A couple of days ago, I was stuck behind a lady at the grocery store who was paying by cheque. I’m dead serious- a cheque! I checked around for signs of a temporal dissonance of some sort- had I fallen back in time to 1985? Do people still use cheques? Why not try to barter with the clerk and offer a head of cattle and some salt fish in exchange for your groceries?
So I decided to do a little digging to see just how many of these cheque people are left. Surely there can’t be too many. And there aren’t- according to statistics provided by Interac (yes, I realize the issue…), less than 1% of people use cheques as their primary method of payment. I’m surprised that there are 1% of places left that actually accept cheques. But what really surprised me is that in 2006 (the last year for which I could find statistics), 48% of people chose debit as their most used form of payment. That’s right- almost half. Cash was in second at 26%, with credit cards close behind at 25%. The number of luddites who primarily use may be a little off, as many of those people were probably busy holding up the line at a line at the grocery store and couldn’t respond to the survey.
Debit payments are arguably the least efficient method of payment, although based on the numbers I could find and my own personal observations, it’s probably also the most popular way to pay. Unlike most credit cards, there are no rewards or incentives associated with paying by debit. My Canadian Tire MasterCard offers oh-so-valuable Canadian Tire money with every purchase; other cards offer travel rewards and even cash back. Most cards also come with a certain level of purchase protection and merchant dispute mechanisms. Debit? None of that. And not only are there no rewards, but unlike cash, debit transactions actually cost more. While using your own bank’s network can help you avoid fees (and even then it varies depending on your fee package), you’re just as likely to encounter a point of sale terminal from another provider that will leave you with fees ranging from $0.25 per transaction to $1.50 or more. From a purely financial perspective, debit is the worst possible way to pay. So why is it so frackin’ popular?
My first reaction was convenience- it’s easy and quick. There’s no question that debit is more convenient than having to carry cash, but it’s no quicker than a credit card transaction. And if you’ve got a fast payment system like PayPass that doesn’t require a signature for purchases under a set amount (usually $30), credit cards can be noticeably faster that debit.
Okay, it must be security, right? Debit cards are probably the most secure form of payment, as they require the physical card and the owner’s PIN to work. Cash is virtually untraceable and offers no security if you lose your wallet, but your loss will be limited to the amount of cash you have on hand at that moment. With credit cards, we all know that merchants very rarely check the signature or verify ID, and a credit card in the wrong hands can be used for all sorts of goodies online. But is security really the issue? Like most people, I carry my credit cards and debit cards together in the same wallet, and if that gets lost or stolen I’m equally screwed, regardless of my preferred method of payment. When I go to actually make a payment, the biggest potential for a security breach is the shifty guy behind the counter, and anyone running number stealing scams can take advantage of your debit card almost as easily as your credit card. And to top it all off, the identity theft protections offered by credit cards tend to be superior to those of debit cards.
Or are debit cards used as a budgeting tool? While not as effective as using all cash to curb spending like some poor schmuck on a reality debt repair show, debit cards make it harder to spend money you don’t have- unless, of course, you’ve got overdraft protection, which you probably do. And just because the money’s in your account, doesn’t mean that it’s not dedicated for something else, like those pesky bill payments. Ultimately, control of one’s spending depends largely on self control, not on the form of payment being used. And in the money management category, the spending breakdowns offered by most credit cards are actually a great way to track where your money is going.
My only remaining theory is that there is something intrinsically appealing about having to enter a secret code on a keypad. It’s very 007-ish, and it appeals to that little boy inside of me who always wanted to be a spy, but was just too darn clumsy and terribly bad at keeping secrets.
So why do you think that debit transactions are so popular?
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{ 12 comments… read them below or add one }
I have to agree with your opinion. I will do approximately 2-5 debit transactions PER YEAR because of exactly what you have stated. I dislike the system because it costs me for each transaction. With credit, I get points and pay it off each month so there are no costs and lots of rewards!
