7. Money and financial companies

7. Evaluates the contribution of money and financial institutions for the existence and growth of businesses.

7.1 The importance of using money to facilitate transactions

Money

Anything that is generally accepted in exchange of goods and services is considered as money. The requirement of money for exchange can be pointed out as follows.

·         In the past the direct exchange of goods without the use of money was called ‘barter  system’

·         Various difficulties were encountered in the barter system.

·         Therefore, the need of a common medium of exchange that was acceptable to all was felt.

·         That medium of exchange was known as money (currency).

 Accordingly, the necessity of money in exchange is obvious.

 The functions of money

v  Being a medium of exchange

v  Being a standard of value for measuring

v  Acting as a store of value

v  Acting as a deferred payment

Being a medium of exchange

Acting as the intermediary in the exchange of goods and services, or else the price of goods and services is paid in terms of currency

Example: The purchase of a mobile phone for Rs. 30,000.

Acting as the means of measurement in measuring the value

It is use of money for the measurement of the value or worth of goods and services. This is known as the price. Since this facilitates accounting it becomes a unit of account.

 Example: Setting the price of a pair of shoes as Rs. 1999.90.

Acting as a store of value

Money can be stored; notes and coins can be used in the future by storing them without getting outdated or depreciated.

Example: Saving Rs. 10,000

Acting as a deferred payment medium.

An agreement can be made (signed) regarding a future payment currently. That means the possibility of purchasing goods and services at present, under the terms and conditions to settle the payment down on a particular future date determined.

Example: Buying a stock of goods in January 2017 for Rs. 5,000 agreeing to make the payment in March 2017.

Some characteristic of good money;

·          Having a general recognition.

·          Durability

·          Difficulty in imitation

·          Easy movability

·          Easy identifiability/homogeneity

·          Ability to divide into small units (divisibility)

Classification of Money

Currency

Notes and coins issued on the orders of the financial authority are known as currency. Currency is identified as valid money and it has 100% liquidity.

Examples: Coins and notes

Bank Money

The balances held in demand deposits or current accounts in commercial banks are known as bank money. The payments are made with bank money using cheques. Though this doesn’t possess 100% liquidity as currency, it is advanced in liquidity than near money.

Example: Current account deposits in a commercial bank.

Near Money

Nevertheless of having 100% liquidity as currency these are the assets that function as a store (accumulation) of value and could be converted to cash easily.

Example: Time deposits and savings deposits owned by the public in commercial banks.

                Treasury Bills

                Commercial Papers

E-money

The money evolved as a result of information and digital technology which are used in payments of inland and international transactions.

Example: Debit Card, Credit Card, Pre-paid Card

Debit Card

 The cards that can be used only by those who have money in the bank account are called debit cards and the paid amount is debited to the account through electronic media.

Credit Card

 This is a special type of card that can be used to make payment for goods and services on credit terms and to take money from ATM’s, nevertheless of having a bank account.

Pre-paid Card

 These are the cards receivable through the payment of money in advance. The following services (facilities) are available to make these methods of card payment convenient.

1.      Automatic Teller Machine (ATM)

2.      Automatic Deposits Machine (ADM)

3.      Cheques Deposits Machines (CDM)

4.      Electronic Funds Transfer point of sales

5.      Telebanking facilities

6.      Internet banking (online banking)

7.      Television banking

7.2 Financial system of Sri Lanka

The financial institutions in Sri Lanka are categorized as follows:

  Banking Sector

·          Central Bank of Sri Lanka

·          Licensed commercial banks

·          Licensed specialized banks

 Other financial institutions that accept deposits

·         Licensed finance companies

·         Co-operative Rural Banks

·         Thrift and credit co-operative societies

 Specialized financial instructions

·         Specialized financial leasing companies

·         Primary dealers

·         Share brokers

·         Unit trust/ Unit trust management companies

·         Market intermediaries

·         Venture Capital companies

  Contracted savings institutions

·         Insurance companies

·         Employee Provident Fund

·         Employee Trust Fund

·         Approved Pension and Provident Funds

·         State service Provident Funds

(As per the Central Bank Annual Report 2015)

How financial institutions contribute in business activities

  Central Bank of Sri Lanka

Central Bank of Sri Lanka, the main institution that performs its activities as an agent of the government, implementing the financial policies of the country. (The services of the Central Bank of Sri Lanka will be discussed in Competency Level 7.3)

 Licensed Commercial Banks

These are the financial institutions that maintain current accounts and other savings accounts with the ability of creating money. There are many licensed commercial banks registered under the CBSL and Monetary Board out of which a few belong to the state sector the majority to the private sector.

