As recently as 1995, the majority of spending transactions in the United States were made with a check. However, the days of pen-and-paper transactions as the primary method of doing business are gone forever. In today’s fast-paced world, electronic transactions—payments made at the time of a purchase and transfers of money from one account to another—are quickly becoming the standard. They’re not, however, the only approach. This topic provides information about the three main ways consumers make transactions today: (1) traditional, (2) electronic, and (3) hybrid transactions.
No matter which transaction type you choose, it’s important to spend money wisely and to stay within your budget. Check out this video about spending responsibly before moving on to section 1a.
Look at the following column chart; two things should stand out immediately.
Although the volume of transactions is now clearly dominated by debit cards and other electronic forms of payment, this doesn’t mean that the simple checking account is going away any time soon—in fact, the opposite is true. Access to a checking account is even more important today than at any time in the past.
We will explain electronic payments and hybrid methods in more detail in a moment. Before we do, let’s review the traditional methods. Whenever you make a purchase using cash, coins, or checks, you are using the oldest and most traditional form of payment. Although traditional transactions often make sense, it’s important to remember that you have no protection if your cash is stolen or lost. Credit cards are another form of payment that many people use, but note that the ultimate payment to the credit card company must be made using one of the methods described in this topic. We discuss credit cards in more detail in a later topic.
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Whether it’s the total volume of transactions or the dollar value of transactions, electronic payments dominate the payment and transfer options used by consumers today. The table below lists and defines most of the electronic methods currently available and frequently used. The following discussion highlights the role of debit and prepaid cards.
|Type of Payment Method||Description|
|Debit card with PIN||Payment made directly from cardholder’s checking account using a personal identification number (PIN) to verify the transaction.|
|Debit card with signature||Payment made directly from cardholder’s checking account using cardholder’s signature to verify the transaction.|
|Prepaid card||Payment made from money loaded onto the card in advance to make payments in the future.|
|Direct debit||Payment made electronically without a debit card.|
|Electronic bill-paying service||Payments made by direct debit from an account holder’s bank through a noncard-payment network (e.g., the preferred way to pay federal income taxes).|
Source: Fumiko Hayashi and William R. Keeton, “Measuring the Costs of Retail Payment Methods,” Economic Review 2 (2012). Retrieved from http://www.kc.frb.org/publicat/econrev/pdf/12q2Hayashi-Keeton.pdf.
A few words of caution are needed about prepaid cards.
Given the limited fraud protection and potentially higher fees, debit cards tend to be a better method of payment than prepaid cards.
Debit cards and prepaid cards have many benefits. You can flex your productivity skill with these financial tools by moving money instantly and spending within your means. Decide for yourself whether debit cards and prepaid cards are right for you.
The line between checks, debit cards, prepaid cards, and other forms of electronic payments—online payments, mobile transfers, smart cards, and peer-to-peer payments (P2P)—is quickly blurring. Things have gotten even more complicated with the addition of smartphone payment options.
Banks, credit unions, and other financial institutions are always looking for ways to move money faster and improve the buying experience, such as cryptocurrencies like Bitcoin. These hybrid currencies act like cash but work like P2Ps.
|Peer-to-peer (P2P)||P2P apps allow you to transfer money from your bank account to someone in your network. The transfer occurs from one smartphone to another.|
|Automated Clearing House (ACH)||Payments made directly through electronic fund transfers; similar to electronic bill-paying services but broader in transacting both debit and credit transactions.|
|Check-to-electronic conversion||Payment made at point of sale with paper check that is immediately converted to an electronic form of payment.|
Which is the best payment method: a check, a debit card, or a prepaid card? As you might imagine, the answer depends on whom you ask. Some people like checks because it makes it more difficult to buy things on impulse. After all, you must have your checkbook with you, and checks also provide a nice paper trail of expenditures. Some consumers prefer debit cards because purchases can be made quickly and efficiently. Others prefer prepaid cards, most often because they do not have a checking account.
Your choice may also depend on the situation. Being familiar with all types of payment methods will allow you to stretch your agility skill and make the best selection given the circumstances.
As you can see, checks, debit cards, and prepaid cards each have advantages and disadvantages associated with their use. The following table compares some of the features of debit cards and prepaid cards that you should consider as a way to make the best informed choice given your unique situation, goals, and financial resources.
|Factor to Consider||Debit Card||Prepaid Card|
|Insurance if financial institution goes out of business||FDIC or NCUA insurance up to $250,000||Limited loss liability|
||Unlimited loss liability (some card issuers may provide limited protection)|
Generally low or no fees but potentially:
Generally higher fees than debit cards; fees may be charged for:
Source: THIS WORK IS ADAPTED FROM CHAPTER 5.2 OF JOHN WILEY & SONS, INC. EBOOK, “INTRODUCTION TO PERSONAL FINANCE: BEGINNING YOUR FINANCIAL JOURNEY” BY JOHN E. GRABLE PHD, CFP AND LANCE PALMER PHD, CPA, CFP.