I use debit almost exclusively, for a couple of reasons:
1) Trackability - my debit purchases come out of my account immediately, and the location of the purchase shows up in my online banking within one business day. Credit card purchases take considerably longer to process and show up on an account/statement. My debit purchases are tracked closely in Quicken as soon as they hit my online banking, so I know exactly where I stand relative to my budget.
2) I don’t care about accumulating points and rewards. These incentives are designed to get me to spend more money, which is not going to help me achieve my financial goals.
3) Cost - I pay a flat rate for my banking package (which includes a number of features that I use) and as a result pay no per-transaction charges for debit purchases. Retailers that charge extra for debit purchases are few and far between. When I have found a merchant that wants to charge extra for debit, I refuse to complete the purchase and walk out. If enough people did this, the extra charges would vanish pretty quickly.
I’ve pondered this myself and I’ve also done some digging.
Merchants DO charge for Debit, which is why on MOST card scan systems (Point-of-Sale Machines) it goes directly to debit when you swipe your card.
In order to use credit, you have to hit Cancel, then tell the clerk, then he or she has to see the card, then it processes, then you sign, then you leave.
So, what I’ve found is that most people simply just input the code as soon as it enters.
I happen to be in a savings program each time I use CREDIT, so I’ve learned this little process, and have also started to pay attention to others and ask questions.
Most people will just go with the first thing on the screen, which I’ve already established as a DEBIT purchase. But, unless the clerk asks, “Debit or Credit?” or the machine allows a choice before you swipe your card, most machines go to debit first, followed by an apparent 48% of people just entering their pin, instead of saying, Can I pay with credit?
Does this tell you anything about spending? Not really.
More or less, it tells you that people are sheep, and they will follow any prompts in life…
… even from a tiny little machine taking their money.
-Q
@Q: You must be in the USA - MGL is in Canada, where Debit (Interact) purchases are entirely separate from credit (Visa/MC/Amex) purchases - here in Canada they use separate cards at the point-of-sale.
There are in fact rewards programs for debit card usage, at least in the U.S. Also, there are high yield online checking accounts (5%) available at community and regional US banks that require a minimum number of debit card transactions each month (typically 10). Finally, many people are philosophically opposed to credit cards so they avoid them altogether. I appreciate that attitude.
Thanks to all for your comments.
@George - Interesting points, especially about the delay between the transaction and posting for credit cards. If you have a banking package that gives you free transactions that certainly makes debit more attractive, although for me I’ve got a pretty bare bones package that only gives me a handful of free transactions,so I try to keep my debit use to a minimum. I considered getting a better monthly package, but I couldn’t justify the cost when I prefer to just use credit.
@Q - It looks like the US system is configured differently from the Canadian system, although I actually wasn’t aware that this was the case.
@Mr. TML - I’m not aware of any Canadian banks that offer rewards on debit purchases, unless you consider ever increasing fees to be a reward. Certainly, if rewards were available that would be a plus for debit. Are the rewards offered by US banks for debit transactions similar to those offered by credit card companies? As for the philosophical opposition to credit cards, I can respect that as well. Unfortunately, judging by consumer debt levels I suspect that this applies to a small minority of people.
1) I’m not charged any fees when I debit, nor do I pay for my banking accounts
2) I often use the money-back option when I debit = no ATM fees!
3) My bank gives a rebate (.05%) on my debit transactions.
4) I’m in the US and my debit card has MasterCard logo on it. Apparently the transaction can be processed either way - I am guessing that a credit transaction is cheaper for my bank, as I just found this on their page: “Earn 1 point for every $2 debit card purchase. Select “credit” at checkout; PIN-based purchases do not earn points.”
I’m not currently using the rewards program though.
