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Plastic transactions overtake cash, check payments

By Ben Woolsey

For the first time since the dawn of payment cards, the use of plastic has surpassed that of cash and checks combined. This is quite a milestone that has been driven by growing consumer preference for credit cards and debit cards to pay for everything from groceries to gasoline. In the past, certain nondiscretionary items such as food, fuel and doctors bills were strictly paid by check or cash. But, as credit cards made inroads into these areas a large portion of these payments shifted to plastic.

Debit cards bearing the Visa or MasterCard emblem have provided the most growth in plastic payments in recent years. Aside from being safer and easier to carry than checks and cash, debit cards continued to meet many consumer's basic requirement that food and other core bills should be paid for immediately, rather than being paid for with borrowed funds. Bank check cards, which look just like a credit card, perform this task nicely by transferring money instantly from the customer's checking account to the merchant's account.

The growth in bank check cards has also been driven by broad merchant acceptance. While credit cards typically charge merchants anywhere from 2 percent to 4 percent to accept, debit cards normally charge very little in comparison. New merchant categories continue to proliferate, including fast food, medical services, local/state governments and even rental property management companies.

Visa commands a 75 percent market share in the bank debit card market, with MasterCard covering the remaining 25 percent. American Express and Discover do not have such product offerings due mainly to how they are organized as vertical credit card companies. Visa and MasterCard are associations comprised of member banking organizations, so they have a built-in bank distribution network.

Prepaid debit cards are a slightly different variation on the check card in that they carry a pre-loaded or stored value amount on the card rather than being tied to a checking account. They still enjoy the same acceptance as a bank debit card but are simply pre-funded.

An important distinction between debit and credit cards concerns liability protection. While most credit cards offer zero liability for unauthorized charges resulting from loss, fraud or merchant mistake, debit cards do not provide these protections. Only when a debit card is used like a credit card, requiring a signed charge receipt and not a PIN based transaction, are similar protections extended. While this factor puts most debit card transactions at a slight disadvantage compared to credit cards, it still makes them more convenient and safe than using cash or checks.

Published: April 22, 2006


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