Credit Cards and Banks

¶ … Cash Loses Currency" published in The Boston Globe (Talcott, 2004) underscores the movement toward a cashless economy where electronic payments made by credit and debit cards replace cash and checks. The article is primarily a fact-based research piece describing latest trends in ATM and electronic payment use. However, a more thorough understanding of the impact of the transition on consumers is warranted.

Talcott provides many data points to support the cashless economy emergence. For example, a Synergistics Research Corp. study reveals that the number of U.S. households using ATMS fell to fifty-seven percent in 2003, from sixty-five percent in 2000.

And, for the first time, the number of electronic payments surpassed cash and checks according to the American Bankers Association. Reasons cited for the switch from ATMS to electronic payments include greater convenience by eliminating trips to ATMS and a desire to avoid ATM transaction fees, particularly at ATMs that do not belong to their banks where fees average $2.70 per transaction. And, some banks are seeing customers taking more cash out at each visit, thus decreasing their frequency of ATM use. Further the newer debit cards are contributing to the overall increase in electronic payments.

What The Boston Globe article doesn't say is that a large part of the reason for the increase in electronic payments is because banks and retailers are promoting them for their own benefit because they make more money on them than cash or check transactions. Banks make money from debit and credit card transactions by charging retailers a percentage fee for the transaction. Banks make even more money from credit cards through incredibly high interest rates on unpaid balances and annual credit card fees. Debit and credit card acceptance helps merchants by boosting revenue from impulse purchases and eliminating the risk and administrative costs for handling large quantities of cash.

As a consumer, I have long preferred to use credit cards whenever possible for several reasons. In comparison to cash it's more convenient than making frequent ATM trips and it's less risky than carrying around large sums of money. Credit cards are better than checks because payment authorization is easier and quicker. Debit cards present more issues related to liability for stolen cards than do credit cards. For example, there are higher dollar liability maximums for lost cards and the chance that checking account data can be accessed.

While it's true that you don't run up interest charges with debit cards, this fact is irrelevant because I pay my full credit card balance each month. Plus, I do not pay an annual credit card fee and receive a two percent cash back reward for all purchases, something I would not get with any other payment method. In summary, I feel that I have learned to use a credit card in a way that benefits me more than the merchant or the bank.

For other consumers increasing reliance on electronic payments may be a problem, especially for the newer and lesser understood debit cards. There appears to be certain classes of consumers that view a plastic card differently from actual cash or that purchase more because it's easier to do so. The rising credit card debt problem in the United States is already a frequently covered issue and debit cards may be the next item of discussion. Debit cards may make the consumer debt problem worse by extending electronic payment access to customers who don't qualify for credit cards. Unlike credit cards, debit cards require the cash to be available in an account, but it doesn't mean that this cash wasn't earmarked for other necessities. And, it is possible to dip into an overdraft line of credit tied to your checking account. One has to wonder if the growing use of debit cards will also fuel greater use of credit cards as cash is drained from accounts by more impulse purchasing.

As more consumers turn to debit cards, banks may well devise strategies to eek more profit from them.