current time, without store value it would die at the end of season and it would be lost value - but with store value you can sell that chicken for money to then use that money to buy food at a later date.

Question 5

What is ‘Legal Tender’

Answer 5

It is a legally recognised form of payment.

Money is widely recognised and used for all sorts of transactions from buying an ice cream or getting a haircut, aside from purchases you may also have your wages paid in legal tender.

Question 6

Explain Cash

Answer 6

Notes and coins in a wide range of denominations

Question 7

What are the advantages and disadvantages of Cash

Answer 7

Advantages:
Most widely accepted form of exchange.
Physical not virtual.
Consumers feel confident when using it.

Disadvantages:
Can be lost or stolen.
Threat of counterfeit.
Only really appropriate on purchases up to a certain amount.
It can be inconvenient to carry cash.
Cannot be used online.

Question 8

Explain Debit Cards

Answer 8

Issued by banks with payments for goods and services being deducted directly from a current account.

Question 9

What are the advantages and disadvantages of Debit Cards

Answer 9

Advantages:
No need to carry cash.
Secure method of payment with a low risk of theft.
Widely accepted.
Offers protection on purchases.
Suitable for online transactions.

Disadvantages:
A short time lapse between making the transaction and the money being withdrawn.
Easier to overspend.
Not appropriate or accepted for all transactions.

Question 10

Explain Credit Cards

Answer 10

It is issued by financial institutions allowing customers to delay payments for goods and services by allowing them to go into tempory debt.

Question 11

What are the advantages and disadvantages of Credit Cards

Answer 11

Advantages:
Allows a period of credit that is interest free.
Most cards are widely accepted.
Loyalty schemes are often offered.
Offers a degree of protection on purchases.
Suitable for online transactions.

Disadvantages:
Interest is charged on balances not paid off within a month.
Can encourage a customer to overspend and get into debt.
Interest is charged on cash withdrawals.
A limit will be set on the amount of credit allowed.

Question 12

Explain Cheques

Answer 12

A written order to a bank to make a payment for a specific amount of money from one person’s account to another account.

Question 13

What are the advantages and disadvantages of Cheques

Answer 13

Advantages:
Low risk form of payment as the cheque can only be cashed by the named payee.
Widely accepted for face-to-face transactions.
No need to provide change as can be written for an exact amount.

Disadvantages:
If the cheque bounces both the person cashing in the cheque and the person who wrote the cheque are given a fee.
Very old fashioned in relation to technology now.
Easy to make errors when writing the cheque.

Question 14

Explain Electronic Transfers

Answer 14

Payment is transferred directly from one bank account to another.

Question 15

What are the advantages and disadvantages of Electronic Transfers

Answer 15

Advantages:
Almost instantaneous.
Provides a record of payment.
No additional costs incurred.
Easy to use for one-off and more frequent transactions.

Disadvantages:
Risk of loss if the transfer is incorrectly set up.
Not appropriate for face-to-face transactions.

Question 16

Explain Direct Debit

Answer 16

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. An example would be paying gas bills, the ammount changes depending on how much it is used.

Question 17

What are the advantages and disadvantages of Direct Debit

Answer 17

Advantages:
An easy way to make regular payments, e.g. utility bills.
Amount paid can vary to ensure the payment matches the amount required.
Quick and easy to set up.

Disadvantages:
If the person taking the money makes a mistake and takes too much, it’s the person who is paying that is responsible to reclaim the money.
The person taking the money determines the amount paid each time, making it difficult to plan budget.

Question 18

Explain Standing Orders

Answer 18

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. For example you pay £30 for a phone contract each month, the amount cannot be changed without due notice.

Question 19

What are the advantages and disadvantages of Standing Orders

Answer 19

Advantages:
The same amount is paid each time, making it easier for the person paying to plan a budget.
Easy both to set up and to cancel.
No need to remember to make regular, standard payments.

Disadvantages:
Payments are taken regardless of the customer’s balance.
Payments will continue to be made unless cancelled.

Question 20

Explain Pre-Paid Cards

Answer 20

Money is uploaded onto a card with transactions then being withdrawn to reduce the balance. They are usually used for holidays.

Question 21

What are the advantages and disadvantages of Pre-Paid Cards

Answer 21

Advantages:
Can set a budget in advance to help with overspending.
If lost or stolen the loss is limited to the remaining balance.
An effective way of controlling how much children spend.

Disadvantages:
No protection if the card is lost.
Sometimes it requires an initial fee to purchase or set up the card.

Question 22

Explain Contactless Cards

Answer 22

Cards containing antennae allow money to be transferred when the card touches the contactless terminal.

Question 23

What are the advantages and disadvantages of Contactless Cards

Answer 23

Advantages:
Secure method of making payments.
Quicker and easier to make payments.
Becoming more popular.

Disadvantages:
Often only accepted for relatively small transactions.
Still not widely accepted due to it being a new technology.

Question 24

Explain Charge Cards

Answer 24

Issued by a retail outlet so that customers can delay payments for goods and services. (Similar to credit cards but only accepted by stores specified)

Question 25

What are the advantages and disadvantages of Charge Cards

Answer 25

Advantages:
Reduces risk of running up debts.
Allows a short period of credit.
Avoids the need to carry cash.
Often offers additional perks.

Disadvantages:
Must be paid in full each month.
Often an annual fixed fee is applied.

Question 26

Explain Store Cards

Answer 26

Issued by retail outlets so that customers can delay payments for goods and services. (Similar to a credit card but only accepted by stores specified)

Question 27

What are the advantages and disadvantages of Store Cards

Answer 27

Advantages:
Allows a short period of credit that is interest free for one month.
Often offer loyalty schemes, discounts and special promotions or privileges.

Disadvantages:
Only accepted in issuing store or linked associations.
Interest is paid on outstanding balances.
Can encourage overspending and result in a consumer getting into debt.

Question 28

Explain Mobile Banking

Answer 28

The ability to carry out financial transactiosn using mobile devices such as phones or tablets.

Question 29

What are the advantages and disadvantages of Mobile Banking

Answer 29

Advantages:
Convenient as can be used at any time and place.
Secure with many precautions.

Disadvantages:
Features are still limited and hence mobile banking does not offer all the functionality of internet banking.

Question 30

Explain BACS (Banker’s Automated Clearing Service)

Answer 30

A system that allows the transfer of payments directly from one bank account to another.

Question 31

What are the advantages and disadvantages of BACS

Answer 31

Advantages:
Faster payment allows almost instant transfers guaranteed within 2 hours.
Can be accessed in a number of ways including in a branch, over the telephone and online.
No additional costs.

Disadvantages:
Faster payments are not offered by all banks or branches.
A limit is set on the amount that can be transferred in any single transaction.

Question 32

Explain CHAPS (Clearing House Automated Payment Systems)

Answer 32

A system that allows the transfer of payments directly from one bank account to another.

Question 33

What are the advantages and disadvantages of CHAPS

Answer 33

Advantages:
Transfers can be made the same day assuming instructions are received prior.
There is no limit on the amount that can be transferred in a single transaction.

Disadvantages:
Normally, there is a fixed charge per transaction regardless of the amount transferred.