Examples:

Government sector commercial banks – Bank of Ceylon / People’s Bank

Private sector commercial banks – Sampath Bank

 Commercial Bank PLC

 Hatton National Bank

 Seylan Bank

Licensed specialized banks

These are a special type of institutions that has procured a license from the Central Bank of Sri Lanka to undertake business activities as a specialized bank under the Bank Act. The specialty is that they are not authorized to operate current accounts. However, they are authorized to accept deposits for Savings Accounts and time deposits or term deposits.

Examples: National Savings Bank

 Sri Lanka Savings

 Regional Development Bank

 State Mortgage and Investment Bank

How the licensed commercial banks contribute in business activities

·         Accepting time and savings deposits

·         Providing loan facilities to entrepreneurs involved in different fields

·         Underwriting of company shares

·         Providing leasing facilities

·         Providing management advisory services

Licensed finance companies

These are a special type of public companies that has procured a license from the Central Bank of Sri Lanka under the Finance act with the purpose of accepting time deposits and providing with investment loan facilities based on those funds.

Examples: L.B. Finance PLC

 Sinha Putra Finance PLC

 The Finance Co. PLC

 Singer Finance PLC

Activities of licensed finance companies

·         Providing hire-purchase facilities

·         Sale of land and property

·         Finance leasing

·         Providing short-term loans

·         Investing in public state securities

·         Accepting time deposits

Co-operative Rural Banks

This is an organization that provides loans to its members as one of its main activities and also accepts time and fixed deposits from members as well as non-members. This is the banking sector of multi-purpose co-operative societies.

Examples: Co-operative Rural Bank of Maharagama Multi-purpose Co-operative Society.

Activities of Co-operative Rural Banks

·         Receiving deposits from members as well as non-members

·         Pawning activities

·         Maintenance of Savings and Fixed Deposit accounts

·         Providing loan facilities to members for agriculture, manufacturing, and industrial and marketing activities.

·         Popularizing the co-operative life-style among rural people.

Thrift and credit Transaction Co-operative Society (SANASA)

This is a special type of institution registered with the Co-operative Commissioner under the Co-operatives Act which provide with loan facilities only to members by utilizing the deposits obtained as savings and membership shares while aiming and having as its objectives, the encouragement of savings and the provision of loans to members

Examples: Nelumkulama Sanasa Society

 Attanagalla Sanasa Society

·         SANASA societies perform the following activities

·         Operating marketing centers to market the productions of members.

·         Marketing of equipment in the field of activity of the society at concessionary prices.

Example: Fisheries Co-Operative Societies – Fishing gear

·         Accepting deposits and providing loans to its members.

Specialized Leasing Companies

These are the companies registered with the Central Bank especially for leasing activities. Provision of finance facilities as per the requests of businessmen to enable the leasing of machinery and other assets required for their use is the main business activity of these finance companies. The main income of these companies is the rent collected through leasing these assets.

Examples: Assetline Leasing Company Ltd

 LOLC Micro Credit Ltd

 SMB Leasing PLC

 Isuru Leasing Company Ltd

Benefits gained by businessmen from leasing companies

·         The ability to use high valued assets without paying the full value up front.

·         The lease rent paid in respect of a lease being free from income tax.

·         Being able to overcome any losses and capital losses that result through obsolescence of machinery and other assets

·         The ability of earning higher returns without making large investments.

Primary Dealers

The market where government securities are marketed for the first time earning money is the primary market. The firms that have been granted permission by the Central Bank of Sri Lanka to participate in the primary market are known as Primary Dealers.

The main responsibility of Primary Dealers is to participate in the primary auctions and secondary market dealing with Securities.

Examples: Capital Alliance Co.

 Ceylinco Sriram Securities Co.

 Bank of Ceylon

 Sampath Securities Co.

Share Brokers

Organizations that act as mediators for buying and selling of shares debentures in incorporated companies is known as broker companies. It is necessary to obtain a license from the Securities and Exchange Commission to carry on business as a share broker.

