HOME

TheInfoList




A financial transaction is an
agreement Agreement may refer to: Agreements between people and organizations * Gentlemen's agreement, not enforceable by law * Trade agreement, between countries * Consensus, a decision-making process * Contract, enforceable in a court of law ** Meeting of ...

agreement
, or
communication Communication (from Latin Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to b ...

communication
, carried out between a
buyer Procurement is the process of finding and agreeing to terms, and acquiring goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distri ...
and a
seller Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, completes a sale in ...

seller
to
exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green Township, Morgan County, Indiana, Morgan County, in the U.S. state of In ...

exchange
an
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
for
payment A payment is the voluntary tender of money or its equivalent or of things of value Value or values may refer to: * Value (ethics) it may be described as treating actions themselves as abstract objects, putting value to them ** Values (Western p ...

payment
. It involves a change in the status of the finances of two or more businesses or individuals. The buyer and seller are separate entities or objects, often involving the exchange of items of value, such as
information Information is processed, organised and structured data Data (; ) are individual facts A fact is something that is truth, true. The usual test for a statement of fact is verifiability—that is whether it can be demonstrated to c ...

information
,
goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
,
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
, and
money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or verifiable record that is generally a ...

money
. It is still a transaction if the goods are exchanged at one time, and the money at another. This is known as a two-part transaction: part one is giving the money, part two is receiving the goods. A financial transaction always involves one or more financial asset. Either buyer or seller can initiate such a transaction, hence one is the originator/initiator and the other is the responder. From liquidity point of view, one is the liquidity provider, the other party is the liquidity consumer. The liquidity provider is also called offer and the liquidity consumer is also called taker. While bidder and asker are much more confusing. Some people use both bid & ask for liquidity provision, while some other people use offer & ask for liquidity provision.


History

In ancient times non-financial transactions were commonly conducted through systems of credit, in which goods and services were exchanged for a promise of future recompense. Credit has certain disadvantages, including the requirement that traders or their intermediaries trust one another, or trust that authorities exist who can be relied on to enforce agreements. Debts must eventually be settled either with goods or by payment of
money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or verifiable record that is generally a ...

money
, a substance of agreed value such as
gold Gold is a chemical element Image:Simple Periodic Table Chart-blocks.svg, 400px, Periodic table, The periodic table of the chemical elements In chemistry, an element is a pure substance consisting only of atoms that all have the same numb ...

gold
and
silver Silver is a chemical element In chemistry, an element is a pure Chemical substance, substance consisting only of atoms that all have the same numbers of protons in their atomic nucleus, nuclei. Unlike chemical compounds, chemical ele ...

silver
. Systems of credit are evident throughout recorded history and from archeology. By contrast little evidence has been found of widespread use of pure
barter In trade, barter (derived from ''baretor'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods or ...

barter
, where traders meet face to face and transactions are completed in a single swap. As cities, states, and empires were established,
coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...

coin
s and other compact forms of
specie Specie may refer to: * Coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material that, when fresh ...

specie
were minted or printed as
fiat money Fiat money (from la, fiat, ) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree A decree is a rule of law usually issued by a head of state A head of state (or chief of sta ...
with set values, permitting the accumulation of assets that would not deteriorate over time as goods might and that had the relatively secure backing of a government which could adjust value by producing more or less of the
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed t ...

currency
. As fixed currencies were gradually replaced by floating currencies during the 20th century, and as the recent development of
computer network A computer network is a set of s sharing resources located on or provided by . The computers use common s over to communicate with each other. These interconnections are made up of technologies, based on physically wired, optical, and wire ...
s made
electronic money Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet The Intern ...
possible, financial transactions have rapidly increased in speed and complexity.


Examples


Purchases

This is the most common type of financial transaction. Goods or services are exchanged for
money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or verifiable record that is generally a ...

money
. This transaction results in a decrease in the finances of the purchaser and an increase in the benefits of the sellers.


Loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...

This is a slightly more complicated transaction than others in which the lender gives a single large amount of money to the borrower now in return for many smaller repayments of the borrower to the lender over time, usually on a fixed schedule. The smaller delayed repayments usually add up to more than the first large amount. The difference in payments is called interest. Here, money is given for not any specific reason.


Mortgage

This is a combined loan and purchase in which a lender gives a large amount of money to a borrower for the specific purpose of purchasing a very expensive item (most often a house, car, gold etc). As part of the transaction, the borrower usually agrees to give the item (or some other high value item) to the lender if the loan is not paid back on time. This guarantee of repayment is known as
collateral Collateral may refer to: Business and finance * Collateral (finance) In loan agreement, lending agreements, collateral is a Borrower, borrower's pledge (law), pledge of specific property to a lender, to Secured loan, secure repayment of a loan. ...
.


Bank account

A
bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

bank
is a business that is based almost entirely on financial transactions. In addition to acting as a lender for loans and mortgages, banks act as a borrower in a special type of loan called an account. The lender is known as a customer and gives unspecified amounts of money to the bank for unspecified amounts of time. The bank agrees to repay any amount in the account at any time and will pay small amounts of interest on the amount of money that the customer leaves in the account for a certain period of time. In addition, the bank guarantees that the money will not be stolen while it is in the account and will reimburse the customer if it is. In return, the bank gets to use the money for other financial transactions as long as they hold it.


Credit card

This is a special combination of a purchase and a loan. The seller gives the buyer the good or item as normal, but the buyer pays the seller using a
credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

credit card
. In this way, the buyer is paying with a loan from the credit card company, usually a bank. The bank or other
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
issues credit cards to buyers that allow any number of loans up to a certain cumulative amount. Repayment terms for credit card loans, or
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
s vary, but the interest is often extremely high. An example of common repayment terms would be a minimum payment of the greater of $10 or 3% every month and a 15–20% interest charge for any unpaid loan amount. In addition to interest, buyers are sometimes charged a yearly fee to use the credit card. In order to collect the money for their item, the seller must apply to the credit card company with a signed
receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of parcel, Manifest (transportation), manifest or customer receipt) is a document acknowledging that a person has rece ...

receipt
. Sellers usually apply for many payments at regular intervals. The seller is also charged a fee of normally 1–3% of the purchase price by the credit card company for the privilege of accepting that brand of credit card for purchases. Thus, in a credit card purchase, the transfer of the item is immediate, but all payments are delayed. The credit card holder receives a monthly account of all transactions. The billing delay may be long enough to defer a purchase payment to the bill after the next one.


Debit card

This is a special type of purchase. The item or good is transferred as normal, but the purchaser uses a debit card instead of money to pay. A debit card contains an electronic record of the purchaser's account with a bank. Using this card, the seller is able to send an electronic signal to the buyer's bank for the amount of the purchase, and that amount of money is simultaneously
debit Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance Balance may refe ...

debit
ed from the customer's account and credited to the account of the seller. This is possible even if the buyer or seller use different financial institutions. Currently, fees to both the buyer and seller for the use of debit cards are fairly low because the banks want to encourage the use of debit cards. The seller must have a card reader set up in order for such purchases to be made. Debit cards allow a buyer to have access to all the funds in his account without having to carry the money around. It is more difficult to steal such funds than cash, but it is still done. See also skimming and shoulder surfing.


See also

* Alternative payments *
Financial transaction tax A financial transaction tax is a levy on a specific type of financial transaction A financial transaction is an agreement, or communication, carried out between a buyer and a seller to Trade, exchange an asset for payment. It involves a cha ...
* Teeming and lading


References

{{DEFAULTSORT:Financial Transaction Payment systems