Monday, July 26, 2004

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The credit debit-card boom

On Friday Jathon Sapsford has a fascinating Page One story in the Wall Street Journal on the revolution in how Americans purchase goods and services (subscription required). Some of the interesting bits:

For the first time, Americans used cards -- credit, debit and others -- to buy retail goods and services more often than they used cash or check in 2003....

By letting consumers buy things with unprecedented convenience and speed, cards have transformed the economy. They have helped keep consumer spending strong even through terror attacks and recessions. When people pay with plastic, they tend to spend more -- often more than they have in the bank. Thus, credit cards also have fueled an explosion in consumer debt. It is expected to hit $838 billion this year, an increase of 6.8% from 2003 and more than double what it was ten years ago.

The aircraft carrier USS Harry S. Truman went completely cashless earlier this year. The Navy issued MasterCards to all 5,000 sailors aboard. On payday, seamen insert cards into a machine that electronically loads money stored onto each card. They then use the cards for all onboard purchases.

The Navy estimates sailors on the Truman buy 250,000 soft drinks monthly. When it was a cash ship, somebody had to collect half a ton of quarters each month from all the Truman's vending machines. Those coins then had to be redistributed. Now it's all settled electronically.

An added benefit: Shipmates can use the same cards while visiting nightclubs or movie theaters on shore, as well as to send money home. The Navy has even put a swiper by the door of the chapel as a substitute for the Sunday church-service collection plate, says Cmdr. Boyle McDunn, a chaplain aboard the Truman....

Some Christians see the pervasive use of plastic as part of a dark biblical prophecy. Pat Robertson, founder of the Christian Broadcasting Network, has said that plastic may signal the cashless society of the end times foreshadowed in the Bible. Mr. Robertson's network accepts contributions from supporters on both Visa and MasterCard....

For roughly 60 million Americans without bank accounts, however, living without cards is getting harder. They can't easily rent cars or stay in hotels, among other things. "You're effectively locked out of the American Dream if you don't have some kind of plastic, and it's going to get worse," says Mr. Simmons, the hip-hop mogul, whose RushCard lets holders put their paychecks onto plastic.

U-Haul International Inc., the truck-rental company, has begun issuing "payroll cards" to about 3,000 of its employees, or about 17% of its work force. They are mostly hourly workers who lack bank accounts. Workers can withdraw cash once a week from any automated teller machine without paying a fee, and they can use the cards wherever Visa is accepted. They can even get cash back after a purchase from the supermarket without any charge. The company, meanwhile, says it is saving about $500,000 a year in costs associated with issuing checks.

The only odd thing about the piece is the large number of paragraphs devoted to warning that the explosion of credit has led to a similar explosion in personal debt. I'd accept that, except for this piece of information contained in the story:

Last year, cash was used in 32% of retail transactions, down from 39% in 1999. Credit-card usage has remained stable, accounting for about 21% of purchases during that time. Meanwhile debit cards, which take money out of checking accounts immediately after each purchase, shot up to 31% of purchases last year, from 21% in 1999.

An increase in debit card puchases, unlike an increase in credit card purchases, would not necessariy lead to an increase in household debt.

One possibility is that the use of any kind of card automatically increases purchasing size, so expenditures via debit card are larger than those with cash. If credit card expenditures remain constant, that would increase debt.

UPDATE: Bruce Bartlett has an interesting and related NRO essay on why, despite the proliferation of plastic, the use of cash persists at all in the advanced industrialized states. His theory -- gray market economies:

According to the Treasury Department, in 1990 there was $1,105 of currency in circulation for every American. By March of this year, that figure had risen to $2,455, an increase of 122 percent. It is highly unlikely that all of this increase is due to the needs of consumers to buy more goods and services, because per capita personal consumption expenditures only rose by 79 percent over the same period. This suggests that at least 35 percent of the increased demand for cash was for underground economic activity.

A further indication that this is the case is shown by looking at the composition of currency in circulation. Since 1990, 84 percent of the increase in currency is accounted for by $100 bills. Such bills now represent 71 percent of the monetary value of all U.S. currency, up from 52 percent in 1990. Average people do not ordinarily use $100 bills, but they are used heavily in the underground economy, which includes drug dealing and other illegal activity. Hence, it is reasonable to assume that the increased demand for $100’s is due almost entirely to an increase in the underground economy.

