As previously detailed in the Master Plan, Part 1 and the Master Plan Intro, Verify Payments at its core is about banks. We’ve already discussed the reasons why we chose banks, and in this article we will look into how banks compare to other means of moving money.
To look into and study the options of moving money around we need to consider the sender and receiver. The sender in this context is someone who has the money and plans to give it to the receiver. The sender can be the receiver. One other thing to keep in mind is that money can be anything that both parties agree to use as a means of exchange. This latter quality is actually a function of money called “medium of exchange” [1, 2].
With that in mind let us consider the various forms to moving money around. The dominant ones are listed below:
Cash, Checks, Money Orders, Bank Drafts, Credit Cards, Crypto, Money Transfers (like MoneyGram and WesternUnion) and Online Payments like Venmo and Paypal.
Here is a handy table that summarizes the Pros and Cons of each method:
Detailed Comparison
Here is a more detailed version of the table summarized above; we will go through each and list the pros and cons known for each form of moving money around:
1. Cash: is a widely used instrument, especially for small micro-payments. It can happen that each region has it is own shape and name. Cash can be in forms of coin and/or paper. Of its advantages [3]:
- It can be accepted almost anywhere (Mostly for the same country).
- Reliable
- Fast to settle
- 0 fees for receiver
However Cash still lacks in various aspects which we can summarize in the following:
- Requires physical presence to initiate the exchange
- Not safe to carry around
- Costs to keep (safety and protection)
- Can’t be recovered after damage
- Takes time to manage; especially to settle accounts.
- Not suitable for large transactions
- Can’t use it online
- Not widely accepted in self service outlets
- Enables black market and money laundry
- Sending it cross-border by mail is very risky
We see cash is quite hard to manage and in most cases requires a teller to manage. It is not suitable for online-commerce. It is also inconvenient to move larger amounts of it as it poses security/safety threats.
2. Checks: checks are easier mean to move money around than cash. Carrying a single paper is better than carrying a bag of papers. Let us look into what checks offer [4,5]:
- Safe (it is usually only intended for the specific receiver)
- Personalized and can be branded to suit the brand of the issuer
- Easier to move around than cash
- Easier to manage
- Easily traced
- Easily recovered
- Suitable for larger amounts
- Has the overdraft option where it can act as a credit option
From the above checks can easily be moved around than cash; however there are some pitfalls:
- Less acceptance
- Takes time to issue and to clear
- Verification of checks takes time
- Might bounce back
- Mostly needs manual collection; i.e. requires the receiver to approach a bank in order to cash out
- To use internationally the issuer must use international checks and those are costly
We can see that checks have lesser spread than cash in the sense that you can’t use the checks anywhere to pay for products and services. In most cases, you have to cash out first. However, it is not the best option for the receiver
because it has no guarantees that the check will not bounce back. Time to settle is a real pain.
Since we are focused on moving money around it is a better option than cash. It still requires physical activity to move the check around and to actually cash out. This could slow commerce since parties need to hold until things clear.
3. Money orders: Just like checks, Money order are a better way to move money around than cash; It differs from checks in that it is however it is capped. which makes them suitable mostly for smaller payment amounts. It can be
compared to gift cards. Let us see where Money Orders stand the most [5]:
- Useful for small orders
- Does not require a bank account
- Does not bounce back
- Fairly Safe; they can be reported when stolen however it is a long process getting them back
- Can be obtained off the shelf
This reflects that they are fairly less complicated to use than checks however they suffer some drawbacks:
- There are fees to issue
- They are not widely accepted; however they are accepted in some stores and services
- They are capped
- Hard to track
- Manual collection, in the sense that they are still moved around physically
- Requires authentication of holder before using
Just like checks, Money Orders to be used in various places they need to be cashed out. They are not the best option for businesses especially because they are physical and slow to issue and cash out.
