Chapter 12; Banking

12.1: Banking Services – Commercial Banks

Importance of Banking in Trade

• Banking is an aid to trade, helping businesses and individuals manage money.

• Commercial banks provide financial services essential for commerce.
• They maintain accounts at the central bank to store reserves and borrow in case of
cash shortages.

Why Banks Are Important in Commerce

• Facilitate money transfer and payments.

• Allow individuals and businesses to manage finances efficiently.
• Offer borrowing facilities such as loans and overdrafts.

Services Provided by Commercial Banks

1. Safety – Secure place to deposit money.

2. Spending Control – Enables customers to spend without carrying cash.
3. Interest – Some accounts offer interest on savings.
4. Other Banking Services:

• Loans & Overdrafts – Borrowing facilities for personal and business use.
• Cheque Services – Alternative to cash transactions.
• ATMs – Access to cash anytime.
• Credit & Debit Cards – Convenient payment methods.
• Telephone & Online Banking – Manage accounts remotely.
• Foreign Currency Exchange – Exchange money for international use.
• International Payments – Facilitates global trade transactions.

Conclusion:
Commercial banks play a crucial role in trade by providing essential financial services that help
individuals and businesses manage their money effectively.

Types of Bank Accounts

1. Deposit Account (Savings Account)

Used by individuals, businesses, and associations to store money safely and earn interest.
Depositing Money: Done using credit (paying-in) slips or electronic transfers.
Withdrawing Money:

• Withdrawn in cash using withdrawal slips.

• No cheques issued for this account.
• Electronic transfers can be used to transfer money to another account.
Other Features:
o Banks may require prior notice for large withdrawals.
o Interest is earned as a reward for keeping money in the bank.
 Chapter 12; Banking

o Cannot be overdrawn (no spending more than available funds).

o Banks lend deposited money to others at a higher interest rate, which is how they
make a profit.

2. Current Account (Cheque Account)

Used for daily transactions and money transfers without using cash.
Issued Items:

• Paying-in slips for deposits.

• Cheque book for making payments.
• Bank cards (debit, ATM, credit cards).
Other Features:
o Safe place for keeping money available for immediate use.
o Some banks pay nominal interest if a minimum balance is maintained.
o Bank may charge fees for cheque transactions if the balance falls below the
minimum limit.
• Regular bank statements provided, showing:
o Deposits made.
o Withdrawals/payments.
o Bank charges.
o Remaining balance.

Other Banking Services

1. Night Safe

Allows businesses and individuals to deposit cash and cheques outside banking hours.
Special envelopes are used for depositing money, with account details and the amount written
on them.
Benefits:

• Provides security for businesses earning cash outside bank hours.

• Money is credited to the account once the bank opens.

2. Automated Teller Machine (ATM)

Allows cash withdrawals anytime, anywhere.

Customers receive an ATM card (also used as a debit card).
Security Feature: Requires a Personal Identification Number (PIN) for access.
Other ATM functions:

• Provides a withdrawal receipt and shows account balance.

 Chapter 12; Banking

• Prints a mini-statement of the account.

ATMs are convenient for quick access to cash without visiting a bank.

3. Internet Banking (Online Banking)

Allows customers to access accounts online through the bank’s website.

Functions include:

• Viewing account balance and transactions history.

• Transferring money between accounts.
• Paying bills and making online purchases.
• Setting up standing orders for regular payments.
• Managing loans and credit card applications.
Advantages:
o Convenient and available 24/7.
o Reduces the need for physical banking visits.

4. Telephone Banking

Allows customers to perform financial transactions over the phone without visiting the bank.
Services include:

• Checking account balance.

• Transferring money between accounts.
• Paying bills.
• Setting up standing orders for regular payments.
Benefits:
o Convenient and saves time.
o Available 24/7 in most cases.

Conclusion:
Bank accounts and services help individuals and businesses manage money efficiently, ensure
safety, and provide convenient financial solutions for daily transactions.