Examples: Asha People’s Securities Co.

 Asia Securities (Private) Co.

 John Keels Share Broker (Private) Co.

 J.B Securities (Private) Co.

Activities of share brokering companies

·         Accepting buying and selling orders from investors.

·         Opening of accounts in the Central Depository System on behalf of investors.

·         Advising investors about making investments in shares and debentures.

·         Assuring the highest returns to investors through market analysis and preparation of reports on surveys conducted the share market.

·         Assist with the listing of companies.

·         Assisting the public limited companies in generating of capital.

Unit Trust/ Unit Trust Management Companies

A Unit Trust is an investment fund that has been raised through the sale of units to investors. The funds thus collected are deposited in an investment portfolio by professional fund managers. The returns generated are distributed among the investors on the unit price of the

 Unit Trust.

A unit Trust consists of three parties.

·         Unit trustee

·         Fund management company

·         Unit holders or investors

The connection between these parties can be shown diagrammatically as follows.

 

Returns from investment in Unit Trusts

·         Reducing the risk through diversification of investments

·         Possibility of obtaining the services of professional managers for investment management.

Market Intermediaries

While Underwriters, Investment managers and Marginal suppliers are included in this, they act as mediators in the sale of financial instruments. For these services, the buyer and seller of the financial instrument is levied a service charge.

Underwriters

In the sale of securities to the public by a public limited company, the organization that contracts to pay and purchase any unsold securities within the given period, is known as the underwriter. Investment managers provide various services during the issue of securities to the public.

Some of these services are:

·         Issuing of investment applications for the issue

·         Accepting applications

·         Allocation of securities to the investors

·         Financial management about the issue

·         Advertising activities

Marginal suppliers

Marginal suppliers are the organizations involved in debt collecting on behalf of the supplier and providing with factoring services. This is also known as debt factoring.

Venture Capital Companies

These are companies specialized in meeting the capital requirements of businesses of new entrepreneurs. They also provide funds for the commencement of new businesses, for the expansion of existing business, for business acquisitions and purchase of businesses etc. In addition, they also engage in underwriting, loan syndication etc.

Examples: Central Finance Venture Fund Ltd.

 Lanka Ventures Ltd.

 NDB Venture Investments (Pvt) Ltd.

 Insurance Companies

Insurance companies are the institutions involved in raising funds through the issue of various insurance policies and performing financial intermediary services lending in the financial market and making investments.

Examples: Sri Lanka Insurance Corporation Ltd.

 Ceylinco Insurance Co Ltd.

 Janashakthi Insurance Co. Ltd

Provident and Pension Funds

There are pension funds and provident funds administrated by the state sector management and private sector management.

Examples:

Funds under state management

 Employees Trust Fund – This is administered by the Employees Trust Fund Board coming under the purview of the Ministry of Policy Planning, Economic Affairs, Child, and Youth Cultural Affairs.

 State Service Provident Fund- This fund is managed by the Pensions Department 

Employees Provident Fund – (EPF) This is the largest pension fund for the private sector employees in Sri Lanka and is administered by the Labor Commissioner. The responsibility of management of this fund is with the Central Bank of Sri Lanka.

Funds managed by the private sector and approved pension and provident funds are administered under the purview of the Labour Department.

7.3 The role of the Central Bank of Sri Lanka.

The Central Bank of Sri Lanka which was established on 28th August 1950 under the Monetary Act No. 58 of 1949 is the principal institution that represents the state as its agent to implement the financial policies of the Sri Lankan government. Its founder Governor was Mr. John Exter.

Its organization of affairs is carried out by a monetary board consisting of 5 persons namely, the Governor of the Central Bank, the Secretary of the Finance Ministry overlooking finance and 3 other appointed members.

The Central Bank of Sri Lanka has two main objectives in view.

v  To maintain economic and price stability.

v  To maintain stability of the financial system.

Maintain economic and price stability.

The maintenance or protection of the value of the domestic currency is price stability. Through this the economy is expected to be maintained devoid of inflation and deflation. Less inflation leads to a better economy. This helps to have sustainable economic development and higher employment levels.

