When you reach into your pocket to pay, what comes out? Debit card? Checkbook? A bitcoin printed onto a slip of paper in a tiny font? (originally provided by Matthew Amster-Burton).
I’ve often wondered about how people pay, because when I write about checking accounts, budgeting tips, I make assumptions. Too often, I assume you’re just like me, a debit card fiend who carries a wad of $1 bills for tipping at coffee shops.
And now that I look at that self-description, wow, I don’t want to meet me, either. The Federal Reserve Bank of Boston was also curious about payments. Instead of making assumptions, however, they carried out a rigorous survey of American consumers. It’s called the Survey of Consumer Payment Choice, and it contains a lot of interesting tidbits.
Spoiler: it turns out I’m not the only American partial to debit cards and cash.
(And if you’re wondering how Federal Reserve bankers pay, they snap their fingers and money magically appears. Central banking humor!)
How we pay
The study covers the year 2010. Crunching numbers takes time.
Here’s the magic chart:
As you can see, cash and debit cards together count for well over half of all transactions. Keep in mind that we’re looking at raw transaction numbers here.
Three swipes of the debit card at Wendy’s makes up a bigger slice of the pie than writing a check for $5000. As you might expect, the chart would look completely different if we excluded small transactions.
I only write one check in a typical month (for rent), but it’s almost always my largest expense of the month. That category labeled “electronic” is divided about equally between online bill pay and payments made by bank account number.
Debit and credit
As financial columnist John Ulzheimer says, people love their debit cards. Debit card payments overtook cash in 2007 and show no sign of slowing down.
And, according to the study, people actually do love their debit cards. The Boston Fed asked consumers to rate the various payment types on a scale of 1 to 5 in several categories. Credit cards, for example, scored high on convenience but low on cost. The overall favorite? Debit cards, with a score of 4.0.
People even scored debit cards and credit cards equally for security, even though (don’t tell Ulzheimer I admitted this) debit cards are less secure than credit cards. They’re directly tied to your bank account and have fewer legal protections against fraud.
Here’s what I think is going on there. Americans don’t think of debit cards as an alternative to credit cards. They think of them as an alternative to cash. Over the years, debit card payments keep eating away at cash payments while credit card payments stay relatively constant. And a debit card is more secure than cash.
If a crook steals your debit card, it’s going to be inconvenient, but you can call your bank and start the process of reversing the fraudulent charges. If the same bad guy steals your cash, who you gonna call?
Debit and credit, revisited
Not everybody is as in love with their debit card as the average American. The credit elite, people with a FICO credit score of 750 or higher, pay more often with credit than debit.
That makes sense: as you go up the credit score ladder, you’re more likely to qualify for a good credit card (perhaps a rewards card) and more likely to feel you can use it without falling into a cycle of debt. As with broadband internet, the US is behind much of the rest of the developed world in several financial technologies:
US debit cards are insecure compared to the “chip and PIN” cards common in Europe. The US magnetic stripe technology is easier to counterfeit, and US cards are easier to use fraudulently. How easy would it be to make off with a fraudulent purchase by forging a signature? Does anyone even check the signature? Now imagine trying to get away with the loot without knowing the four-digit PIN.
The US has a slow, antiquated system called the Automated Clearing House for moving money between bank accounts. If I want to send you some cash, I can use an online money transfer service, but there are many competing services with assorted fees, and all of them take at least a day (usually three days) to move money from one account to another. The Fed calls these A2A transfers, for “account-to-account.” People in the US barely use them, preferring checks or cash, whereas they’re secure, quick, and popular in countries ranging from Russia to South Africa.
Cold, hard cash
Finally, let’s consider what it means to be popular. One of my favorite bands, the English pop group The Beautiful South, got very rich by being, in their words, “everybody’s second-favorite band.”
Cash may not be the most popular kid on the block anymore, but consider this: in the survey, literally 100% of respondents said they use cash at least sometimes. I don’t see that changing any time soon.
“Debit, Credit, Cash, or Check: How Do You Pay for Things?” was provided by Matthew Amster-Burton.