Global Trade Center

FOREIGN EXCHANGE
Payments between countries involve additional complications.

The Problem of Different Clearing Systems
Most payments are made with bank dollars. To use bank dollars in payment there must be a way to convert the payer’s bank dollars (dollars in the payer’s bank deposit) into bank dollars the recipients is willing to accept (dollars in the recipient’s bank deposit). This is easy if both payer and recipient share the same bank. It is almost as easy, if a little more expensive, if they have different banks but the two banks are part of the same clearing system.
However, if the two banks are not part of the same clearing system, payment is much more difficult.The payer must find a way to trade his bank dollars for bank dollars at the recipient’s bank or bank dollars that are convertible into the same through a common clearing system. Trade in bank dollars of bank in different clearing system is called foreign exchange.

The foreign exchange market expanded rapidly with the breakdown of the Bretton Woods system of fixed exchange rates in 1971 and exploded with the large increase in exchange rate  volatility that began in the late 1970s. In 1977 trading volume in NewYork amounted to less than $5 billion a day (about $15 billion in 1998 dollars). By 1998 it had increased to $351 billion a day. Trading volume in London, the center of the world market for foreign exchange, was  $637 billion a day in 1998, and the worldwide total was about $1.5 trillion a day. By 2001, total trading volume had fallen to $1.1 trillion. One reason for this was the creation of the Euro, which replaced 11 national currencies. Another reason has been the consolidation of the banking industry, which has reduced the number of participants in the market.

Trading volume in foreign exchange is nonetheless many times greater than the volume of international trade. In fact, most foreign exchange transactions are related not to trade but to finance. For example, if a Japanese pension fund wants to buy U.S. government securities, it must change its yen into dollars. Indeed, as the volume of international financial transactions has grown, securities firms have increasingly become dealers in foreign exchange , offering this service to their customers themselves , rather than refering them to a commercial bank.

An International Comparison of Payments Patterns
All developed countries use all of the different methods of payment to some extent. However, the pattern of use differs widely across countries. Americans rely mainly on checks and credit cards. Europeans prefers giro payments and debit cards. The Japanese (and other Asians) rely far more on cash.
Exhibit 8.2 gives a breakdown of the composition of cashless payments in the United States, Europe, and Japan. The breakdown is for the number of transactions per person. This differs radically from the breakdown by value. For example, in the United States, wire transfers account for a negligible percentage of the total number of transactions, but they account for 85% of the total value (in Exhibit 8.2, wire transfers are included in the category “giro” for the United States).
The total number of noncash payments is highest in the United States because cash is used less than elsewhere (less than 1% of the total value of all transactions). It is intermediate in Europe and lowest by far in Japan. The Japanese rely on cash for most POS transactions. You can see that the United States is the biggest user of checks and that the second largest category is credit cards. Europe relies on giro payments more than on checks and on debit cards more than on credit cards. Japan uses giro more than any other method, but its use of cashless methods of payment is much lower than other countries’.

How to improve your business financially through Strategic Choices

Finance is the life blood for any business. For a business to prosper it has to manage the financial apart efficiently. It includes deploying funds and improving your business value. Financing huge projects or huge outlay of cash requires careful planning because it is a strategic decision. The funds once locked up cannot be easily liquidated. Hence it is imperative that business managers look into various options put before them before taking such strategic decisions. Finding out where the funds can be obtained cheaply, buy or lease decisions are day to day decisions businesses involve. Finance companies provide funds for businesses of various types.
Apart from providing loans they also provide factoring services, leasing options etc. Leasing and factoring are common activities businesses do. Hence selection of proper leaser and factor is important. Also they must suit your need and business type. When you take a look at this finance solutions, you can find a lot of factoring, loan and equipment purchase options. Certainly business across US and Canada can take a look at their offering just because they seem to be very reputable and highly experienced.
An advantage what I believe in going with companies like these are the amount of time you have to spend in applying a loan or factoring service. Unlike banks these private players have a very short turnaround time and hence small business can easily be benefitted. In my experience I believe managers have tough time in deciding to choose between whether to lease or to purchase equipment. The net cash flows resulting from the two determines the exact position of your choice. You can also rely on these services because they give you the exact details of your current standing. You can also find lot of other services around you to compare and choose from.