4. Cashier’s Check / Bank Drafts: To solve the checks bouncing problem Cashier checks came to shine. To issue the Cashier’s Check you need to have the amount in your balance; Once you issue the check that amount is locked. Let us
take a look at what makes them better than checks for businesses [6, 7]:
- It is mostly accepted by all local banks
- Useful for high dollar transactions
- Does not bounce back
- Easily traced
- Issued by a bank
- Suitable for large payments
Cashier’s checks are better than normal checks for businesses because they can never bounce back; they are mostly used as down payments for large transactions. however they still suffer some drawbacks:
- They are not easy to issue
- Issuer endures fees to issue
- Requires paperwork to issue
- Very slow
- They are one way; if deposited there is no recourse
- They are capped for security and safety
- Allow for scams and cons practices dues to feeling of safety
- Costly to issue international drafts (for issuer and receiver)
- They still require physical presence to process
Cashier’s checks still operate somewhat similar to normal checks in that they still require physical presence to cash out and are slow to process. Businesses will end up wasting a lot of time and resources to clear and issue the checks
and receiver the same.
5. Bank/ACH transfers: Bank transfers are meant to many solve issues with other available means of moving money around. They are stronger in [8, 9]:
- Safest method
- Highly secure
- Useful for high dollar transactions
- Can easily be tracked
- Can easily generate track and statements
- Faster than checks
- Cheap for local transfers
Banks transfers are more suitable to move money quickly and safely however they too have some drawbacks [10]
- Bad exchange rates when it comes to currency exchange
- Some banks enforce transfer Commission
- It is costly for international transfer but are still reasonably cheaper than other methods we’ve seen
- Currently it is somewhat slow when it comes to cross border transfers but still faster than the other seen means
- Might Lack price transparency
- Currently does not allow batch transfers
- Currently it cannot be reversed (one way)
- Currently mostly are closed and Lack open APIs
- Requires approval of transfer
- Currently does not support recurring payment
- Does not have single click payments
Bank transfer are very useful and especially in them being safe and secure. They are often used for down payments for various products. However they are still lacking when it comes to online payments. The great part about this is that most of the drawbacks can be addressed and that is what Verify Payment is doing. Addressing those drawbacks to provide a better solution that solves a real problem.
6. Credit cards: Credit cards are widely adopted especially for online payments. They are mostly known for the following [5, 11, 12, 13]:
- Accepted in almost all online stores and self service points
- Considered reasonably Safe (Electronic Funds Transfer Act)
- Portable
- In many cases, there are Points/Benefits for holder
- Can supports recurring payment
- Single Click payments
- Allows phone payments
Credit cards are considered safe in the sense that if in cases where they are stolen they can easily be reported to the issuer bank and be blocked they also allow the holder to file disputes and get their money back. Even though those
features are great they may not be the best solution for the following [11, 12, 13]:
- They are the most expensive
- Costly fees for the receiver
- Each transaction charges a Commission
- Costly exchange rates when used internationally
- They are capped
- High-interest rate for holder
- Debt/loan is easier to happen with credit cards.
- Requires a lot of security measures
Credit cards are also not suitable for large transactions primarily because they are capped and have a high operational fees. They however provide a protection and allow the giver to overspend. That is why givers like to use credit cards
7. Crypto: Many consider Crypto to be the new Gold in the financial world and many others differ [14]. Crypto is fairly new and it genuinely addresses many of the drawbacks in current financial systems primarily centralization and:
- Is not bound to a country
- Low Fees
- Instant
Those perks make moving money around locally and cross-border very easy however there are limitations which limit the usage of crypto [14, 15]:
- Does not provide reach in that it is yet to be adopted everywhere by everyone
- Highly Volatile which makes it risky for merchants to use
- Exchanges high rates and fees
- Security concerns
- Governmental regulations
Crypto is present in high value transactions but its volatility is a major concern and does not have reach. Crypto if utilized properly with current methods that we have seen could provide a solution to moving money around and
especially cross-border.
We have seen so far that cross-border is a major hurdle and even local transfer methods have their weaknesses that make them a somewhat bad choice to pick.
8. P2P payment tools: P2P tools like Paypal, Moneygram and Venmo are known for ease of use and are considered:
- Faster than checks
- Support Recurring payments
- May accept cash (MoneyGram)
however these tools are:
- Costly to start using and send money [16, 17]
- Capped
- In the case of Moneygram it may require physical presence of the person to send
- P2P is mostly region-specific; like Paypal is mostly used in the US and Europe.
