banking system purpose allows businesses to move money around creating an economy deposit receipts...
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Banking System
Purpose • Allows businesses to move money around• Creating an economy• Deposit receipts• Process payments • Keeping monies secure for a business
System types• Bank – Limited company, owned by
shareholders – Barclays, Lloyds, TSB & private banks
• Building Society – a mutual organisation owned by its members - Nationwide and lesser known (Yorkshire BS, Leeds
BS)
Services available- A comparison Bank
• Current Account • Deposit Accounts with
interest • Investments – shares • Overdraft facility • Loan accounts• Mortgages• Credit Cards • Insurance • Foreign Exchange • Prepayment cards
Building Society • Current Account • Deposit Accounts • Saving Accounts • Loans (larger societies) • Mortgages • Credit Cards (larger
societies)• Insurance (larger societies)• Travel Money (selected few)
Business Services offered • Business Current Accounts – Monies deposited to the account – Monies paid using cheques, Standing Order
(SO),Direct Debit (DD),Bank Automated Clearing System (BACS), Faster payments (electronic transfer using computer system)
– Overdraft facility (for temporary borrowing)Deposit Accounts
Business earns interest by transferring excess money from business current to deposit account. Does not offer the payment facilities as offered by Current Account
Business services offered - cont• Overdraft – Short term borrowing from the bank on the
current account. The business must negotiate with the bank the overdraft facility, the bank will set the value and time limit.
– The business will pay a charge for this facility • Business Loan– Long term borrowing used to finance costly
purchase or project over a period of years with a rate of interest on top of the loan repayment
Business Services offered - cont• Commercial Mortgage– A loan over 25 years to cover the purchase of
property – The property is secured against the loan and
where the business defaults on the repayments the bank can sell the property to remove the original loan
• Card payment processing • International Services – Overseas & currency transaction payments,
Methods of payment and the working practise
Cash - Simplest method of payment- used for small valued purchases & services
Bank service – pay monies into the bank account over the counter using a paying-in-slip- obtain cash from the bank for the business when required - to pay wages- night safe facility - to lodge cash into the bank via a secure letter box in the wall of the bank, outside of normal working hours
Methods and practices
Cheques A document provided by the bank, is an order in
writing and signed by the client/customer (the drawer) instructing the bank to pay an amount to someone (the payee)
• Cheques were once the only method of paying for goods.
• More recent years retail stores have refused cheques
• Still a popular method used for payments made by post – bills and credit customer’s settlement
Cheques • Cheques can be computer generated or manually written• Great care must be taken when written, any inaccuracies
will make them invalid• When writing out cheques they must be:
– Written in pen (non-erasable)– Correct date used (no post dated)– Name of payee shown clearly and correctly (person receiving the
cheque)– Amount in words and figures must agree– Authorised signature only (manager within the drawer’s business)– No gaps left allowing fraudulent additions, blank spaces have lines
drawn through– Any errors crossed through and signature/ initials against the
adjustments
Cheques • Computer generated cheques must have all of
the prior slide controls plus• the process must be closely controlled• Only authorised staff can print off cheques • Password protected facility used in the
process (changed frequently) • All payee details are correct and up to date
Cheque clearing – the process • Every working day cheques are paid into banks and
building societies • From there they are passed onto the bank of the
organisation that issued the cheque for authorisation of payment
• The process is known as cheque clearing• NOTE- cheques paid into a building society have to
pass through their bank before it can be cleared• Where a cheque isn’t authorised by the issuer’s bank
for payment, it is sent bank to the bank it was paid into and the money is deducted from the account. This is known as a Dishonoured cheque .
