Easy Money

Cash alternatives make our life simple. But how safe are they?

woman using credit card onlineTo buy anything today, you don't always need cash. These are various alternatives to cash [some old, some new], which you can use for financial transactions. But all have their advantages and disadvantages. Let's look at these:

Travellers cheques

A travellers cheque is an internationally-redeemable draft [in various denominations] from a bank or the traveller's aid company. It is payable only upon the purchaser's endorsement against the original signature on the draft. With the advent of international credit cards, its usage has gone down drastically.

    Pros

  • Cannot be used by others in case of theft/loss and can be replaced anywhere in the world
  • Offers better exchange rates than cash
  • Are accepted worldwide
  • Have no expiry date.
    Cons

    • Range of currencies offered on travellers cheques is limited
    • Many merchants do not accept travellers cheques.
    • Travellers cheques are still a better option as the transaction cost is cheaper than on a credit or debit card.

Demand draft [DD]

A financial instrument used by individuals to make transfers from one bank account to another. Demand drafts are a relatively secure method of payment.

    Pros

  • DDs are issued by banks and hence, are a more reliable form of payment
  • Unlike cheques, DDs cannot be dishonoured.
    Cons

  • Commission charges on a DD are high
  • The only requirement to make a DD is the account number and signature. If these are compromised, you are in trouble.

E-banking

E-banking allows customer to conduct financial transactions on the secured website of their banks. You can sit at home and get bank statements, pay bills, make investments, transfer money and so on. Now-a-days, you can even transfer money through SMS banking, phone banking or the electronic clearing services [where in your money gets debited directly for your investments for paying your bills or insurance premium]. All this has made life simpler, but security concerns always remain at the back of the mind.

    Pros

  • Convenience to do banking anywhere in the world, at any time
  • No worries of queues or bank holidays
  • More control over your finances
  • No danger of being overheard while doing banking transactions.
    Cons

  • Personal touch is missing
  • Identity theft is a concern
  • If you have not taken a print out of your transactions, there is no proof of transaction
  • Have to tolerate technical problems like server slowdowns.

As I said, you cannot avoid it because of its biggest advantage of convenience. But do remember to log out and close the window as soon as your transactions are over.

Credit cards

Credit card—termed as the biggest substitute for cash—is a payment method that allows consumers to buy goods or services on credit. With its easy usability comes a responsibility to use it prudently failing which disastrous consequences loom large.

    Pros

  • Convenient
  • Flexible
  • Useful in emergencies
  • Prudent credit card usage can build up a good credit history with the lenders
  • Purchases through credit cards are documented, which helps in resolving transaction problems.
    Cons

  • Gives a false sense of buying power
  • Has exorbitant credit card fees
  • High late payment fees
  • In case of rollover payments, interest rates are as high as three per cent per month. Credit card is the costliest debt any individual could have. Once the vicious circle starts, it is difficult to get out of it
  • High chance of erroneous charge—items are charged twice

Debit cards

These cards are termed as electronic cheques that provide an alternative payment method. The funds are directly debited from your bank account. Now-a-days, all banks issue debit-cum-ATM cards. They are similar to credit cards, the only difference being that the debit card amount is deducted from your account right away, whereas in credit card the purchases are made on credit. They have an edge over credit cards in certain ways.

    Pros

  • Convenient
  • Can only buy as much as you can afford as the amount is directly debited from your account
  • Can have a tab on your expenditures
  • They curb the temptation to over-leverage and stay within your limits, unlike credit cards.
    Cons

  • In case of a theft, as the money directly gets debited from your account, the thief can dry your entire bank account before you realise it and you will not be able to do anything about it
  • In case of purchase of defective goods you will not be able to return them, unlike credit cards.

Money order

Money order is a payment order for a pre-specified amount of money. They are purchased for the amount desired. They are a very old alternative to cash transfers.

    Pros

  • A more trusted form of payment than a personal cheque.
    Cons

  • Money orders have limited maximum face value
  • Limited acceptance.

Cheques

The first cheque was written in 1659, which makes cheques 350 years old. Cheques are a negotiable instrument where you instruct your bank to pay a precise amount [to the specified person] from your account. They are a preferred mode of payment when it comes to purchasing white goods or in business transactions. But, of late, it's been losing its sheen due to advancement in technology and other modes of payments.

    Pros

  • Accountable
  • More secure. In case of theft, an immediate instruction for stop payment can be done
  • Can be en-cashed only by the person on whose name the cheque is drawn [unless it is a self-bearer cheque]
  • In case of non-satisfactory transaction, you can opt for stop payment.
    Cons

  • Cheques bounce in case of any mistake while writing the amount in words and figures, overwriting or mismatch of the signature on the cheque as against the bank records. They can also bounce due to insufficient cash leading to a penalty. Charges get deducted from both parties—a real embarrassment for the drawee
  • Clearing of cheques takes 2 – 3 working days depending on the type of cheque.

The above are most commonly used forms of alternatives to cash. Select the instrument prudently according to your needs.

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