Read the whole thing.

posted by Dan on 07.26.04 at 02:07 PM


That snippet about "It's" Pat Robertson is priceless. Thanks!

posted by: Dave Straub on 07.26.04 at 02:07 PM [permalink]

Dan, consumer debt would also increase if the amount of credit card purchases, not just their frequency as a percentage of all purchases, increased. Credit cards can also be used for cash advances, and it is likely a certain amount of money borrowed in this way finds its way into bank accounts, and is then used in debit card transactions.

posted by: Zathras on 07.26.04 at 02:07 PM [permalink]

Or if the Debit Cards resulted in more NSF days...

About Pat Robertson, just because someone believes that Visa or Mastercard may lead to a cashless society which would allow the mark of the beast to become universally necessary does not make Visa or Mastercard inherently bad or a less useful tool, it just means one needs to be on guard that we do not require the conversion to the cashless society. Signals may point to an item, but they are not the item.

posted by: Joel B on 07.26.04 at 02:07 PM [permalink]

Highly recommended: Joe Nocera's A Piece Of The Action, a short history of personal finance in the U.S. in the 20th century. Explains how credit cards, retail brokerages, mutual funds were rolled out and became pervasive. Really good stuff.

posted by: alkali on 07.26.04 at 02:07 PM [permalink]

I don't have a problem with electronic money transfers. The expanding consumer credit craze has definitely led to more consumer debt in an unhealthy way, but that's a separate issue. The real problem isn't a cashless society but privacy and national ID concerns. If you think identity theft is bad now or the Patriot Act infringes on freedom now ... in Mexico law enforcement people are already getting RFID tracking and identification chips implanted in employees. The recent mostly underplayed Supreme Court decision about making illegal refusing to identify yourself to a police officer, paves the way for National ID and Walmart is already rolling out these RFID chips on their products. Combine that with tightened security laws and a possible trend toward security clearances needing cybernetic tracking implants...

There is an invasion of privacy and it's not good but electronic debit cards are the least of it. I'm not a luddite, but it seems clear to me that socially and culturally we're just not ready for this technology on a widespread basis. It would either be abused by criminals or anarchist terrorists, or by intrusive security state considerations.

posted by: oldman on 07.26.04 at 02:07 PM [permalink]

Not to generalize from my personal experience, but the trend I've noticed in my own use of debit cards is that I'm using them more frequently for *smaller* purchases. This is because the newer generations of checkout machines at fast food establishments (particularly Starbucks) all play nice with debit cards now, whereas a few years ago one was much more likely to encounter minimum purchase rules or have to avoid the hassle and wait of authorization.

posted by: Euskaria on 07.26.04 at 02:07 PM [permalink]

Funny, I thought the social security number was the mark of the beast.

posted by: j swift on 07.26.04 at 02:07 PM [permalink]

I don't remember if the article mentioned this, but one reason why I use my credit card (I only have one) more than I used to is because I get airline miles for every purchase.

posted by: Bruce Bartlett on 07.26.04 at 02:07 PM [permalink]

"Bruce Bartlett has an interesting and related NRO essay on why, despite the proliferation of plastic, the use of cash persists at all in the advanced industrialized states. "

Another reason is that it's a bad idea to slip your Visa into that stripper's g-string.

posted by: Jon H on 07.26.04 at 02:07 PM [permalink]

So, eliminating the $100 bill could be one approach to mitigating the extent of the gray economy, id'n-i?

posted by: oneangryslav on 07.26.04 at 02:07 PM [permalink]

We approaching cashless, also agree with Bartlett.

U.S. consumer addiction to and size of credit card debt vs. savings is incredible. Has not been a healthy sign in my view.

posted by: Alex on 07.26.04 at 02:07 PM [permalink]

Euskaria, the machines may play nice but the issuing bank may not. My bank treats a POS swipe as a withdrawl from an out-of-network ATM machine and dings you for them.

posted by: Chris B on 07.26.04 at 02:07 PM [permalink]

Yes - oneangryslav draws the right conclusion: the $100 bill is not used by 99% of the population but is rather the currency of choice for the underground economy. Assuming other "hard" currency countries did not step in to fill the void, dropping the $100 bill would be a smart move for a variety of reasons.

