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Non-cash payments: profit for financial institutions

Categories : Cash is efficient, Costs of cash versus costs of electronic payment instruments
June 7, 2018
Published in : Cash, Costs of payments, Credit card
Non-cash payments incur hidden costs that consumers are not always aware of, writes the Wharton School at the University of Pennsylvania.
Communication Team

The promotion of non-cash payments is often supported by arguments of technological innovation, of modernity and of convenience, but behind this façade, there is much more. The University of Pennsylvania presents a number of risks that consumers should be aware of. Indeed, the use of non-cash payments:

  1. Tempts users to overspend thanks to “buy now, pay later” schemes, which don’t require immediate reimbursement, but come with high interest rates if settled too late.
  2. Puts users at greater risk of their credit or debit card information being stolen. Indeed, consumers are always encouraged to thoroughly verify their monthly statements to identify any abnormalities.
  3. Cards generally come with embedded activation and monthly maintenance fees. These can also be in the form of annual fees, even for people that pay their dues on time.
  4. There is a risk of overdraft penalties.
  5. Credit card companies want consumers to use cards because these are an important source of revenue for their business.
  6. The more consumers use non-cash payments, the more financial institutions can collect income from services fees.

Just like in the free economy of the internet (social media, Google and other online services that are accessible for free), any form of payment that is issued by a private enterprise unsurprisingly comes with a cost (in the case of online services such as social media, user data is what drives profits), and it’s important to be aware of them, as the article tries to point out.

The risks and costs of non-cash payments also explain why cash usage is indeed growing across the globe. In the US alone, ATM withdrawals might be down 0.9% from 2009 to 2012, but the value of withdrawals went up 2%, showing a trend of less trips to the ATM for a greater amount each time. “The Federal Reserve also reports that credit card usage is on the decline: In 2011, consumers had $803.8 billion of “revolving credit,” mostly in the form of credit cards, down nearly 15% from 2007.”

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