Eco 531 Chapter 3 Money and Payment System PDF

ECO 531- CHAPTER 3 MONEY AND PAYMENT SYSTEM OBJECTIVES OF THE LESSON  Meaning of money  Functions of money  Measuring money  Evolution of the payment system MEANING OF MONEY  Also referred to as money supply.  It is defined as anything that is generally accepted as a medium of exchange...

ECO 531- CHAPTER 3 MONEY AND PAYMENT SYSTEM OBJECTIVES OF THE LESSON  Meaning of money  Functions of money  Measuring money  Evolution of the payment system MEANING OF MONEY  Also referred to as money supply.  It is defined as anything that is generally accepted as a medium of exchange or in the repayment of debts. of  Money is an important instrument in any monetary economy in that it performs four specific functions, which overcome the problems of barter trade. 1. Medium of Exchange 2. Store of value 3. Unit of Account (measurement of value) 4. Standard of Deferred Payment 1. MEDIUM OF EXCHANGE  That is generally accepted by people in exchange for goods and services (g&S). Money enables us to buy and sell g&S.  Money as a medium of exchange removes the inconvenience and inefficiency of the barter system.  Its also eliminated the need for a double coincidence of wants because generally people could now accept money in exchange for g&S. 2. STORE OF VALUE  Refer to any commodity that can be held in order to enable people to buy and sell it at different places.  Therefore,money acts as a store of value.  Money can be held in reserve for future spending.  The value can be held over time for as long as the value does not fall. 3. MEASUREMENT OF VALUE / UNIT OF ACCOUNT  Value of g&S exchanged in the economy are measures and expressed by money.  In other words, society finds it convenient to use monetary units as a yardstick for measuring g&S.  The Ringgit is used to measure the value of g&S in Malaysia.  Money as a unit of account provides the basis for keeping accounts, and calculating profit and loss. 4. STANDARD OF DEFERRED PAYMENT  A large number of transactions relate to future contractual payments, which are stated in terms of the monetary unit, money.  Therefore, money serves as a unit or standard of deferred payment or in terms of which all future payments are expressed.  Money makes it possible for people to make a contract or an agreement to exchange goods or settle debts in the future.  However, money as this function is satisfactory only if its value or purchasing power remains stable over time. of  Durable – an item must be able to withstand being used repeatedly.  Easily divisible into larger or smaller amount.  Comparatively scarce, procuring them required effort.  Homogeneous - Every item of the commodity was exactly like every other item.  Convenient - It was easy to carry enough around to made trades for other commodities. m o n ey s u p pL y  Basically, every country has its own supply of money which is used in the making of transactions.  The methods used to measure money supply are called  M1-Narrow money  M2-Near money Plus MI  M3-Broad Money M1  Is the narrowest definition of the supply of money.  also a money transaction in which the money is directly used for transactions.  Consists:  Currency- includes coins and paper money issued by BNM. Also call fiat money.  Checkable Deposits- checking account balances kept in commercial bank, which are convertible into cash on demand by writing cheques. These are known as demand deposits – current account – current deposit  M1 = Coins + Paper Money + Demand Deposit in Commercial Banks (checkable deposit, traveler’s check) M2  Is a broader definition of the supply of money because it consists of M1 and near money.  Near money are items that are highly liquid financial assets such as saving accounts, fixed deposits, negotiable certificates of deposits (NCD) in commercial banks and BN certificates.  M2 = M1 + Fixed and Saving Deposit in Commercial Banks + Negotiable certificates in Com. Bank + repo in Com. Bank + Bank Negara Certificates + Short Term Money Market Investment.  Near Money (Quasi Money)= M2-M1 M3  Is measure of money supply which is the broadest in definition.  The difference between M2 and M3 is the savings and fixed deposits in other banking/financial institutions. Other financial or banking institutions in M’sia are Merchant Banks, BIMB, Finance Companies, Discount Houses, LUTH, Public Mutual, ASB, Insurance companies.  M3 = M2 + Fixed and Saving Deposit in Other Financial Institutions (Bank Islam Malaysia Bhd, Bank Simpanan Nasional) + Large Time Deposits + Repurchase Agreement (Repo) in Other Financial Institutions.  Broad Near Money (Broad Quasi Money)= M3-M1 WHY IS IT NECESSARY TO HAVE MORE THAN ONE MEASURE OF MONEY SUPPLY?  The financial system continually introduces new financial instruments and methods of making transactions that require redefinition of money supply from time to time.  For ease of control/coordination/supervision. For example, different monetary aggregates (M1, M2 and M3) can be used as guide for monetary policy actions.  For ease of setting up monetary objectives/targets.  Act as data collection for various purposes such as research findings, planning, velocity analysis, and other trend synopsis.  