Page 516 - Introduction to Business

490 PART 5 Finance

Even normal currency risk can be fairly important over five- to ten-year periods
of time. Suppose that at one point in time it cost you $30 to purchase a pair of shoes
made in Indonesia; three years later the same pair of shoes cost $50 because the
value of the dollar gradually decreased compared to the Indonesian rupiah. Such
currency movements can and often do affect international trade and finance.

electronic money The use of Electronic Money. Another form of money is electronic money, which is
computers, equipment, and electronic
communications to make payments, increasingly replacing coin and paper currency. Some of the most popular types of
including credit cards, stored value electronic money are listed below.
cards, debt cards, wire transfers, and
Internet payments • Credit cards allow people to borrow money on demand from financial institu-
tions in order to pay for goods and services. Credit cards issued by such firms
as Mastercard, Visa, and American Express can be used in many countries
around the world. A U.S. citizen on vacation in Japan purchasing Sony prod-
ucts would be billed in yen, and international banks would convert the yen
debt to U.S. dollars at the prevailing U.S. dollar/yen exchange rate. Assuming
that 100 yen equal $1, a debt of 3000 yen would be converted to $30 (3000 yen
divided by 100 yen/$1). Credit card companies charge interest rates on out-
standing balances, which customers must pay back on a monthly basis. Banks
get information from different sources to evaluate the creditworthiness of
potential customers and aggressively market their credit cards by mail, phone,
and promotions.
• Stored value cards have a magnetic strip that records the money value of the
card to be used in paying subway and toll road fees. Once the value of the card
is used up, it can be reloaded.

• Debit cards or smart cards have a computer chip that records the money value
of the card. As people use the card, it adjusts the balance remaining. Like
stored value cards, the money held in debit cards can be reloaded. However,
debit cards can be used at more locations than stored value cards, such as gro-
cery stores, gasoline stations, and restaurants.

• Wire transfers can be used to make large-denomination payments or tranfers,
especially in international business transactions. In the United States, the
Clearing House Interbank Payments System (CHIPS) and the Fed wire provide
wire services for banks, businesses, and government. Also, the Society for
Worldwide Interbank Financial Telecommunications (SWIFT) is a major sup-
plier of international wire transfers.
• Internet payments can be made by means of online deposit and investment
accounts that permit digital transfers of funds to pay monthly bills, pay for
goods and services, and buy and sell securities. Even home mortgage loans
can now be arranged over the Internet. Specialized Internet banks have
emerged in some cases. However, most banks have Internet websites from
which customers can access and move their money.
The advantages of electronic money are speed, convenience, low transactions
costs, automated record keeping, and increased control of funds. However, there
are some disadvantages. Unlike coins and paper money, electronic money is not
always accepted by business firms. Credit cards are most widely accepted but can
be rejected as payment by some business firms. Many times the user must prove his
or her identity to access electronic money. Also, some people express confusion in
terms of deciding what forms of electronic money are most appropriate to meet
their needs. The most serious concern is safety. If information about a person’s elec-

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