Economic incentives and the use of methods of payment

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Economic Incentives and the use of methods of payment- o Why doesn’t consumer pay the true cost of check and credit card transactions Taxes- explicit interest on deposits is taxable, while implicit interest is not Competition among banks o Why don’t retailers pass on cost of credit card purchase to consumer Credit card consumers are already rich, retailers will offer them a lower price because on the whole cardholders are better customers Float- o Delay is what makes credit card purchase attractive. You receive merchandise but don’t have to pay until end of billing period o Float- interest earned because of delays in the payment system o Paying by check also has float benefit o Don’t involve float = EFTPOS o Loss of float is one reason debit cards have been slow to catch on in the US, checks and credit cards offer greater float The Use of cash- o Immediate payment in cash has no float yet it is preferred, why? It is the only method that involves no credit (promise). Methods that involve credit have fixed costs Foreign Exchange The Problem of Different Clearing Systems- If two consumers with different currency are share same bank or clearing system transaction is easy Difficult if not same clearing system. The payer must find a way to trade his bank dollars for bank dollars at the recipient’s bank or bank dollars that are convertible through a common clearing system Foreign exchange- trade in bank dollars of banks in different clearing systems A Foreign Exchange Transaction Banks get other currency by: o If bank is big enough it maintains a deposit of its own in other countries bank for such purposed o If it doesn’t it ban buy the other currency in the inter banking market in foreign exchange where deposits in different countries are traded “Domestic Exchange” distance and poor communication would cause difference in currencies domestically. In 19 th century, it was just as difficult to pay across country as it was to pay internationally Introduction of euro The Foreign Exchange Market Interbank market in foreign exchange is an international market Trade in this market include forward transactions as well as spot transactions Growth of the Market
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Trading volume in foreign exchange is greater than that of international trade, most foreign exchange trades are related to finance As volume of foreign exchange grows, securities firms have increasingly become dealer in foreign exchange, offering this service to their customers themselves, rather that referring them to a commercial bank How the market Works Market Organizations o Foreign exchange transaction is a trade. o Market organized by brokers Vehicle Currencies o Most trading involves one or a few “vehicle currencies”, you trade vehicle currency for other currency o Principle vehicle currency is the US dollar Settlement and Its Problems o Herstatt risk- risk counterparty will fail in the middle of an exchange of currencies o To reduce delay and the exposure to risk, payments in interbank market are cleared through the books of the Tokyo branch where deposits are guaranteed to the consumer o
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  • Fall '19
  • Credit card, Cheque, Fed

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