Act as one of economic indicators. policy EVOLUTION OF THE PAYMENT SYSTEM  1. BARTER ECONOMIES ❑ Pure BARTER system  A pure barter system is an economic system in which goods and services are directly exchanged for other goods and services without the use of money or a medium of exchange. In a barter system, individuals or entities trade what they have for what they need, relying on a mutual desire for each other's goods or services. While it's an ancient and straightforward system, pure barter systems have several limitations and challenges, which is why most modern economies use money as a medium of exchange.Here are some key features of a pure barter system:  Double Coincidence of Wants: For a barter trade to occur, both parties involved in the transaction must want what the other has to offer. This requirement can lead to significant challenges in finding suitable trading partners.  Lack of a Standard Unit of Account: Unlike money, which serves as a standard unit of account, barter transactions lack a common measure of value. This makes it challenging to compare the relative values of different goods and services.  Difficulty in Making Change: Barter transactions may involve indivisible goods, making it difficult to make exact change in the trade EVOLUTION OF THE PAYMENT SYSTEM  Limited Scope: Barter systems tend to work best in localized and small-scale economies or in situations where individuals have personal knowledge of each other's needs and resources. It's less practical for complex, large-scale economic activities.  Inefficiency and Time-Consuming: Finding suitable trading partners and negotiating the terms of a barter transaction can be time-consuming and inefficient, especially when dealing with a wide range of goods and services.  Absence of Store of Value: Money serves as a store of value, allowing individuals to save wealth over time. In a pure barter system, there is no equivalent store of value, which can make it challenging to save for the future.  Vulnerability to Imbalances: Barter systems are susceptible to imbalances in supply and demand. For instance, if there is an oversupply of a particular good or service and a scarcity of what you need, it can be challenging to facilitate a trade.  In modern economies, money has largely replaced barter systems because it overcomes many of these limitations. Money making economic transactions more efficient and enabling complex economic activities. However, barter systems are still observed in certain situations, such as in informal or localized exchanges, where individuals or communities choose to engage in direct trades of goods and services. EVOLUTION OF THE PAYMENT SYSTEM ❑ Organized BARTER (trading-post Economies)      Organized barter, often referred to as a barter exchange or trading-post economy, is a structured system where businesses or individuals come together to facilitate the exchange of goods and services without the use of money. These organized barter systems aim to address some of the limitations of a pure barter system by providing a platform for individuals and businesses to find trading partners more efficiently and expand their barter networks. Here are some key features of organized barter systems: Barter Exchange or Platform: In an organized barter system, there is usually a central exchange or platform that facilitates the barter transactions. This platform can be physical or virtual, and it serves as a meeting place for members looking to trade. Membership: Participants in organized barter systems typically need to become members of the exchange.Membership often involves paying fees or dues to access the platform and its services. Listing of Goods and Services: Members list the goods and services they have available for trade on the exchange.This creates a directory of available items for other members to browse. Barter Credits: Instead of direct one-to-one trading, organized barter systems often use a system of barter credits. Members earn credits when they provide goods or services, which they can then use to acquire other goods and services from different members of the exchange. EVOLUTION OF THE PAYMENT SYSTEM ❑ Trade Directory: The organized barter system usually maintains a directory or catalog of available ❑ ❑ ❑ ❑ ❑ ❑ goods and services,making it easier for members to find what they need. Barter Coordinator or Broker: Some exchanges may employ a coordinator or broker to facilitate trades,help members find suitable trading partners, and manage the barter credits system. Clearinghouse Function: The exchange often acts as a clearinghouse, ensuring that the value of goods and services traded among members is balanced. This helps maintain fairness and prevent abuses of the system. Rules and Regulations: Organized barter systems have rules and regulations that members must follow, ensuring the integrity and smooth operation of the exchange. These rules can cover issues like pricing, quality, and dispute resolution. Marketplace Expansion: Organized barter systems can help businesses expand their market reach by allowing them to trade with other businesses they might not have otherwise encountered. Record Keeping: Detailed records of transactions and barter credits are maintained by the exchange to ensure transparency and accountability. Organized barter systems offer a more efficient way to conduct barter transactions by addressing some of the issues associated with pure barter systems, such as the double coincidence of wants and the lack of a common unit of account. These systems are especially useful for businesses looking to save cash and improve their overall liquidity. However, they are not without challenges, including the need for a critical mass of participants and the potential for over complication if not managed effectively. EVOLUTION OF MONEY (CONT’D)  2. MONETARY ECONOMIES ❑ COMMODITY MONEY • Commodity money is a type of currency that has intrinsic value because it is made of a valuable