We use debit because we don’t have credit cards right now, and won’t have any until we’re finished paying off previous debts. I’ll go back to using a credit card some time, but only for the rewards- I’m never going to carry a card balance again. I hate the rates that credit card companies charge in interest… I’m not doing it unless I’m getting more out of the deal than they are.
(we have an account with tons of free interac transactions every month, so that’s not a problem; I’d use cash, but I actually tend to spend more that way, and it’s harder to track where it’s going).
Sorry George but i disagree.
Credit cards offer far more benefits than hassle.
1. Do i need to track my purchase’s daily or better yet up to the minute? Lol. I check my online mastercard statements every few weeks. If i really need to see what i’ve spent when i login online i see my ‘remaining credit’ and ‘balance owing’. I subtract the difference to see what’s coming. Yes almost always there is a lag, but i have gotten over being anal about seeing it in ‘real time’. Like getting stock quotes by the second (which i also did?) it makes no sense and wastes your valuable time for nothing important.
2. I am spending the money anyways so all big items and many small go on my PC paypass Mastercard (which i have convinced others to get). I also have many bills going to my credit card via direct or auto billing. More groceries for nothing! I agree with George that some reward cards make you spend it to get it. (like Airmiles which is annoying as hell to deal with)
3. I need groceries. With PC Mastercard i get average $40/month in free stuff or groceries there. This i remind people is not forcing me to spend money, because contrary to what some might say i enjoy eating!
4. Cost? I pay nothing for debit or mastercard. Who would pay for this when you can get it for free? I have for over 8 years now!
5. Security. Mastercard has suspended my purchases before because i have done strange things (travelling, large purchases, etc.) Some may find this annoying, i know i did at first, but now i am grateful.
6. Using the credit card is like an interest free loan. It may not be much, but i can leave my money in my ‘higher interest’ savings account until its time to pay the card off (note always pay it off).
7. Credit score is boosted by using your card! Not that i care because banks constantly try to offer me more credit until i drown in it. For young people wanting a car or house in a few years a $500 card is nice to build up your rating.
8. Retailers are charged fees for debit/credit card machines and both have associated fees.
9. I can’t for the life of me understand why retailers add $0.25-0.75 to transactions. This is where George and i agree. I sometimes walk out cause it just annoys me. Just raise the prices so i don’t see what your doing and make it less hassle already! Most people use this for of payment anyways!
One final note: my free cheques are great for transferring money between banks (that charge for this) and for giving to others, mailing, or rent payment. One reason i am still watching T.DHF.un
nice posts. Rather jovial
DH
One far more important fact for us Canadians is that even Tim’s accepts Mastercard, but not debit. Although paypass works less than half the time due to glitches, poor training and people hitting them with their cars (i am killing myself as i write this, but its true!).
DH
@D: You’ve got a system that works for you, and I for me - we can “disagree” all we want about what’s best, but in reality it comes down to personal preference. I do have a few responses, though:
1) It’s not obvious as a “cost”, but it’s very clear that people (on average) spend more on credit cards than with debit cards. One possible reason is that it feels like you’re borrowing ‘free’ money on an interest-free loan. Even if you pay the balance off every month, chances are you’re spending more utilizing your credit card than if you were only using cash on hand.
2) Credit scores are actually higher if you have credit cards but don’t use them a lot. One contributor to your credit score is the ratio of amount borrowed to your credit limit - having a small amount charged to your credit card maximizes this ratio. I only use my credit card a few times per month (the typical balance never exceeds $300) and my credit score has never suffered because of it.
3) Every Tim Horton’s in my area accepts debit - I think this varies in different regions of Canada.
For those very few cases where debit is cheaper (usually shady computer stores) because the merchant passses on the difference in the card processing fees, I use debit. But as long as the system encourages credit card use, I use credit, for all the benefits, not the least of which is the liability.
I think though that debit is so popular because you can get a debit card at age 12, but more like 18 for credit. Interac’s raised a generation of kids, some of whom won’t bother to get a credit card until the first time they have to rent a car.