Borrowing from a Bank

Banks offer three main types of borrowing: overdraft, loan, and bridging loan.
Banks may require collateral (e.g., property deeds, stocks, machinery) as security.
If the borrower fails to repay, the bank may sell the collateral to recover its money.
 Chapter 12; Banking

1. Bank Overdraft

Allows customers to withdraw more money than they have in their current account.
The amount overdrawn must be agreed upon with the bank beforehand.
Interest is charged daily on the amount overdrawn.
Benefits:

• Useful when the borrower does not know the exact amount needed.
• Any deposits made reduce the overdraft and interest charged.

Drawback: Higher interest rates than a standard bank loan.

2. Bank Loan

A fixed amount of money is transferred to the borrower's account.

Repayments are made in fixed installments over a set period.
Banks assess the borrower’s financial status before approving the loan.
Benefits:

• Suitable when the amount and repayment period are known.

• Lower interest rates than an overdraft.

3. Bridging Loan

A temporary loan provided until expected funds become available.

Commonly used when waiting for money from the sale of an asset (e.g., property).
Short-term (usually a few weeks).

Annual Percentage Rate (APR)

APR (Annual Percentage Rate) represents the total cost of borrowing for one year.
Used for loans, mortgages, and credit cards.
Helps borrowers compare interest rates from different banks and lenders.

Example:
If one bank offers a loan at 8% APR and another at 10% APR, the 8% APR loan is cheaper overall.

Summary:

• Banking services like telephone banking provide convenience.

• Borrowing options include overdraft, loans, and bridging loans, with different purposes.

• APR helps in comparing loan costs.

 Chapter 12; Banking

12.2: Means of Payment

Overview of Payment Methods

Individuals and businesses use various methods to make payments, access cash, and conduct
financial transactions both locally and internationally.

Cash Payments

Widely accepted for small transactions.

Convenient for quick payments.
Risks: Can be lost or stolen.
Foreign exchange issues: Travelers must exchange currency when visiting different countries.

Cheque Payments

Suitable for larger payments (e.g., paying bills).

Can be used for postal payments.
Not always accepted, especially in foreign countries.
Inconvenient for small payments (e.g., public transport).

Credit Transfer

Allows money to be deposited into any bank account.

Still used, but largely replaced by Electronic Funds Transfer (EFT).

Standing Order (Banker’s Order)

Automatic fixed payments at regular intervals (e.g., loan repayments).

Prevents missed or delayed payments.
Reduces paperwork (no need for monthly cheques).
Only fixed amounts can be paid.

Direct Debit

Similar to a standing order but allows payments to vary in amount.

Commonly used for bills with changing amounts (e.g., electricity, water, mortgage).
More flexible than standing orders.
 Chapter 12; Banking

Debit Cards

Immediate payment from the cardholder’s bank account.

Accepted by most retailers.
Transaction declined if insufficient funds.

Credit Cards

Allows purchases without immediate payment.

Two payment options:

• Full payment (no interest).

• Delayed payment (interest charged).
Useful for large purchases and international transactions.

Electronic Funds Transfer (EFT)

Digital transfer of money between accounts without paper cash.

Used for:

• Credit/debit card payments.

• Direct deposits (e.g., salary payments).
• Standing orders and direct debits.
Fast and secure for both local and international transactions.

Letter of Credit

Used in international trade.

Exporters receive payment before ownership documents are released.
Banks guarantee payments, reducing risk for both importers and exporters.

Bank Drafts

A cheque issued by a bank, ensuring payment.

More secure than personal cheques.
Common in international transactions or when sellers do not trust personal cheques.

Summary:
 Chapter 12; Banking

• Traditional methods: Cash, cheques, credit transfer.

• Automated payments: Standing orders, direct debits.
• Card-based payments: Debit cards, credit cards.
• Electronic transfers: EFT, bank drafts, letters of credit.
• Each method has advantages and drawbacks, depending on convenience, security,
and cost.