commodity, such as gold, silver, or other precious metals, rather than having value solely because a government declares it to be legal tender. Commodity money has been used historically and is based on the idea that the actual physical substance of the money is worth something. Here are the key characteristics and aspects of commodity money: • Intrinsic Value: Commodity money derives its value from the commodity it is made of. For example, a gold coin has value because the gold itself is valuable. • Durability: Commodity money, especially when it's a precious metal like gold or silver, tends to be durable and resistant to wear and tear, making it a reliable form of money. • Fungibility: Each unit of commodity money is interchangeable with another of the same type and weight. For instance, one ounce of gold is generally considered equivalent to any other ounce of gold. • Limited Supply: The supply of commodity money is limited by the availability of the underlying commodity. This limitation can help maintain the value of the money. • Portability: Precious metals used as commodity money are typically portable and can be divided into smaller units without losing their intrinsic value. EVOLUTION OF MONEY (CONT’D) • Historical Use: Throughout history, various civilizations and societies have used commodity money as a medium of exchange.Gold, silver, and other valuable commodities have been used in this way. • Store of Value: Commodity money serves as a store of value because the underlying commodity typically retains value over time.This makes it a useful form of wealth preservation. • Legal Tender: In some cases, governments may declare specific types of commodity money as legal tender, meaning they must be accepted for transactions. However, their value is not solely dependent on government fiat. • Drawbacks: While commodity money has intrinsic value, it can also have limitations. Its supply may not be easily adjustable, leading to issues in controlling the money supply. It can also be subject to fluctuations in the value of the underlying commodity. • Evolution: Over time, many economies have transitioned from commodity money to fiat money, where the currency is not backed by a physical commodity but is accepted due to government decree. This transition often occurs to provide more flexibility in the money supply and to address issues related to scarcity of the commodity. • Historically, gold and silver have been the most common commodities used as money, but other items, such as tobacco, shells, and grain, have also been used in specific regions and time periods. Commodity money played a vital role in the development of early economies, and its principles are still relevant in understanding the history of money and the concepts of intrinsic value and durability. Problems: • It is heavy, hard to transport from one place to another. EVOLUTION OF MONEY (CONT’D) ❑ COMMODITY STANDARD a. FIAT MONEY • • • • Currently, Fiat money is used in our daily lives. The former has a commodity value less than its value as money. Examples of fiat money are coins and paper money issued by BNM. This type of money is called currency. Every country has it own currency. Fiat money can be issued by the government (like coin and notes) and depositary institution (like checks,credit cards). Problems: • Paper money and coins are easily stolen. • Expensive to transport in large amounts because of their bulk! EVOLUTION OF MONEY (CONT’D) b. BANK MONEY  Bank money refers to the portion of the money supply that exists in the form of deposits held in banks and other financial institutions. It is also known as commercial bank money or demand deposits and is a key component of modern monetary systems. Bank money is created through a process known as fractional reserve banking.Here are the key characteristics and aspects of bank money:  Types of Bank Money:  Demand Deposits: These are checking accounts that allow depositors to write checks, use debit cards, and make electronic transfers.Demand deposits are highly liquid and can be readily used for transactions.  Savings Deposits: While savings deposits are not as liquid as demand deposits, they are still considered a form of bank money because they can be accessed relatively easily.  Creation of Bank Money: When individuals or businesses deposit money in their bank accounts, these funds become part of the bank's reserve. Simultaneously, the bank can lend a portion of the deposited funds to other customers, effectively creating new bank money. Bank money is a critical component of the modern financial system, facilitating economic transactions and providing a liquid medium of exchange. Its creation and regulation are subject to financial regulations and the policies of central banks to maintain financial stability and prevent excessive inflation or deflation. Problems: • It takes time to get checks from one place to another. • All the paper shuffling required to process checks is costly.  EVOLUTION OF MONEY (CONT’D) c. ELECTRONIC Monies  Electronics Monies (e-money) are becoming increasingly important.  E-money is money that exists in electronic form.  Electronic money (e-money) in Malaysia refers to a digital representation of value that is issued by a financial institution and can be used for various electronic transactions. Emoney in Malaysia is regulated by the Central Bank of Malaysia, also known as Bank Negara Malaysia.  Types of Electronic Money: E-money in Malaysia can take various forms, including prepaid cards,mobile wallets,and electronic vouchers.  