e- Business: How to choose the Web Hosting Service

Business in Internet is attracting thousands of entrepreneurs each day. Since e- marketing and e-business are turning out profitable ventures, existing businesses must establish itself in this revolutionary turnaround. To start with individuals or firms can start with their own website to attract customers. One of the most critical decisions a blogger or a website owner has to decide is regarding the web hosting service that best fits into his needs. When we surf around the web we find a lot of hosting providers. But there may be still few other services hidden that you may never came across. Because of the increasing competition web hosting companies are drastically reducing their rates and coming up with different plans. Hence to find out the type of service available and list of providers you can easily find from these web hosting reviews

Apart from looking at different service providers you can also learn about the different hosting mechanisms like dedicated hosting and multiple domain hosting. These sites offer you services like suggestions for domain names and selecting the SEO campaigns. So before starting a website for your business you must learn few concepts to make your site effective. Do not fall into marketing gimmicks of one hosting provider. For example if your site is forum related there are few web hosting providers who specialize in this area. I also read few customer’s web hosting reviews.

When you enter the site you can find the content management part which explains you how a proper content should be oriented to the main theme of your business. Hence instead of blindly following a marketed campaign comparing different services from such websites allow you even to earn discount to your purchase. Thus once you are done with your website, hosting and SEO part you can easily attract few thousands of customers to you virtual market place. Go through these web hosting reviews site and you will surely save some money and feel the best service.

Payment on the Internet

An increasing fraction of all transactions now take place on the Internet. There are predictions that business-to-consumer transactions (B2C) on the Internet will soon be in the hundreds of million of dollars and that business-to business transactions (B2B) in the trillions.
Currently, the overwhelming majority of B2C purchases on the Internet are paid for by credit card. This works reasonably well, but there are some problems. The first is security. Hackers can acquire credit card information, either by intercepting communication between consumer and merchant or by gaining access to merchant computers.20 Once they have the information, they can use it by faking e-mail from the owner of the credit card . Credit card fraud is 12 times more common for Internet transactions, and the credit card companies consequently charge a larger discount on such transactions. The principal defenses against fraud are encryption of credit card information and better security of merchant computers.
A Second problem is that payment by credit card is not available for transactions between consumers (P2P) -for example, to settle purchases in online auctions. Various technologies are being developed to bridge this gap with some form of “online check”. One, called eCheck, is a relatively straightforward electronic version of the paper check. Another, called PayPal, provides consumers with the capability of linking up with the existing credit card and ACH networks to make payments. Yet another technology is planned to link up with existing ATM network.
A third problem with payment by credit card continues is that it is expensive. There is the potential on the Internet for a large volume of quite small transactions involving the sale of information, such as a single song, photograph, news item, or piece of data. The payments involved are likely to be small-from $10 down to 1c or even less. For such transactions, various technologies are being developed to provide some form of “digital cash”.
For the time being, however, the credit card continues to dominate Internet commerce. None of the new digital check or cash technologies have yet caught on. Of course the same network externalities that stand in the way of the smart card are part of the problem here. Consumers do not use the new technologies, because not enough merchants accept them. Merchants do not accept them because not enough consumers use them.

International prepaid cards

The electronic equivalent of the special check is the prepaid card, commonly used on many campuses to operate copying machines. You buy the card, often from a vending machine, for cash, say $10. You insert the card into the copying machine to make copies, and the cost of the copies is debited from the balance on the card until the $10 is used up. There are other uses of international prepaid cards- for example, paying for tickets on the Washington, DC subway system. Prepaid cards are popular in Europe and extremely popular in Japan.
A more sophisticated version is the smart card or “electronic purse or wallet,” which embodies a microchip and can be used as a general rather than a specific means of payment. Users “download” cash from their bank deposits via an ATM machine or a specially adapted phone. Smart cards can be used for payment wherever merchants have the equipment to read them. Unlike credit or debit cards, no verification is necessary. This saves on telecommunications costs which can be 8¢ to 15¢ for a credit /debit card transaction. Consequently smart cards are viable for much smaller transactions-purchase of a newspaper, for example.
Smart cards have been slow to catch on. One reason is again network externalities. Merchants do not find it worthwhile to install readers because few consumers have the card. Consumers do not find it worthwhile to acquire the card because few merchants accept it. Moreover, although the cost to the economy of using cash is substantial, the cost to a consumer of an individual transaction is small. There is therefore little incentive to go to a lot of trouble to avoid it.

