Money and Payment Systems Chapter 3

Types of Stored-Value Cards

• A smart card contains a computer chip that can be loaded with digital cash from an owner's bank account whenever needed.
• Smart cards can be loaded from ATM machines, personal computers, or specially equipped telephones.
• Example: London-based Mondex Corp., started running tests in 1995, allowing funds to be transferred between consumers and retailers or between individuals.

Electronic Cash (e-Cash)

• A form of electronic money that can be used on the Internet to purchase goods or services.
• A consumer gets e-cash by setting up an account with a bank that has links to the Internet and then has the e-cash transferred to their PC.

Electronic Checks

• Allow users of the Internet to pay their bills directly over the Internet without sending a paper check.
• The user writes the equivalent of a check and then sends the electronic check to the other party, who in turn sends it to their bank.

Functions of Money

• Medium of Exchange: a medium that can be used to buy and sell goods and services.
• Store of Value: an asset that can be used to transport purchasing power from one time period to another.
• Unit of Account: a standard unit that provides a consistent way of quoting prices.
• Standard of Deferred Payment: facilitates the process of getting and paying credit/debt.

Properties (Characteristics) of Money

• Portability
• Durability
• Divisibility
• Standardizability
• Recognizability
• Acceptability
• Stability
• Scarcity

Evolution of Money

Barter Economies

• Pure Barter Economies: direct exchange of goods and services for other goods and services.
• Three shortcomings of a pure barter economy:
  • Absence of a method of storing generalized purchasing power.
  • Absence of a common unit of measure and value.
  • Absence of a designated unit to use in writing contracts requiring future payments.

Commodity Money Economies

• Commodity money: physical commodities used as money, having intrinsic or physical value equal to their face value.
• Examples: wool, boats, sheep, and corn.
• Later, people used metals like gold and silver, especially since the onset of the industrial revolution in the 1800s.

Commodity Standards

• Minted coins with nonmonetary values developed, with face value equal to market value.
• Token money: money whose metallic value is lower than its face value.

Fiat Money

• Money with a commodity value much less than its value as money.
• Examples: coins and paper money issued by the central bank.
• Fiat money can be issued by the government (like coins and notes) and depositary institutions (like cheques, credit cards).

Electronic Monies (e-Money)

• Debit Cards: enable users to purchase goods by electronically transferring funds directly from their bank accounts to a merchant's account.
• Stored-Value Card: contains a fixed amount of digital cash, with the simplest example being prepaid cards.