Choice of methods of payments

Factors Affecting the Choice of Payment Method

Different methods of payment are chosen based on:

✔ Convenience for the payer and payee.
✔ Security of the transaction.
✔ Speed of payment (immediate vs delayed).
✔ Acceptance by businesses and individuals.
✔ Cost implications (fees, charges, interest rates).

Common Payment Methods and Their Uses

1 Cash & Cheque

✔ Traditional one-off payment method.

✔ The payer controls when and how much is paid.
✔ Suitable for businesses with few customers or infrequent payments.
Risk of loss or theft (cash).
Cheques may not be accepted everywhere.

2 Credit Transfer

✔ Used by public utility companies for easy bill payment.

✔ Allows payment without needing a bank account.
✔ A simple and secure manual bank deposit method.
Slower than electronic payments.

3 Standing Orders

✔ Ideal for fixed, regular payments (e.g., rent, loan installments).

✔ Ensures payments are never missed.
✔ Reduces paperwork and manual effort.
Only works for fixed amounts.
 Chapter 12; Banking

4 Direct Debit

✔ Suitable for regular payments with changing amounts (e.g., electricity bills).
✔ Allows businesses to collect payments automatically from many customers.
✔ Less administrative work for businesses.
Requires customer authorization.

5️ Debit Cards

✔ Alternative to cash.
✔ Instant payment directly from the customer’s bank account.
✔ Can be used at ATMs for cash withdrawal.
Transactions declined if insufficient funds.

6️ Credit Cards

✔ Popular for immediate purchases with delayed payment.

✔ Accepted worldwide.
✔ Buyer has the option to pay later or in installments.
Interest charged on outstanding balance.
Some businesses charge extra fees for credit card payments.

7 Electronic Funds Transfer (EFT)

✔ Fast and secure money transfer without physical cash.

✔ Used for:

• Salary payments (wages paid directly into employee accounts).

• Point-of-sale (POS) transactions (businesses processing payments).
✔ Reduces need for cheques or cash payments.
Requires internet access and bank accounts.

8 Documentary Credit (Letter of Credit)

✔ Used in international trade.

✔ Ensures that exporters receive payment before handing over goods.
✔ Provides security for both buyers and sellers.
Requires bank guarantees, which may involve fees.
 Chapter 12; Banking

12.3 Trends in Banking

Global Internet Access & Banking

✔ Increased demand for instant services due to a growing on-demand economy.

✔ Expansion of global marketing has fueled internet banking growth worldwide.
✔ Internet banking has transformed how people access financial services.

Mobile & Digital Banking

✔ Mobile banking allows users to access bank services via smartphones & tablets.
✔ Customers can check balances, transfer funds, pay bills, and locate ATMs from anywhere.
✔ Mobile banking reduces the need for physical bank visits.

Mobile Wallets

✔ A digital alternative to carrying cash & cards.

✔ Stores debit/credit cards, loyalty cards, and other financial tools.
✔ Accepted by many retailers for contactless payments.
 Chapter 12; Banking

Credit Card Charges

✔ Interest-free spending if the full balance is paid at the end of the month.
✔ Shoppers pay no extra charges, as traders are charged by credit card companies.
Some traders pass these charges to customers, making credit card purchases more
expensive.

Package Accounts

✔ Premium accounts offering exclusive benefits for a monthly service fee.

✔ Features may include:

• Personalized banking services

• Insurance coverage (travel, home, medical, phone)

• Airport lounge access

• Breakdown assistance for motorists

✔ Different banks offer different package names & perks.

The Rise of a Cashless Society

✔ More digital payments through credit cards, debit cards, and EFTs.
✔ Less reliance on cash & cheques for transactions.
✔ The shift to digital banking has reshaped financial behavior worldwide.

Decline in Personal Banking

✔ Bank branches closing, especially in less populated areas.

✔ Fewer staff employed due to automation & internet banking.
✔ Customers are encouraged to use self-service banking within branches.

⚠ Implications of Internet Banking

✔ 24/7 banking convenience from home or work.

✔ Fewer teller transactions, reducing the need for physical banking.
✔ Job losses & bank closures due to digital banking.
✔ Increase in online financial fraud & cybercrime.
 Chapter 12; Banking

Key Takeaways

Technology is reshaping banking, making services faster & more accessible.