Cheque clearing the process
• Due to the confusion over the time taken for cheques to clear and funds being available a system was introduced called the
2-4-6 clearance cycle • The 2-4-6 refers to the number of working days(wds) after
paying in a cheque to an account. • 2 relates to 2wds from which interest can be paid against the
value • 4 relates to 4wds from which the customer can withdraw
monies from the amount deposited (the cheque may still bounce)
• 6 relates to 6wds from which the customer can be assured the monies paid in are secure/safe. Monies will not be deducted if the cheque bounced
Example of the 2-4-6 clearing cycle Actual day Working
day
Monday 0
Tuesday 1
Wednesday
2
Thursday 3
Friday 4
SaturdaySunday
Weekend
Monday 5
Tuesday 6
• Tina banks at Barclays Bexley, she pays a cheque into her branch for £400 on MONDAY
• The cheque is issued by Emma who banks at HSBC Nottingham
• The cheque is sent off on MONDAY from Barclays to HSBC
• If Tina earns interest with her account she will start to earn on WEDNESDAY
• Tina can withdraw funds from the cheque on FRIDAY but still runs the risk of the cheque bouncing
• Tina waits until the following TUESDAY to withdraw funds from the cheque as no monies can be deducted from her account if the cheque were to bounce
Payment cards (chip & pin) • Debit card – allows customers to make electronic
payments from their bank accounts– Quicker and more convenient to use– Card payment only processed after entering personal
identification number (PIN)– Allows cash withdrawals from bank/ cash machines – Takes 2 days for payments to be taken from the account– Transaction shown on bank statement – Card issuers include Visa and Maestro these are not
banks they are the facility to process a payment electronically
Payment cards • Tap and go cards /contactless payment– Radio technology– Present card to terminal using a tap method – no PIN required – Used in shops and public transport facilities for speed– Has limits set on the card – small values of £20 and
less and the number of transaction in a day– Where a transaction goes over the limit the customer
will be required to enter PIN– Clearing of transaction same as debit card– Transactions shown on bank statement
Payment cards • Prepayment cards PayPoint– Preloaded with a balance to spend– Can be disposed of or topped up at various locations –
bank, post office and paypoint terminals– Can be used in shops or online– Cash can be withdrawn (limit set on card with some
charges)– Can be used internationally– Useful by customers with poor credit record or under 18
– No clearing cycle for customer - instant– For businesses, cards are treated as debit/ credit card
allowing time for funds to appear in account
Payment cards • Credit cards
– Allows goods to be purchased and pay later – Cards are issued by banks, building societies and other
organisations using the Visa and Mastercard facilities – Used in retail, online and mail order purchases– Sellers of goods/services use a card merchant to process the
payments – The card merchant charge a set percentage on top of the
purchase value to the seller who can off set the cost against their customers
– The card holder receives a statement showing the balance owed, they have the option of paying off part or the full debt
– Interest is charged on any outstanding debt thus increasing the cardholders debt
Other banking methods • Bank Giro Credits (BGC)– Paying in slip attached to bills allowing monies to be
paid into one bank and processed to another bank or branch
– Process takes 3 working days to clear– BGC slip is presented with either the cheque or cash at
the counter• Bankers Automated Clearing Services (BACS)– Computer transfer payment system owned by the banks – Used for regular payments – wages, insurance
premiums – Takes 3 working days to process
Continued • BACS Direct Credits – Used for regular payments of various values (used for wages
and supplier debts)– The business sends the bank a schedule of the payment
details – Payment cycle takes 3 working days
• Standing order– Allows business to make regular payments for a fixed amount – Organisation must complete/give written instruction
authorising the bank to make payments – The bank sets up the instruction on their computer and the
payment is taken by computer link using either BACS or Faster payment method
• Faster Payments – Scheme used by banks that allow customers to make payments
between their account and another’s account in the same day– Customers can give instruction for payment in branch, by
telephone or internet– Instruction must give all details relating to the payee, account
number, sort code and reference– There must be sufficient funds in the account to be able to pay
debt – Payments take 2 hours to reach their destination and once
sent they cannot be cancelled– The banks will send and receive acknowledgement of payment
or rejection of payment
• BACS Direct Debits – Are used for fixed and variable amounts with various
payment time intervals– The business receiving the payment will set up the
instruction requesting monies from the payer’s bank account
– 3 working days• Mobile electronic payment – Used on smart phones – Download an app to the phone for the business– Similar to the faster payments
• Clearing House Automated Payment System (CHAPS) – Used for one-off large payments through the banking
system– Fees charged for the service – Same day transaction – Used mainly by solicitors when arranging the sale &
purchase of property for clients• Bank Drafts – Is a cheque written by the bank from their funds – Used by organisations when making large purchases – Is as good as cash – Bank draft cannot be cancelled or stopped
Payment cycle and the bank balance • It is important to understand the effects of different types
of payments on the bank account – For monies received, the dates from which the money is
available and can be used – For monies paid out, the dates from which the monies left the
account reducing the balance• Cheques (2-4-6 clearing cycle)
– Pay in a cheque, wait 4 days to clear - to be able to use the funds
– Send a cheque more than the 4 days as you have to allow the transportation of the cheque plus the time to clear
• BACS/ Faster payment – Monies received will be cleared and made available the same
day
Retention of banking documents • All documents relating to an organisation must be
kept by law for a number of years • Each organisation has a policy for keeping/filing
documents (records) known as a Retention Policy• Normally a Retention Policy states that records
must be kept for 6 years plus the current year • The policy is for legal reasons– Legislation– Company law, – Taxation and data protection