Maintaining the stability of the financial system

The ability of economy to sustain itself is known as the stability of the financial system. The creation of security in the financial system makes it possible to identify and minimize any threats to the stability and strengthen the financial process, this way a favorable atmosphere will be dawn for both depositors and investors.

The central bank of Sri Lanka engages in the following activities in order to achieve its objectives.

The main activities of the Central Bank

1.      Manipulation of finance policies.

2.      Manipulation of exchange ratio policies.

3.      Management of Sri Lanka’s official foreign reserves.

4.      Issuing and distribution of the currency in use.

5.      Working as the supervisor of banks and non-banking institutions.

6.      Working as the financial agent, banker and the economic advisor of the government.

7.      Providing facilities to maintain the Central Bank’s settlement accounts of the commercial banks and primary traders’ clearance and settlement.

The agency activities of the Central Bank

·         Management of state loans.

·         Foreign exchange control.

·         To work as the primary institution concerned with rural loan schemes for small scale finance institutions.

·         Management of the Employees Provident Fund.

 How the activities of the Central Bank are supportive to the success of businesses

  Sri Lanka Inter-bank payment system – SLIPS

 This system with the use of computers is used for the settlement of inter-bank transactions.  This inter-bank payment system that was carried out by the Central bank has been entrusted to Lanka Clear (Private) Co.Ltd which is owned jointly by the Central Bank and commercial banks.

 The following clearing activities are carried out by Lanka Clear (Pvt) Co.Ltd.

·         Exchange of cheques and bank drafts and calculating net balances.

·         Keeping the Central bank and other banks informed about this net balance.

  Lanka Clear Private Co. Ltd has introduced a common card for transactions under the brand name “Lankapay”.  Universal Interbank Financial Electronic Communication Network – (SWIFT – Society for Worldwide Inter-bank Financial Telecommunication)

 This is a network that embraces financial markets across the world based on the latest technologies. International money transfer between banks is facilitated through this system.

  RTGS – Real Time Gross Settlement System

This is a computer system that has been set up using modern technology and standardized for the settlement of high value transfers among banks within Sri Lanka without any time  delays. This is important because settlements can be done in a very short time. This is the only national payment system in the country for high value transactions.

  SSDS –Script less Securities Depository System

 This is a system used to effect paperless transactions in the buying and selling of securities instead of the printed security certificates. This is also known as Lanka Secure. This avoids the risk of the investor in the safe keeping and selling of printed securities.

When the two systems above are combined, it is known as Lanka Settle System.

 (RTGS+SSDS= Lanka Settle System)

Central Bank activities contribute to there being security when making investments in businesses, the ease of financial transactions being conducted in an efficient manner which in turn ensures success in businesses and their long term existence.

7.4 The impact of various deposits undertaken and loans of commercial banks for the operation and growth of businesses.

 There are two main services rendered by commercial banks.

·         Services related to deposits

·         Services related to loans

Deposit related services

Maintaining Current Accounts (Demand deposits), saving deposits and fixed deposits are deposit related services carried on by commercial banks.

 Current Accounts (Demand deposits)

A type of account that has facilities to do transactions with cheques and are not entitled to any interest on the balance. Bank overdraft facilities may be available while transactions can be carried out through teller cards.

1.      The ability to make payments through cheques

2.      Ability to obtain remittance facilities

3.      Ability to make payments on standing orders

4.      Ability to obtain overdraft facilities

5.      Ability to obtain a report of the transactions (Bank statement)

 Saving Accounts

This type of accounts has been introduced with the purpose of encouraging savings and accumulating an interest on the balance. Money can be deposited or withdrawn on the discretion of the depositor. Transactions may also be done through teller cards.

 Fixed Deposits

This is a deposit of a fixed sum of money for a fixed period, attracting a fixed rate of interest. A higher rate of interest is payable relative to Savings deposits. Some of the benefits that can accrue to the businessmen, holding a current account among the above mentioned deposits are as follows.

Lending related services

·         Overdraft

·         Loans

1.      Business Loans

2.      Consumer Loans

Overdrafts

 A bank overdraft is a specific approval granted by the commercial banks to a current account holder to issue cheques up to specified value over and above the credit balance available in the account. These are in two types as temporary overdrafts and permanent

 Overdraft.

When an overdraft facility has been granted by the bank, the bank will honor cheques drawn by the account holder, up to the limit of the overdraft. Therefore, the value of cheques drawn for more than the available balance in the current account is known as then bank overdraft. Normally a higher rate of interest is charged on overdraft.

