Unit 2: Payment Methods

Question 1

Who are the three key parties to a payment system?

Answer 1

1. Customer
2. Retailer or trader (supplier of goods and services)
3. The bank

Question 2

What are some different payment systems (7 listed)?

Answer 2

1. Cash
2. Cheques
3. Debit cards
4. Credit cards
5. Automated payments
6. Internet banking
7. Payment innovations, such as digital wallets

Question 3

What is the oldest method of payment (according to the course)?

Answer 3

Cash

Question 4

Is use of cash declining? Explain?

Answer 4

Use of cash is declining as innovations such as ‘tap-and-go’ cards and payments by smart phones emerge

Question 5

What is a cheque, in essence?

Answer 5

A written instruction that orders the bank to pay a third party a specified amount

Question 6

Who is the drawer of a cheque?

Answer 6

The person writing the cheque

Question 7

Who are the three parties involved in a cheque?

Answer 7

1. Drawer - person writing the cheque.
2. Drawee - bank paying the cheque (who money will be drawn from)
3. Payee - person to be paid.

Question 8

Are most retailers still accepting cheques? Explain?

Answer 8

No, due to the delay in payment caused by the clearing cycle, and the cost of processing.

Question 9

Thinking of cheques, what are uncleared funds (aka uncleared effects)?

Answer 9

Proceeds of cheques that have not yet been paid by the drawee banks

Question 10

What are cheques generally used for?

Answer 10

Larger expenditures such as household items, bills, or holidays… often chosen where there is no alternative available (because they are seen as a safe form of payment, or provide a record of payment)

Question 11

What is the basic process of clearing cheques, where the cheque is taken to the same branch where the cheque was drawn?

Answer 11

1. Cheque issued to payee.
2. Payee takes it to their bank and has their account credited. At this stage, the cheque has not ben cleared or confirmed.
3. The banker may honour/pay the cheque immediately or dishonour it.
4. If it is to be paid, it will be deducted from the drawers account, and once paid the payee can have full credit of its proceeds.
5. If a cheque can’t be paid it is dishonoured and returned to the person making the deposit or lodgement.

Question 12

What is the basic process of clearing cheques, where the cheque is taken to a different branch from where it was drawn?

Answer 12

The cheque must be directed to the account-holding banks and branches for processing.

Question 13

What are the potential problems for the payer and payee where a cheque is taken to a different branch than it was drawn from?

Answer 13

1. Payee has provided goods or services even there is no guarantee the cheque they received from the customer will be paid.
2. The bank has permitted funds to be credited to the account in the name of the payee, but has no guarantee the account will not have to be debited at a later date should the cheque not be honoured when they are presented to the respective account-holding bank.

Question 14

When a customer uses a debit card to get ‘cash out’ from a retailer, what are the benefits for the retailer?

Answer 14

• Reduces the amount of cash held on the business premises which is a security measure.
• As the retailers cash holdings are reduced, they will have less physical cash to deposit with their bank, thus reducing the cash handling aspect of any service charge their bank may charge them,

Question 15

How do debit card transactions work in essence?

Answer 15

They draw on existing funds held within the bank accounts linked to the debit card.

Question 16

How do credit card issuers generate income on credit card transactions?

Answer 16

• Charging commission to retailers who accept the card as a method of payment.
• Charging interesting to cardholders who do not repay their balance in full within a certain number of their credit card account statement (typically 25 days)

Question 17

What are two repayment options credit card holders can choose from?

Answer 17

1. Repay full balance
2. Repay part (at or above minimum amount set by card issuer)

Question 18

What are two examples of automated payments?

Answer 18

1. Periodic orders
2. Direct debits

Question 19

What is a key difference of periodic payments vs direct debits?

Answer 19

Direct debit can be set up for a variable amount on an unspecified date.

Question 20

What is the main advantage of an unspecified or ‘variable direct debit’?

Answer 20

It allows variations to the amount or payment date to be made within the terms of the direct debit instruction. However, the beneficiary is required to give the payer notice of any changes.

Question 21

What is an example of where a variable direct debit is suitable?

Answer 21

Mortgage payment, which may alter in line with interest rate changes.

Question 22

What is Electronic Funds Transfer (EFT)?

Answer 22

The electronic exchange (transfer of money from one account to another), through computer-based systems.

Question 23

What were 5 impediments that made it hard to get internet banking started?

Answer 23

1. Hardware was too expensive for most households.
2. Software not user-friendly until Windows-based systems developed.
3. Major concerns about data security and integrity.
4. Dial-up internet was slow and inconvenient.
5. Customers more used to traditional branch banking.

Question 24

What 6 things rapidly accelerated growth of internet banking?

Answer 24

1. Significant price reductions for hardware.
2. Massive investment in new systems by banks and software suppliers.
3. New security.
4. Increased computer literacy
5. Introduction of broadband (faster net)
6. New ways to access - smart phones, tablets, etc.

Question 25

Besides online banking, what are 4 other digital payment methods currently in use?

Answer 25

1. Electronic purse (e.g., Opal card)
2. Contactless payment
3. Digital wallet
4. Payment intermediaries (like PayPal)

Question 26

Are banks generally willing participants in Fintech innovations?

Answer 26

Yes

Question 27

What are some concerns around Fintech?

Answer 27

1. Data security.
2. DDoS attacks.

Question 28

What regulation applies to Crowd Funding?

Answer 28

Generally none, unless the crowd funding involves offering or advertising a financial product or providing a financial service - in which case a PDS would be required.

Legal obligations could be imposed on operators of crowd funding sites and on people using those sites to raise funds, under the Corporations Act and ASIC Act.