Those who promote credit cards over debit cards claim that using the latter is like giving away your money. Conversely, charge cards offer cash back plans, airline miles, credits toward future purchases, and countless other benefits. Given the myriad of extras that credit cards offer, everyone should switch from debit cards to credit cards, right? And everyone should eat cake too!
What those who disdain debit cards miss is that it wasn’t always this way. Before various government attacks on debit card interchange fees, the cards themselves had many benefits. For example, Citibank offered debit card users frequent flyer points at American Airlines for every dollar spent.
Next, the Federal Reserve imposed a maximum fee of 0.12 cents per swipe that could be imposed on retailers by debit card providers. To put it more bluntly, the Fed threatened debit card issuers with draconian price controls. Readers can probably guess who paid for the central bank’s compassion.
Although the Fed’s attempt to cap prices at 12 cents didn’t work, the 21 cent rate ultimately succeeded. Suddenly, the ability of debit card issuers to offer benefits and services to their customers was seriously limited. On this note, keep in mind that debit cards are the predominant way consumers access or spend their accounts; meaning that the Fed’s price controls would negatively affect a large portion of total card users. Yes, the masses. Out of nowhere, Citi debit cards arrived in the mail replacing the Citi/American Airlines cards that once existed to allow debit card users to accumulate mileage balances when making purchases.
You see, it wasn’t always true that using a debit card equated to “giving money.” When financial institutions were “allowed” to make money in exchange for providing an essential service to customers using debit cards, they were once again able to offer extras for using those cards. Before price controls, debit card issuers could compete for business debit card users.
Which brings us to where we are today. To mitigate the negative consequences of price controls on debit cards, debit card users are asked to obtain credit cards. To, you know, eat cake. Except it’s not that simple. It is precisely because financial institutions finance their customers’ debit card purchases with money already in their bank accounts that debit cards are logically much easier to obtain. You are financed with your own money.
On the other hand, acquiring a credit card requires, well, credit. Which not everyone has. Or not everyone can benefit from it due to poor credit history. More generally, some debit card users prefer to use them because of the natural spending limits they impose, while others prefer debit cards over credit cards because they don’t like debt or debt. monthly debt payments.
Which simply reminds us that debit cards exist as an answer to two crucial problems: spending beyond one’s means, and much more problematic, spending beyond one’s means while incurring huge debt. Call debit cards the personification of prudence.
Except that thanks to government decrees, the cards that allow the most prudence no longer come with benefits. Worse still, the Fed is reviewing its price controls. Its goal is to lower interchange fees from 0.21 cents per swipe to 0.14 cents. Okay, but there aren’t as many price controls as there are shortages. Watch services provided to the underbanked decline even further.
This is ultimately the important point. The widespread use of debit cards indicates that they have emerged as the market solution for less deprived banking customers. In other words, the Fed’s imposition of price caps on debit cards will be felt most uncomfortably by those who have the most limited access to banking and its various services. Let them get credit cards.