Digital & mobile banking are on the rise, reducing the need for traditional branches.
Security risks & unemployment are challenges of the shift to internet banking.
The world is moving towards a cashless society, with less reliance on physical money.
Chapter 12; Banking
 Chapter 12; Banking

Section A: Short Answer Questions

1. Define a commercial bank.

2. State two reasons why banks are important in commerce.
3. List three types of bank accounts.
4. What is an overdraft?
5. Give two features of a deposit (savings) account.

Section B: Structured Questions

1. Explain three services provided by commercial banks.

2. Discuss two advantages and two disadvantages of using ATMs.
3. Compare standing orders and direct debits as methods of payment.
4. Explain the concept of APR (Annual Percentage Rate). Why is it important for
borrowers?

Section C: Essay Question

Discuss the impact of digital banking on the banking sector and customers.
 Chapter 12; Banking

Chapter 12 – Question

2 Refer again to the bank statement shown in Figure 12.2 and answer these questions related to it.

a Name the holder of this account. [1]

b What period does this statement cover? [1]

c Why is it important for customers to receive bank statements regularly? [2]

d Since the date of this statement Mr Baudin has written cheques for $28.40, $96.00 and $136.89.

A direct debit of $189.27 has also been paid. How much funds does Mr Baudin have access to?
Show all of your working out. [4]

e Give a clear explanation of the purpose of the debits, credits and balance columns, using
examples from the statement to illustrate your explanation. [6]

f Explain the difference between the services shown on this statement as direct debit and standing
order, and give examples of how a business might use each. [6]
 Chapter 12; Banking

MCQ : C A D B C D B A B D

Section A: Short Answer Questions

1. Define a commercial bank.

Answer: A commercial bank is a financial institution that provides banking services such as
accepting deposits, offering loans, facilitating payments, and providing other financial
services to individuals and businesses.

2. State two reasons why banks are important in commerce.

Answer:

o They facilitate money transfers and payments.

o They offer borrowing facilities such as loans and overdrafts.

3. List three types of bank accounts.

Answer:

o Deposit (Savings) Account

o Current (Cheque) Account

o Fixed Deposit Account

4. What is an overdraft?
Answer: An overdraft is a short-term borrowing facility that allows a current account holder
to withdraw more money than is available in their account, up to an agreed limit.

5. Give two features of a deposit (savings) account.

Answer:

o It earns interest on deposits.

o Withdrawals are usually made in cash and require prior notice for large amounts.

Section B: Structured Questions

6. Explain three services provided by commercial banks.

Answer:

o Loans & Overdrafts: Banks provide funds to individuals and businesses to meet
financial needs.

o Online & Telephone Banking: Customers can manage accounts and make
transactions remotely.

o Foreign Currency Exchange: Banks allow customers to exchange money for

international use.

7. Discuss two advantages and two disadvantages of using ATMs.

Answer:
Advantages:
 Chapter 12; Banking

o Provides access to cash 24/7.

o Reduces the need to visit a bank branch.

Disadvantages:

o Risk of card fraud and skimming.

o Limited withdrawal amounts per day.

8. Compare standing orders and direct debits as methods of payment.

Answer:

o Standing Order: A fixed amount is transferred regularly from one account to

another.

o Direct Debit: Allows variable amounts to be withdrawn, usually for bills with
changing amounts.

9. Explain the concept of APR (Annual Percentage Rate). Why is it important for
borrowers?
Answer:
APR represents the total cost of borrowing for a year, including interest and other charges. It
helps borrowers compare loan options and choose the most affordable one.

Section C: Essay Question

10. Discuss the impact of digital banking on the banking sector and customers.
Answer:

• For banks: Reduces costs by closing physical branches, leading to job losses.

• For customers: Provides convenience, 24/7 access to banking services, and faster
transactions.

• Challenges: Increases cybercrime risks and requires internet access.

Chapter 12; Banking