Issuers: E-money issuers are typically financial institutions, such as banks and non-bank institutions like payment service providers. Some well-known e-money providers in Malaysia includeTouch 'n Go, GrabPay,Boost,and BigPay.  Security: E-money providers in Malaysia typically incorporate various security measures, such as PIN codes, fingerprint or facial recognition, and two-factor authentication (2FA) to protect users' funds and data. EVOLUTION OF MONEY (CONT’D) i. Debit cards  Looks like a credit card.  Enable users to purchase goods by electronically transferring funds directly from their bank accounts to a merchant’s banks. The value of the card will depend on your bank’s account balance.  An example in Malaysia is the MyDebit CIMB, Maybank, RHB.  They can be used for a variety of transactions, including: ✓ ✓ ✓ ✓ ATM cash withdrawals Point of sale (POS) purchases at retail stores, restaurants, and online shops Online payments and bill payments Contactless payments using NFC technology EVOLUTION OF MONEY (CONT’D) ii. Stored-value card • • • • • • • • • A stored-value card, also known as a prepaid card or gift card, is a type of electronic payment card that is preloaded with a specific amount of money. These cards can be used to make purchases, pay for services, or withdraw cash up to the value stored on the card. Stored-value cards have become popular for various financial transactions due to their convenience and flexibility. Here are some key features and uses of stored-value cards: Prepaid Value: Stored-value cards are not linked to a bank account or credit line. Instead, users load a specific amount of money onto the card, which can be used until the balance is depleted. Types of Stored-Value Cards: Gift Cards: These cards are typically issued by retailers and can be used to make purchases at the issuing store or within the store's network. Prepaid Debit Cards: These cards are branded with logos like Visa, Mastercard, or American Express,and can be used for purchases wherever those card networks are accepted. Transportation Cards: Some cities and regions use stored-value cards for public transportation, allowing passengers to pay for bus or subway fares. Phone Cards: These cards are used to add credit to a mobile phone or make long-distance phone calls. Payroll Cards: Employers may issue stored-value cards to employees as a means of disbursing salaries or wages. Reloadable vs. Non-Reloadable: Some stored-value cards are reloadable, meaning users can add more funds to the card as needed. Others are non-reloadable, and once the initial value is used up, the card is no longer active. EVOLUTION OF MONEY (CONT’D) • • • • • • • Security: Stored-value cards typically offer enhanced security features. If a card is lost or stolen, the user can often report it and have the remaining balance transferred to a new card. Online and In-Person Transactions: Stored-value cards can be used for online purchases, point-of-sale transactions, and ATM withdrawals, depending on the type of card and the network it's associated with. No Overdraft or Credit: Stored-value cards do not allow users to spend beyond the preloaded balance.They are not credit cards, so they do not involve borrowing money. Record-Keeping: Transactions made with stored-value cards are usually recorded, allowing users to track their spending. Many card issuers also provide online account access to monitor balances and transactions. Expiration: Some stored-value cards have expiration dates, which can result in the loss of any unused balance after a certain period. Cardholders should be aware of any expiration dates and terms. Widely Accepted: Depending on the type of card and the card network it's associated with, stored-value cards can be widely accepted and used at a variety of locations, including retail stores,restaurants,and ATMs. Stored-value cards offer convenience and can be a useful budgeting tool for consumers. They are often used for gifting, travel, budget management, and other purposes. However, users should be mindful of any fees associated with these cards, such as initial purchase fees, reload fees, and inactivity fees, which can reduce the card's value over time. EVOLUTION OF MONEY (CONT’D) iii. Electronic cash  Electronic cash, often referred to as e-cash or digital cash, in the context of Malaysia typically involves electronic payment systems, digital wallets, and other cashless payment methods. These digital payment methods have become increasingly popular in Malaysia as the country continues to advance technologically. Here's an overview of electronic cash in Malaysia:  Digital Wallets: Digital wallets are widely used in Malaysia. They are mobile applications that allow users to store and manage their money digitally. Some of the popular digital wallet providers in Malaysia includeTouch 'n Go eWallet, GrabPay,Boost,and BigPay.  Banking Apps: Many traditional banks in Malaysia offer mobile banking apps that allow customers to perform electronic cash transactions. These apps enable users to make payments,transfer money,and manage their accounts from their mobile devices.  Online Banking: Online banking is a popular method of managing electronic cash in Malaysia. It allows users to access their bank accounts, pay bills, and transfer money electronically through secure web platforms provided by banks.  