From Sea Shells to Electrons
Payment cards are merely the latest innovation in the history of commerce, specifically the way that people pay for things.
What Is Money?
The author delves a bit into the identity of money, which was an early evolution that occurred in commerce to enable individuals to "price" items in terms of a specific commodity rather than barter directly.
When the commodity became metal, it could be stamped into standard weights, or coins. For transactions requiring a great amount of coin, it became customary for customers to offer a "bank note" that authorized withdrawal from a central repository (to save them the trouble of carrying it about).
Eventually, the notes themselves were not immediately redeemed, but used in other trades. This is not so different than credit cards - in that "paper" money is accepted at face value, but to obtain the actual value, the person who accepts it must go to another source.
The mechanics of money differ among countries, but in America, government has long "backed" money and become a central issuer and guarantor of notes that are guaranteed by commodity (gold and solver) in a central reserve.
In 1933, wealth was seized to preserve the national economy, and the dollar was no longer redeemable for metal. And in 1965, national currency was divorced from the gold standard altogether, and remains backed merely by "good faith" - money is merely a commodity for exchange of goods that has no intrinsic value.
EN: The author leaves out a lot of detail, but my sense is this is sufficient for the topic at hand.
Cash, Check, or Charge?
Presently, Americans have three basic forms of making payment for retail purchases: they can pay for it in cash, present a check (which is redeemed for cash by the merchant), or charge it to a credit card (redeemed through the card payment system).
When considered as a portion of consumer spending, payment by check has remained fairly constant, at about 57% of monthly expenditures. This is largely because most household expenses are bills such as mortgages, auto payments, utility payments, and the like that are paid by mail (or electronic debit, which is fundamentally a paperless check).
For payments made by cash or card (debit and credit cards are considered as one), there has been a significant change between 1986 (in which cards were used for less than 10% of purchases) and 1996 (in which cards were used for over 25% of purchases, surpassing cash).
EN: I expect the trend has continued, and cards now far surpass cash, but wasn't able to turn up any figures by a quick search and didn't want to chase a red herring just now.
Debit or Credit?
Currently, the choice of debit or credit card is inconsequential at the point of purchase (merchants accept both) but of significant difference to the consumer, as it pertains to the method of payment.
The author identifies three classes:
A charge card works much like a tab: you accumulate small charges over a period of time (generally, a month) and are expected to pay them off in full when the bill comes due.
A credit card enables a customer to finance purchases over time: the account carries a balance that accrues interest, like a consumer loan, until it is paid off in full. The account holder generally has an option to pay any amount between the minimum monthly payment (often a token) and the full balance of the card.
A debit card works much like a check, in that the amount charged is due immediately, and is generally withdrawn automatically from a deposit account to which the card is assigned. In some instances, an ATM card can be used as a debit card - but most often, they are one in the same.
Presently, credit cards are by far the most common in America, and continue to grow at a faster rate.
The Role of Cards in the U.S. Economy
The author posits that payment cards are preferred by customers and merchants over cash for a number of reasons:
- Convenience - It is easier for a customer to carry and use a card, and easier for a clerk to accept it, that for either cash or checks
- Security - If cash is lost stolen, it cannot be traced (nor can its value be "turned off") or recovered, and credit cards offer greater protection than checks
- Breadth - Credit cards are accepted more widely than checks (which are generally only acceptable in the state they are issued), and even more widely accepted than cash when it comes to international travel
- Reliability - For the merchant, credit card payment is more reliable than payment by check (which may be forged) or cash (which may be counterfeited)
- Distance - A credit card can be used for telephone and internet purchases over great distance, without the delay (or risk) or mailing a check
Additionally, payment cards have become a major source of credit for consumers: you do not need to have cash in your wallet (or account) to purchase an item you need immediately, and do not have to make credit applications with various merchants to finance purchases.
In addition to consumers, many small businesses use credit cards (a business card or the personal card of the owner) to finance their business operations, which is more convenient than dealing with banks to obtain small or short-term loans to solve short-term cash flow issues.
Since the "big four" are widespread, the credit card industry has also made a significant dent in the (highly profitable) retail finance business, in which stores would offer their own charge accounts to customers (either as a card or a payment plan), which has had a significant effect on some retail businesses (appliances, furniture, white goods, and other items with moderate prices).
Also, electronic commerce depends almost entirely on credit card payment. If e-retailers had to rely on cash and checks, commerce over the Internet would be no different (and no more convenient) than catalog sales.
The movement away from hard currency also facilitates international commerce on a small scale, and decreases the ability of governments to control the retail habits of their citizens.