Different Modes of Payment
Money is an important means of payment, but we have seen that, value-wise' the check is more important. Although checks are not 'money', the 'bank deposits' that they represent must be considered an essential part of the money supply. In addition to money and checks, there are many other means of payment.
- Coins Coins are limited legal tender in the sense that a sack of 5p coins, offered in settlement of a debt of £1000, need not be accepted by a creditor. For many years, in the UK, rules of law have governed limits of the legal tender of bronze coins, nickel-brass coins, and cupro-nickel coins up to a total of £2. Legally, a creditor may insist upon a debtor paying the exact amount without requesting the change.
- Notes Notes of £1, £5, £10, £20, and £50 denomination are full legal tender to any amount, although here again, from the common sense point of view, one would expect comparatively large debts to be settled by cheque or similar 'claims on money' held by financial institutions. The central bank is the only bank in England with the authority to issue notes, although a few banks in Scotland and Northern. Ireland issues notes of a strictly limited quantity: apart from £4.3 million, their notes have to be backed 'pound for pound by Bank of England notes. Since the UK finally left the Gold Standard, the legend: "I Promise to pay the Bearer on Demand the Sum of... has no significance. It is only retained because of tradition. The words may suggest some mystique, but the only promise the Bank could fulfil if presented with a £5 note, would be to hand over another £5 note or notes and coins of the same value.
- Cheques A person with a current account at a commercial bank can make payments utilizing cheques so long as:
- His account is in credit or his bank manager has sanctioned a loan or overdraft facilities.
- The payee has sufficient faith in the reputation of the drawer of the cheque.
- The payee has a banking account or can 'cash the cheque in some way.
- Standing orders Standing orders (or banker's orders) involve the holder of a commercial bank current account giving instructions (or orders) to his bank manager to make certain payments of specified amounts at regular intervals. This system of payment is very similar to the cheque system but no cheque is drawn and payment is made utilizing a ledger transaction. A standing order is merely a bookkeeping method of payment whereby a bank (the drawee) credits the payee's account and debits the drawer's account Standing orders are a very convenient method of making mortgage payments to building societies, fulfilling hire purchase commitments, paying life insurance premiums, annual subscriptions, etc.
- National Giro system The National Giro system is one of three methods of making payments provided by the Post Office. The main advantages of the Giro system over the commercial banks' cheque payments system are its cheapness, centralization, and speed. Although there are facilities for making payments with those who are outside the Giro system, it is far easier to move funds within the system. Only El is required to open a Giro account and the Post Office aims at a 24-hour transaction service.
- Postal orders Postal orders are useful for making small payments through the letter service: for example, mail-order business, football pools, etc. Postal orders may be crossed for payment through a bank, and unlike the currency, they do not represent value in themselves; legally they are not negotiable instruments. But postal orders are a very safe means of payment for amounts varying from 20p to £10.
- Inland money orders Inland money orders and inland telegraph money orders are similar to postal orders but may be used for payments up to £500. They are a safe but more cumbersome method of payment. The debtor has to insert the payee's name on the money order form and the name of the post office where the payment is to be made. The extra security against the money order being stolen or lost involves the payee being asked, by the post office employee, for the name of the sender.
- Bills of exchange Bills of exchange are a method of payment usually confined to foreign trade, although inland bills of exchange are still used to a limited extent. Bills of exchange, in addition to acting as a form of payment, have the advantage of allowing a period of credit-usually three months. A bill is drawn by a creditor, e.g., an exporter, and is not valid until the debtor, e.g., an importer, writes across the bill his signed acceptance which signifies that he will meet the obligation to pay at a pre-determined date.
- Promissory notes Promissory notes are now used less frequently. They constitute a promise to pay at a later date, e.g., a finance company might issue a promissory note (say, for £100) to a debtor who would use it as a means of payment. The debtor would then pay back the finance house on an instalment basis (say, 10 months at £10, plus interest).
- 'Offsetting debts' Offsetting debts is a common method used for the payment of bills within a trade; consumers of such commodities as alcoholic drinks may offset part of their debt by returning crates and bottles. Offsetting is facilitated by the use of debit or credit notes; the latter are printed in red.
- Credit cards Most commercial banks offer credit cards that act as a means of payment, although schemes differ in many details. Similar payment opportunities are offered by the Diners' Club and other credit-card organizations.
A cheque is merely an order to a banker to transfer 'money' from one bank account to another. The person having a current account could have drawn the money from the bank in notes and/or cash and settled his debts in this way. A credit transfer allows some bills to be paid with one cheque. Although money held in a deposit account cannot be used directly as a means of payment, nevertheless it is relatively easy for a sum to be transferred from a deposit to a current account so that cheques may be drawn. In theory, a bank may require seven days' notice of transfer (or withdrawal) from deposit accounts, but in practice, this restriction is normally waived so long as the sum in question is not very large. In terms of value, over 90 percent of all business transactions are made by cheques Traveller's cheques are useful for making navigate abroad and are issued for amounts ranging from £2 to £50. For larger foreign payments, letters of credit are used, whereby a UK banker writes a letter to a foreign banker authorizing his client to draw money abroad.
Note: Miscellaneous means of payment include gift vouchers, book tokens, luncheon vouchers, books of trading stamps, etc., although restrictions are applicable for each example.