- May not be reversible like Venmo
One major problem with using these tools is the high fees involved in moving money around. In most cases, they use banks or credit card in their core.
9. Mobile payments: Mobile payments is a good option [18] to move money around and they are considered:
- Faster checkout process
- Convenient
- Cheaper fees
However they are fairly new and do not provide reach since they are mostly operational in specific regions. Businesses cannot adopt this option yet which makes this option unfavorable especially to B2B models.
As presented there are various issues that can be solved by going bank-to-bank to move money around. That is why Verify is currently pushing out Verify Payments with the aim of enabling seamless bank-to-bank transfers in the
region.
We’re always on the lookout for great developers! If you’d like to join a team
on the bleeding edge of financial technology, send us a note → jobs@verify.as
References:
[1] Wikipedia, (2018). “Money”. Wikipedia.com. Available at:
https://en.wikipedia.org/wiki/Money#Functions,
Accessed (18th May 2018)
[2] Investopedia, (n.d.), “What is a ‘Medium Of Exchange’?”, https://www.investopedia.com/terms/m/mediumofexchange.asp. Accessed (13th Apr 2018)
[3] Michelle Miley, (n.d.), The Advantages & Disadvantages of Using Cash vs. Credit, thenest.com. Available at:
https://budgeting.thenest.com/advantages-disadvantages-using-cash-vs-credit-31004.html
[4] Rivera, J, (2014), What’s the Difference between a Check and a Note?, legalmatch.com. Available at:
https://www.legalmatch.com/law-library/article/kinds-of-bank-checks.html
[5] Caldwell, M, (2018). The Differences Between Money Orders, Bank Checks, and Cashier’s Checks. Thebalance.com. Available at:
https://www.thebalance.com/money-orders-bank-checks-and-cashiers-checks-2385803
[6] Pritchard, J, (2018), Learn How Bank Drafts Work: Safe Payments (Or Electronic Transfers). Thebalance.com. Available at: https://www.thebalance.com/bank-drafts-315281
[7] Money Advice Service, (n.d.), How to use banker’s drafts and cheques, moneyadviceserivce.org.uk. Available at:
https://www.moneyadviceservice.org.uk/en/articles/using-cheques-or-bankers-drafts
[8] Mybankinglicense, (n.d.). Advantages of Bank Wire Transfers. Available at:
https://www.mybankinglicense.com/15153/advantages-bank-wire-transfers/
[9] Caldwell, M, (2017). Five Advantages of Online Banking. Thebalance.com.
Available at: https://www.thebalance.com/three-advantages-of-online-banking-2385804
[10] Birch, S, (2016). Disadvantages of using a bank to transfer your money abroad. Available at:
https://www.currencysolutions.co.uk/news/personal/send-money-home/disadvantages-using-bank-to-transfer-your-money-abroad
[11] Finder, (2018). Benefits and disadvantages of a credit card. Available at:
https://www.finder.com/credit-cards-top-benefits-and-disadvantages
[12] Money Supermarket, (2018). Credit card pros and cons. Available at:
https://www.moneysupermarket.com/credit-cards/advantages-and-disadvantages/
[13] Mountain State, (n.d.). Advantages and Disadvantages of Credit. Available at: http://mtstcil.org
[14] Coin Pupil, (2017). Advantages and disadvantages of cryptocurrency. Available at:
https://coinpupil.com/altcoins/advantages-disadvantages-of-cryptocurrency/
[15] Boukhalfa, S, (2017), What are the disadvantages of cryptocurrencies?. Available at:
https://prescouter.com/2017/11/disadvantages-of-cryptocurrencies/
[16] Soffar, H, (2016). What are the advantages and disadvantages of using PayPal?. Available at:
https://www.online-sciences.com/technology/what-are-the-advantages-and-disadvantages-of-using-paypal/
[17] Finder, (2017). Western Union vs. PayPal: What’s the Difference?. Available at:
https://www.finder.com/western-union-vs-paypal
[18] Simicart, (n.d.). The advantages of mobile payment systems. Available at:
https://www.simicart.com/mobile-commerce/mobile-payment-systems.html/