A Permanent Overdraft Facility is where the facility allowed in continuously. In order to obtain a permanent overdraft facility it is necessary to provide some assets as security.

 Temporary Overdraft Facility is where the bank will honor cheques drawn in the excess of the balance in the account.

Bank loan

 A bank loan is a loan furnished by a bank at a fixed rate of interest on the condition of repayment within an agreed period in installments together with the relevant interest.

 Bank loans are of two types

·         Business loans

A financial facility allocated to an individual or business on short term, medium term or long term basis to meet their business requirements, by a bank is known as a business loan.

·         Consumer loans

 Loan facilities granted by banks to consumers for purchasing of assets or to meet emergency needs are known as consumer loans.

 In order to get an overdraft facility a current account is essential, but it’s not necessary for a loan.

7.5 Other services provided by commercial banks

Besides accepting deposits and providing loans, commercial banks also provide with the following services that have an impact on business activities.

1.      Agency services :

Commercial banks perform as a representative an agent of customers when necessary.

Examples:

·         Purchase and sales of securities.

·         Putting standing orders into effect.

·         Payment of water bills and electricity bills.

2.      Leasing services

Provision of finance facilities as per the requests of businessmen to enable the leasing of machinery and other assets required for their use.

3.      E-banking

The facilities furnished through the internet to enable customers to carry out their banking needs are known as electronic banking services. Some such facilities are mentioned below:

4.       Home banking

This is to access the bank’s website through one’s home computer and using the secret pin number to carry out the necessary banking transactions online.

5.       Tele banking

This is where the customer is able to use his phone (instead of going to the bank) to access the bank and carry out the necessary banking transactions.

6.      Pawning Services

An important service furnished by a commercial bank is to provide emergency loans to customers, mortgaging jewelry items as securities.

7.      Safety locker facilities

Commercial Banks also undertake to protect an individual’s gold, silver, gems, jewelry, deeds and other important documents. Banks maintain special safety lockers for this purpose.

8.      Purchase and Sale of Foreign Exchange

In accordance with Foreign Exchange regulations, commercial banks undertake to purchase foreign currency from customers and also to sell them their requirements of foreign currency.

9.      Credit Card Services

This is a type of card issued by a commercial bank or other licensed business entity, through the use of which a customer can purchase goods or services from authorized dealers up to a specified value. It is also possible to obtain cash up to a limit, at an Automatic Teller Machine, using the credit card.

Examples:

·         Visa Card

·         Master Card

·         American Express Card

10.  Money Remittance Activities

This means the collection of money due to the account holder on his behalf. Here, sending money to an individual in a foreign country as well as receiving money from an individual in a foreign country also takes place.

11.  Issue of Traveler’s Cheques

This is a special type of cheque that is used by the local and foreign travelers that enable them to carry out their various transactions easily and safety. Traveler’s Cheques are issued in commonly used currencies and in different denominations. The traveler gives the local currency notes he possesses to the bank who will issue Traveler’s cheques for an equivalent value subject to bank service charge. Then the tourist on his travels will exchange the traveler’s cheques at a local bank according to his cash requirement.

12.  Automatic Banking Services

This is an electronic method of funds exchange that is available to bank account holders who can enjoy a lot of facilities that his bank has made available, at any time of the day. Through this the customers are able to obtain the following services from banks.

  Advantages to customers because of automatic banking services:

·         Withdrawal of cash using the teller card (ATM)

·         Depositing cash in the account

·         Transferring funds from one account to another

·         Ability to check the balance in the account

·         Availability of bill payment facilities

  Advantages to the bank because of automatic banking services:

·         Cost reduction

·         Reduction in the rush at the Bank

·         Increase in accuracy

·         Possibility of reducing the work force

·         An increase in banking service will result in increased profits

13.  Issuing of Letters of Credit

A letter of credit is a confirmation issued by the importers’ bank to the exporter’s bank on the request of importer as the assurance that they will pay the cost of the goods supplied by the exporter on behalf of the importer.

14.  Insurance services

 A commercial bank will tie up with an insurance company to provide insurance facilities to its customers.

