Electronic payments usage is up, but comes with privacy issues for consumers

Personal Finance

Guido Mieth

Americans are spending more with digital payments and credit cards than ever before, as convenience and technology have relegated cash and checks more to the periphery.

Online shopping has proliferated on retail websites such as Amazon, mobile payment apps like Venmo have become more popular, and banks have made it as easy to transact on a smartphone as in a brick-and-mortar branch.

These trends point to the continued rise of digital and card transactions, said Jason Thacker, head of U.S. deposits and consumer payments at TD Bank.

“Electronic payment is up, and cash handling and checks are trending down,” Thacker said. “And we don’t see that changing anytime soon.”

The convenience of these new methods of payment is clear. However, experts say these new methods may also include personal information, online activities and purchases being shared.

“It’s just a mind-boggling tangle of information sharing that’s going on out there that consumers have no idea is happening,” said Susan Grant, the director of consumer protection and privacy at the Consumer Federation of America.

Meanwhile, the number of check payments in 2018 fell below the number of automated clearing house debit transfers for the first time ever, according to a new study by the Federal Reserve.

An ACH debit payment is a type of electronic transaction that pulls money directly from a consumer’s checking account to pay for things like a mortgage bill.

There were 16.6 billion ACH debit transfers and 14.5 billion check payments in 2018, according to the Federal Reserve’s study, which is conducted every three years. That compares with 2.1 billion ACH transactions versus 42.6 billion check payments about 20 years ago.

The total number of card transactions (including debit and credit) grew by 8.9% annually over the 2015 to 2018 period. That’s up from 6.8% for the prior three-year period.

While consumers used debit cards almost twice as often as credit cards in 2018, the value of credit card purchases exceeded those of debit cards by around 30%.

Tom Werner

The trend away from cash and checks has been going on for awhile, but consumers are increasingly being pushed to transact in non-traditional ways, Grant explained.

Card companies entice consumers with the promise of travel rewards and cash back. Banks have debuted contact-less debit, allowing customers to transact with cards even faster than with the standard swipe or chip reader. Many stores have reduced barriers to using credit cards, such as forgoing minimums on transactions.

Digital and card transactions are often easier and speedier, experts said. Consumers can set up recurring bill payments and account transfers. Merchants don’t have to count out change for each customer paying with cash.

“If you can give consumers the same experience but it saves them 15 seconds, they’ll take that all day,” Thacker said.

However, those benefits come with a few drawbacks — namely privacy, Grant said.

For the most part, U.S. law doesn’t limit the personal information institutions can collect about consumers and what they can do with that data.

Depending on their privacy policies, certain businesses can gather information about what consumers buy, where they buy it and how much they’re spending when transactions are done via card or electronic means. These electronic breadcrumbs can then be used to target consumers to buy related items down the road.

Consumers, especially those using credit cards, should also be wary of overextending their budgets when transacting in non-traditional ways due to the ease of transacting.

And credit cards can carry high interest rates that may pose financial traps for the unwary. According to CreditCards.com, the average interest rate on credit cards for is 17.3% and the average rate for those with lesser credit is 24.5%.

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Grant suggests using debit instead of credit cards wherever possible, so consumers are limited to spending up to their account balance. If using a credit card, consumers should avoid charging more than they can pay off in full when the bill arrives.

Some businesses have also shifted entirely away from cash, and only allow for card transactions. But barring cash discriminates against people who don’t have credit cards or bank accounts.

Around 6.5% of U.S. households don’t have a checking or savings account, according to a 2018 report published by the Federal Deposit Insurance Corp. that also found that blacks and Hispanics are disproportionately affected.

While the Federal Reserve couldn’t directly measure the number of cash transactions, ATM withdrawals were down 0.9% over 2015-2018 compared with the prior three-year period, which experts say hints at diminishing use.

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