Paper to plastic: Checks and cash losing to debit and credit
Paper may always beat rock, but plastic is increasingly overpowering paper.
As debit card and credit card purchases become increasingly popular, check and cash payments continue to lose out. These traditional payment methods now account for less than half of all transactions, and a recent rule change by the Federal Reserve Board should tilt the balance even further away from paper transactions and toward plastic payments.
Under a June 2007 change in the rules of Regulation E of the Electronic Funds Transfer Act, merchants no longer need to give shoppers a receipt on debit card electronic fund transfers (EFTs) of $15 or less at electronic terminals. The change took effect in August. Previously, banks and merchants had to give receipts for all transactions, no matter how small.
Debit train speeds up
The rule change should make plastic even more popular by enabling debit transactions in places where it was formerly not practical (such as the subway station, where waiting for a receipt could mean a missed train) or not cost-effective (the prohibitive cost for a snack company to install and maintain printers on its vending machines) to provide paper receipts.
The no-receipt exception is especially beneficial in places where low cost and quick turnaround are key ingredients, says Theodore Iacobuzio, managing director at research and advisory services firm TowerGroup. There has to be "a combination of a low ticket with velocity -- getting people in and out quickly," he says, such as in mass transit situations including tool booths and quick service restaurants.
Credit card transactions, which are addressed under Regulation Z, were already free from any requirements surrounding receipts. The change to Regulation E makes it possible for debit card payments to be accepted for those same small-dollar transactions where credit cards were already in use.
Although they are no longer required to supply a receipt on plastic payments of $15 or smaller, retailers may provide receipts if they choose. Whether a business offers receipts for transactions at all levels in part depends on its individual practices.
Fly the paperless sky
Consumers aren't just seeing greater acceptance of plastic on the ground. Airlines may be getting in on the cashless trend, too. A test currently sponsored by American Express has made some American Airlines flights plastic-only. On certain flights, passengers pay for their in-flight food, drinks, and headsets with credit cards and debit cards swiped through hand-held digital readers carried by flight attendants.
Other payment card developments, such as the introduction of RFID "contactless" cards, are also helping spur the move away from paper. RFID (radio-frequency identification) tags are built in to credit cards to enable a contactless transaction by just waving the plastic in front of or tapping a card reader, with no swipe needed. When it comes to RFID, "It's going to enable debit cards to expand their universe into cash," says TowerGroup's Iacobuzio. "Nobody knows how big the universe of cash is."
According to recent data, fewer than half of all in store transactions are made using paper payments -- cash or checks. Their combined proportion of in-store purchases fell from 57 percent in 1999 to 44 percent in 2005, based on the nationwide 2005/2006 "Study of Consumer Payment Preferences" conducted by the American Bankers Association and consulting group Dove Consulting.
Much of that shift away from cash and checks has stemmed from the popularity of debit cards. The percentage of in-store payments made with a debit card was 21 percent in 1999. It rose to 33 percent in 2005. Meanwhile, over that same time period, in-store credit card use actually edged lower, according to data from the ABA/Dove study.
Plastic gains speed
Plastic is not only more popular than paper, but it's often faster, too, according to a 2002 FMI Study, Pay By Touch, CVS, Aite Group analysis. The average tender time for check-based transactions was slowest, coming in at 64 seconds. Credit and debit card transactions completed with signatures came in second, at 48.4 seconds. It took 44.4 seconds for PIN debit transactions. Those old-fashioned greenbacks are still speedier at 28.5 seconds. However, new card payments technologies trump cash, with contactless bank card payments zooming in at 12.5 seconds per transaction.
Not surprisingly, the credit card associations benefit from increased debit card acceptance. MasterCard's second quarter 2007 earnings report showed that gross dollar volume for all transactions (credit, charge, and debit programs) climbed 13.3 percent from the year-ago period alongside a 14.8 percent jump in worldwide purchase volume. But debit card growth was even more impressive. MasterCard's GDV for debit transactions surged 19.3 percent year-over-year and worldwide purchase volume leapt 21.2 percent.
Additionally, MasterCard said it processed 5.868 billion transactions in the quarter compared with 5.062 billion the year before. Of those, 1.997 billion debit transactions were processed, versus 1.604 billion one year prior.
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