Every country aspires to maintain a balance of trade. That is the total of imports must be equal to total of exports. But both the export and import are measured with respect to a particular currency value. There are lots of influential factors that alter the value of currency. Even a drop in rain may affect the country’s currency value because it affects the balance of trade.
Many countries hold its reserve cash in dollars that too in millions of dollars. Say if a country holds $100mn. Now because of the current economic plunge the dollar significantly lost its value and indirectly all the world countries received a huge blow in terms of their resources. It is estimated for previous case the value may drop to $75mn dollars. Alternatively have people decided to use dollars in more economic way?
Drop in Dollar values

New dollar image

Now might have you heard the recent inflation figure of 1000% in Zimbabwe. People were found carrying millions and millions of currency notes that generate no value. This means the Zimbabwean dollar has reached a value of zero. Another important factor for drop in currency value is the savings made by people. If there are no savings then a country would be ill equipped to meet long term obligations and hence it will import more and more foreign currency which will lead to domestic currency fall. Factors like demand for particular currency, current political factors and natural factors all contribute to rise/fall in world currencies.

When you pay by check, you also benefit  from float. If you send it by mail, the legal date of payment is the date of the payment is the date of the postmark. You earn mail float on the time it takes the check to be delivered to the recipient . It also takes time for the check to go through the  clearing process. You earn bank float until your deposit is debited. If the total delay is a week, you earn an extra week’s interest on the amount of the payment after it has legally been made.

Methods of payment that do not involve float seem less attractive. The transaction cost of electronic payment (EFTPOS, for example) is much lower than that of payment by check or credit card. It is also much faster. But this speed is a disadvantage to you because it reduces float.

The loss of float is one reason debit cards have been slow to catch on in the United States. Checks and credit cards offer greater float. In Europe, payments by cash and giro predominate. Since neither method offers float, the greater convenience of the debit card is not offset by any loss of float, and debit cards have proven very popular.

The Use of Cash. Immediate payment  in cash by definition involves no float. Why is it, then, that there are so many cash payments? There are, in fact, good reasons why immediate payment in cash is the preferred method both for very small payments and for very large ones .

Cash is the preferred method for small payments because it is the only method that involves no credit (no promises). Methods of payment that involve credit involve substantial fixed costs. For example, the costs of credit verification and of clearing a check do not depend on the amount of the check. Consequently, a check is relatively more expensive for small transactions. Therefore, when you buy a newspaper at the corner newsstand, a check or credit card will not be accepted. You have to pay in cash.

For quite different reasons, immediate payment in cash is also preferred for very large payments. For large payments, the recipient may not be willing to accept the loss due to float. At an interest rate of 5% per annum, a day’s delay on a payment of $100 million costs about $13,000 in forgone  interest. Moreever, many large payments are related to very-short-term lending-perhaps for as little as a day. Lending money for a day and sending the money by check would not make much sense. Large payments in “cash” are made by Fedwire.

The different  patterns of use of various methods of payment also relative costs. For example, the cost structure in the United States strongly favors the use of checks and credit cards.

Although your bank provides you with “free checking,” checks are in fact far from free. The average checks costs 76c to process. Total processing costs for all checks add up to some $45 billion a year. Your credit card transactions are also “free” to you. But processing costs average 44c per payment and merchants pay a substantial discount (as much as 5%) to receive payment.

Why is it that you do not pay the true cost of these transactions? One reason for “free checking” is taxes. The receipt of explicit interest on deposits is taxable, while the receipt of implicit interest, in the form of free services, is not.Another reason is the nature of competition among banks. Typically, when there are few firms in a market-as is the case in most local banking markets-they avoid competing on price because of the danger of a price war. Instead, they compete in the services they provide. Free checking is one of these services.

Why don’t  retailers pass on to you the extra cost of them of a credit card purchase? Credit card customers tend to be wealthier and to spend more. Retailers may be willing to offer them a lower price-which is what they do when accept a credit card-because on the whole cardholders are better customers.

Float. The main thing that makes a credit card purchase so attractive to you, and so costly to the merchant, is delay. You receive the merchandise immediately, but you do not have to pay until the end of the billing period. In the meantime you earn interest on the amount of the payment. The merchant avoids having to wait for payment only by discounting the debt with a bank. Essentially the bank lends the merchant the amount of the payment until you pay it. The benefit of delay to you from such a transaction is called float.