15.  Providing medical services (E-Channeling, E-Billing)

16.   Installation of ATM and CDM machines in highly populated locations.

 Installation of ATM machines that are specially meant to accept cash and cheque deposits.

7.6 Transactions can be made easy by using cheques.

 A cheque can be introduced as the written order issued by a bank current account holder  (drawer) to the commercial bank (drawee) asking to pay the amount stated on the cheque to the person named thereon (payee) or to the bearer of the cheque.

Main parties involved in a cheque:

 Drawer: Account holder

 Drawee: The commercial bank where the account is maintained

 Payee: The person named on the cheque or the person entitled to receive the stated amount on it.

Basic characteristics of a cheque

	Paste a Cheque

 

1. Date

2. The name of the Bank and branch

3. Payee’s name

4. The term ‘Or Bearer’

5. The value of the cheque in words and figures

6. The word ‘Pay’

7. Drawer’s signature

8. Magnetic Ink Character Recognition Strip (contains cheque number, Bank ref number, Branch   number and account number in order)

9. Check counter foil

There are mainly two types of cheques

Bearer cheques

This is a cheque where the printed notation “or bearer” has not been cancelled. While, in the absence of an endorsement this cheque can be assigned to another person by merely handling it over, to a great extent it is similar to carrying out a transaction using currency notes.

Order cheques

This is a cheque where “or Bearer” has been struck off and in its place “order” has been mentioned. When a cheque like this is being assigned to another person it is necessary to be endorsed. There is a higher safety level in an ‘order’ cheque over a ‘bearer’ cheque.

Some of the facts that should be taken in to consideration when drawing a cheque

1.      Indelible ink should be used when writing a cheque.

2.      The relevant details should be mentioned on the counter foil.

3.      Any errors made in writing the cheque must be stuck off with a single line with the drawer’s full signature.

4.      The cheque must be written in only one language.

5.      The drawer’s signature must be made as per the specimen given to the bank when opening the account.

6.      Attention must be paid to the date placed on the cheque and also to the steps taken subsequently for its safety.

7.      The drawer’s signature must not be placed on a ‘blank’ cheque.

 Crossing the cheque

Drawing two parallel lines across the face of the cheque or stating the name of a commercial bank is known as ‘crossing’ a cheque. While any person can make a ‘crossing’ on a cheque, it is only the drawer that can make such a ‘crossing’ invalid.

The necessity to ‘cross’ a cheque.

·         This gives on additional safety for the cheque.

·         To ensure that the ‘payee’ stated on the cheque will receive its value.

·         To prevent paying to the cheque at the bank counter.

 There are two types of crossings.

·         General crossing

·         Special crossing

General crossing

Drawing two parallel lines across the face of the cheque with or without any statements is called a General crossing.

Special Crossing

Stating the name of a commercial bank with or without the parallel lines is a “special crossing”. A cheque of this nature must be deposited in an account of the bank name stated on it.

 

“Not negotiable”

Stating ‘not negotiable’ within the parallel lines means that such a cheque can be endorsed  and transferred and that when such a transfer takes place the transferee does not have a greater right to it than the transferor. Therefore, when a cheque with this notation is received the person receiving should be fully aware of the rights of the transferor.

“Account Payee Only”

 When the cheque is crossed “Account Payee Only” it means that the cheque must be deposited in an account bearing the payee’s name. This notation limits the cheque being transferred to another person.

“Only up to Rs. 5,000”

The notation “Only up to Rs. 5,000” limits the maximum amount that can be written on the  cheque.

Endorsement of cheques

 Writing the name of the payee on the reverse side of the cheque, exactly as it is stated on the face of the cheque is known as endorsement. (Any person in whose name the cheque is drawn must write his name on the back of the cheque when it is being transferred.) This endorsement confirms that the transfer is legitimate.

Instances where the endorsement is necessary.

1.      When the ‘Payee’ deposits the cheque in his account

2.      If it is an ‘Order’ cheque, when it is being transferred

3.      When a cheque without crossings is presented to the bank counter for encashing.

 Dishonoring of cheques

Where a bank rejects the payment for a cheque that has been presented, it is known as the cheque being dishonored.

