Section B (PERSONAL FINANCE) Flashcards
To explore the personal finance sector
What are the names of 9 types of organisations?
- Bank of England
- Banks
- Building Societies
- Credit Unions
- National Savings & Investments
- Insurance Companies
- Pension Companies
- Pawnbrokers
- Payday Loans
Explanation, Advantages & Disadvantages of the Bank of England
WHAT?
This is the UK’s central bank with responsibility for maintaining a healthy level of financial stability for the UK as a whole.
Responsibilities include issuing legal tender, setting interest rates and controlling the national debt.
ADVANTAGES:
- Responsible for protecting the financial stability of the economy as a whole
- Sets interest rates at a level designed to help achieve a stable economy
- Lends to banks
DISADVANTAGES:
- Not a bank for members of the general public
- Can raise interest rates making borrowing more expensive
Explanation, Advantages & Disadvantages of Banks
WHAT?
A bank is an organisation that handles financial transactions and stores money on behalf of its customers.
Services offered will include holding deposits, making payments when instructed to do so and supplying credit.
ADVANTAGES:
- Offer a range of services and account types
- Provide a secure place to store money
- Pay interest on credit balances on most types of accounts
DISADVANTAGES:
- Savings are only protected up to the value of £75,000, so if a bank goes bankrupt, savings will above this would be lost
- Profit-making organisations owned by shareholders, therefore costs to individuals may be higher than necessary in order to fulfil shareholder objectives
Explanation, Advantages & Disadvantages of Building Societies
WHAT?
These are organisations that handle financial transactions and store money on behalf of their members.
The members, or account holders, are part owners of the building society and have a right to vote and receive information on the running of the society.
Unlike banks, they don’t have shareholders on a stock exchange which allows costs to be kept down.
ADVANTAGES:
- Offer a range of services and account types
- Provide a secure place to store money
- Pay interest on credit balances on most types of accounts
- Owned by members and therefore costs can be kept down allowing for higher interest payments
DISADVANTAGES:
- Savings are only protected up to the value of £75,000, so if a bank goes bankrupt, savings will above this would be lost
- May lack the business drive of a commercial bank
Explanation, Advantages & Disadvantages of Credit Unions
WHAT?
There are not-for-profit organisations that handle financial transactions and store money on behalf of their members.
Often there is a responsibility or desire to support a community made up of its members.
Members are the owners and have a voting right.
ADVANTAGES:
- Offers a range of services and account types
- Provide a secure place to store money
- Owned by members and therefore costs can be kept down allowing for higher interest payments
- Often offer additional benefits to the community or a good cause
DISADVANTAGES:
- Savings are only protected up to the value of £75,000, so if a bank goes bankrupt, savings will above this would be lost
- May lack the business drive of a commercial bank
Explanation, Advantages & Disadvantages of National Savings & Investments
WHAT?
This offers a range of options including ISA’s, premium bonds and gilts & bonds.
This is a government backed organisation that offers a secure saving option.
ADVANTAGES:
- Government backed, therefore offering security on 100% of savings with no upper limit
- Offers additional services / methods of savings, e.g. premium bonds
DISADVANTAGES:
- Rates are variable
- Not as easy to access due to lack of a high street presence
- Often required to give notice on withdrawals
Explanation, Advantages & Disadvantages of Insurance Companies
WHAT?
These are businesses that protect against the risk of loss in return for a premium.
They are profit-making organisations.
ADVANTAGES:
- Protect against unexpected losses or financial expenses
- Easy and regular monthly payments making planning easy
- Wide range of services and levels of cover to suit the needs of individuals
DISADVANTAGES:
- Premiums are assessed on the estimated degree of risk which may be seen to penalise some members or groups of society too harshly
- Profit-making organisations, therefore premiums will be charged to ensure shareholder needs are met
Explanation, Advantages & Disadvantages of Pension Companies
WHAT?
These are businesses that sell policies to individuals, either privately or through employers, to allow them to save now to fund retirement in the future.
Pension companies normally invest the money paid to them in contributions in order to increase its value. However, this is NOT risk free.
ADVANTAGES:
- Provides a structure to help plan for financial security after retirement
- Deductions can be taken directly from pay and be fully or partially matched by an employer’s contribution
- Experts are employed to make investment decisions
DISADVANTAGES:
- Poor investment decisions by the pension company may result in a disappointing return
- Money already invested in a pension can’t be released prior to the dates agreed in the policy
Explanation, Advantages & Disadvantages of Pawnbrokers
WHAT?
These are businesses or individuals who loan money against the security of a personal asset, e.g. an item of jewellery or piece of electronic equipment.
If the item is not bought back from the pawnbroker within a specified period of time, then it will be sold.
ADVANTAGES:
- A quick way of getting cash needed for a short period of time
- The asset can be bought back within a set period of time
- Interest is not charged
DISADVANTAGES:
- The amount given for the asset is often substantially lower than its actual worth
- If the money is not repaid within the agreed period, the asset will be sold on
Explanation, Advantages & Disadvantages of Payday Loans
WHAT?
These are organisations that offer a short-term source of finance used to bridge the gap between now and next receiving a wage; they are normally only available for relatively small amounts at very high rates.
They may be suitable in an emergency to meet cash shortages.
ADVANTAGES:
- A quick way of getting cash needed for a short period of time
DISADVANTAGES:
- Interest charges are likely to be very high
- Often results in paying back a final sum substantially higher than the initial amount borrowed
What are 5 methods of interacting with customers?
- Branches
- Online Banking
- Telephone Banking
- Mobile Banking
- Postal Banking
Explanation, Advantages & Disadvantages of Branches
WHAT?
Physical places where the customer will visit to carry out transactions which can be face-to-face, e.g. over the counter transactions or using computerised facilities, e.g. an ATM.
Offer additional facilities and services, e.g. advice.
ADVANTAGES:
- Opportunity to build a relationship developing trust and brand loyalty
- Transactions can be conducted there and then
- Additional services such as advice can be offered
- Gives the customer a high level of confidence
DISADVANTAGES:
- Needs to travel to branch which is likely to incur travel costs, e.g. parking or fares for public transport
- Restricted to bank opening hours
- May be long queues plus travel time, making the process time consuming
Explanation, Advantages & Disadvantages of Online Banking
WHAT?
The use of the internet to carry out banking transactions.
ADVANTAGES:
- Available 24/7
- High degree of privacy
- Convenient
DISADVANTAGES:
- Takes time at the beginning to set up or apply for
- Not suitable for cash withdrawals
- Increased risk due to cybercrime
- If just an online account, the facilities may be limited
Explanation, Advantages & Disadvantages of Telephone Banking
WHAT?
When transactions are carried out over the telephone.
ADVANTAGES:
- Convenient, especially to access basic functions such as checking balance
- No additional charges
DISADVANTAGES:
- Full access may be limited to set hours
- Call centres and automated telephone systems can frustrate customers
- Higher risk of fraud and identity theft
Explanation, Advantages & Disadvantages of Mobile Banking
WHAT?
The use of mobile phones / devices to conduct financial transactions.
ADVANTAGES:
- Convenient
- Available 24/7
- No additional charges
DISADVANTAGES:
- May need to download specific apps to access mobile banking for a particular bank
- Higher security risk due to increased risk of loss or theft or mobile devices
- Can be prone to hackers sending texts asking for bank details