Contactless Payments: Contactless payments using debit or credit cards with embedded NFC (Near Field Communication) technology have gained popularity. These cards can be used to make payments at various retail outlets in a convenient and secure manner. EVOLUTION OF MONEY (CONT’D)  QR Code Payments: QR code payments are widely used, where consumers can scan QR codes displayed at shops, restaurants, and other establishments to make payments. Many digital wallet providers and banking apps support QR code payments  e-Payments for Public Services: The Malaysian government promotes e-payments for various public services, such as road tolls, parking, and even local government payments. Touch 'n Go and SmartTAG are examples of systems used for highway toll payments.  Peer-to-Peer Transfers: Many e-cash systems in Malaysia facilitate peer-to-peer transfers. Users can send money to friends and family through their mobile wallets or banking apps.  Cross-Border Transactions: Some electronic cash solutions in Malaysia can be used for cross-border transactions, allowing users to send and receive money internationally.  Security: Security is a top priority for electronic cash systems in Malaysia. These systems often employ encryption, authentication, and two-factor authentication (2FA) to protect users' financial information and transactions.  Regulation: The Central Bank of Malaysia, also known as Bank Negara Malaysia, regulates electronic cash systems in the country.They set guidelines and standards to ensure the security and stability of these systems.  Rewards and Promotions: Many e-cash providers offer rewards, cashback, and promotions to incentivize users to use their services for transactions. Users can benefit from discounts, cashback, and other incentives.  The adoption of electronic cash in Malaysia has been on the rise, with both consumers and businesses embracing the convenience and efficiency of digital payment methods. Users should be aware of the specific terms, fees, and features associated with their chosen electronic cash service and ensure that they use secure and reputable providers. EVOLUTION OF MONEY (CONT’D) iv. Electronics Checks • This e-money allows users of the Internet to pay their bills directly over the Internet without ever sending a paper check. • The user (MR. A) has his PC write the equivalent of a check and then sends the electronic check to the other party (Miss B), who in turn sends it to her (Miss B) bank. • Once the recipient’s bank (Miss B) verifies that the electronic check is valid, it transfers money from the originator’s bank recipient’s (Miss B). ARE WE MOVING TO A CASHLESS SOCIETY?  The move toward a cashless society is a global trend that has been accelerating in recent years, but it is important to note that the pace of this transition varies from one country to another. Several factors are driving this shift towards a cashless society:  Digital Payment Technologies: The rapid development and adoption of digital payment technologies, such as mobile wallets, contactless payments, and online banking, have made electronic payments more convenient and efficient.  COVID-19 Pandemic: The COVID-19 pandemic accelerated the adoption of digital payments as people sought contactless and remote payment options to reduce the risk of spreading the virus.  Consumer Preferences: Many consumers find digital payments more convenient, secure, and faster than handling physical cash. Mobile apps and payment cards have become integrated into daily life for many people.  Cost Savings: Digital payments can be more cost-effective for businesses and governments due to reduced cash handling,transportation, and security expenses.  Financial Inclusion: Digital payments can improve financial inclusion, as they allow people who lack access to traditional banking services to participate in the economy.  Government Initiatives: Some governments are promoting cashless transactions as a way to combat tax evasion and the informal economy.They may also implement policies to encourage digital payments.  Retailers and Service Providers: Many businesses and service providers prefer digital payments because they offer detailed transaction records, reduce theft and fraud risks, and provide convenience for customers. ARE WE MOVING TO A CASHLESS SOCIETY?  Despite these trends, it's essential to recognize that a completely cashless society may not be feasible or desirable for everyone.Some factors slowing down the transition to a cashless society include:  Privacy Concerns: Many individuals are concerned about the privacy and security implications of digital payments. They worry about data breaches, surveillance, and a lack of anonymity when using electronic payment methods.  Digital Divide: Not everyone has access to the technology required for digital payments, including smartphones and internet connectivity.Achieving widespread financial inclusion remains a challenge.  Reliance on Cash: Cash remains a necessity in emergencies, natural disasters, and situations where digital infrastructure may be compromised.  Cultural and Behavioral Factors: Cash has cultural significance and is deeply ingrained in many societies.People may prefer using cash for various reasons,such as tradition or personal preference.  Regulatory and Legal Barriers: Some countries have legal requirements and regulations that support the use of cash for specific transactions or activities.  While the trend toward a cashless society is undeniable, it is unlikely that cash will disappear entirely in the near future. Instead, it's more probable that a "less cash" society will emerge, with cash continuing to coexist alongside digital payment options. The extent to which this transition occurs will depend on the pace of technological advancement, regulatory changes, and societal attitudes towards digital payments and privacy.  TQ