 Instances where a cheque may be dishonored;

1.      Insufficient funds in the account

2.      Where the drawer stops payment (countermanded)

3.      Where the drawer becomes bankrupt

4.      Where the drawer dies and this is intimated to the bank

5.      Where a garnishee order has been received (a court order)

6.      Because of an error in writing the cheque (technical errors)

7.      Where the account has been closed

7.7 Transactions can be made convenient by using e- money.

E-money

The electronically exchange of cash or the cash exchanged through a computer network is known as e-money. As a result, a fund transfer takes place from one party to another party (Electronic Fund Transfer).

Types of electronic money:

·         Credit cards

·         Debit cards

·         Prepaid cards

·         Smart cards

·         Micro Chips

Credit Cards

Cards that are issued by a commercial bank or authorized institution that allow a person to obtain goods or services up to a specified value from authorized dealers are known as Credit Cards.

An electronic verification system is used to verify the validity and credit limit when a credit card is presented to a businessman. When the card is inserted in the card machine at the sales outlet these details are revealed.

However, in electronic commerce the presentation of the card is not necessary and the transaction can be carried out by providing the relevant details about the card.

Examples: Ceybank Visa – Bank of Ceylon

 People’s Visa – People’s Bank

 Master Card – Sampath Bank

 Seylan Visa – Seylan Bank

Advantages and disadvantages of making transactions through Credit Cards

Advantages to the customer	Disadvantages to the customer
·         Having an account is not a requirement to obtain a credit card.	·         Having to pay a penalty for late payments for the credit card.
·         An interest free loan for a given period.	·         Not being able to carry out transactions from all the sales outlets.
·         Cash can be obtained through an ATM machine within the credit limit.
·         Being entitled to discounts and bonus points.

  

Advantages to the business	Disadvantages to the business
·         Certainly that money will be received for a credit sale.	·         A commission is payables to the bank
·         Increase in profit because of a higher turnover	·         A special machine has to be installed
·         Receiving free publicity	·

 Debit Cards

An account holder can use this card to settle his shopping bill and also withdraw money from a Teller machine up to the balance remaining in his account. This card is issued by the commercial bank where the account is maintained.

Examples: SET Sampath Bank

 PET People’s Bank

 Cat supper Commercial Bank

Advantages and disadvantages to the customer by using the debit card for transactions

Advantages	Disadvantages
·         Interest is not payable because the money in his account is used.	·         It is necessary to have an account.
·         The transaction is completed at the same time.	·         The value of transactions is limited up to the balance available in the account
·         Cash withdrawals can be done through ATM machines as well.

 Pre-paid cards

This is a type of card obtainable by making payments in advance. This is a convenient, protective electronic payment system that can be used instead of paying in cash or by cheque. Even a person who does not maintain an account can use this card to make payments electronically.

Examples: Telephone cards

 Travel passes

Smart cards

This is an integrated circuit card. A chip with a specified money value is embedded in the card. Once a transaction is completed using this card the value of the transaction is debited to the card and the balance is reduced. The card can be reloaded by making regular payments to the organization that issued the card. While this card has the same facilities as a Credit card, Debit card, ATM card, it can also be used as an E-purse.

 The following characteristics can be seen in electronic money cards

 

1.      The name and the logo of the issuing organization.

2.      Type of card

E.g.: Debit card, Credit card, ATM card

3.      Card No.

4.      Brand logo

E.g.: Visa. Master

5.      Date of expiry

6.      Card holder’s name

7.      Magnetic strip

8.      Signature stripe

9.      Card security code

10.  Hologram

11.  Issuing organization’s name, address and conditions

12.  Customer service hotline

The following parties are involved in the settlement of electronic transactions:

·         Card holder

·         The card issuing organization

·         The trader or seller

·         Credit Association

 Example: Visa, Master, American Express (AMEX)

 Advantages and disadvantages in making transactions with electronic cards

Advantages :	Disadvantages :
1.      Cost of transactions being minimized.	1.      Having to bear the costs of interest, penalty for delayed payments etc.
2.      Assuring the safety of cash.	2.      Possibility of committing fraudulent deeds.
3.      Ability to make transactions for 24 hours in the day.	3.      Addiction to an unnecessary consuming pattern.
4.      Convenience of payment activities.	4.      Interruptions to transactions due to technical defects.
5.      Various benefits being entitled.	5.      Inability and lack of knowledge for all customers to carry out transactions.
6.      Ability to use for overseas transactions as well.