1. Tax evasion. Making the portability of cash more difficult for the underground economy means more money will be routed through more transparent means, e.g. online transfers, debit cards, etc. The federal government would reap a tax windfall from this decision.

2. Anti-terrorism. If the dollar is the currency of choice for terrorists and their benefactors, eliminating the bill can only help in the fight.

3. War on drugs. The obvious heavy users of $100 bills. Requiring them to use $50 bills instead would theoretically increase the costs of transporting cash by 2x, increase money laundering costs, and have an impact on the liquidity of the drug economy.

4. International bad guys. Saddam Hussein had, like, $1 billion in $100 bills on him when he fled Baghdad. Eliminating the $100 bill would make it doubly harder for Saddam, in theory.

5. Merchant convenience. Occasionally, someone walks up to a small merchant and asks if he'll accept a $100 bill. This is a pain in the a-- for the merchant, usually, and elimating the $100 would make this weird problem go away.

Where this idea weakens is if the Euro or the Yen were to take the place of the dollar as the preferred monetary instrument of the underground economy. This would be an undesirable outcome for the US, which wants to maintain its hegemony of the dollar. The yen as a paper currency seems unlikely to be used extensively in the west perhaps if only for cultural reasons, but the Euro is looking for ways to "beat" the dollar in varoius markets like oil, hence that looms as a potential substitute currency. Unclear whether the word thinks the Euro is truly a global hard currency yet -- in currency form, anyway -- and that they'd pass up two $50 bills in exchange for a $100 Euro note. Interestingly, the Europeans have a 200 and 500 Euro note! Makes you wonder who they're catering to there with those notes, eh?

The Bureau of Engraving and Printing would incur some increased costs as a result of printing more $50 bills, though this is negligable.

Overall, few Americans would have a problem with eliminating the $100 bill since such a small minority use them. Casinos, for instance, might complain, but issuing more $50s seems like a small price for them to pay. Besides, the $50 is more "liquid" than the $100 and people would be more likely to spend them.

Oh, and while we're at it, why don't we eliminate the penny also?

posted by: Ed on 07.26.04 at 02:07 PM [permalink]

I remember fondly going to get Chinese food with two of my friends. One was, shall we say, involved in the black market, and the other needed to borrow money. As we were leaving the house, friend two asked friend one if he had any money for lending. "Yeah, I've got $300 in my wallet." "It's not in hundreds again, is it?" came the response.

posted by: asd on 07.26.04 at 02:07 PM [permalink]

Although Portugal is one of the EU countries which has switched to the euro, the Portugese government has banned the use of the 500 euro note because they believe it will likely be used for only crime and in the underground economy.

posted by: rjt on 07.26.04 at 02:07 PM [permalink]

Ed, the 500 Euro note probably came from concerns that the currency would end up like the Lira, with large-denomination notes needed to make purchases. Its just a hedge against changes in the currency value, though they may want to eliminate those notes soon. Like rjt said Portugal has already refused to accept it on legal grounds.

posted by: sam on 07.26.04 at 02:07 PM [permalink]

I don't get the nefarious vibe some do from high rates of credit card use.

I never use anything other than a credit card to pay for anything, and I have never but twice in my life carried a balance past the end of the month. Credit cards, used properly, get you free stuff. You can get airline miles, discounts or free delivery from retailers, gasoline credits, or almost anything else you want to some extent with no annual fees. You can always check your rate of spending online or on the phone. You get fraud and other types of buyer protection. There is a security advantage to having a delay between the time you spend and the time your account is reduced. You get itemized bills paid regularly. And, of course, you have the OPTION to balance current needs with future income.

Debit cards I don't like. If you use checks, you still have to write down everything you do. The convenience of the card makes me want to use it for everything, but I inevitably wind up not writing down a pack of gum here or a tank of gas there, then I write checks based on slightly inaccurate information.

I tell you, though. A lot of people I know are all electronic. They use bill pay services from brokerage accounts in combination with credit cards and don't use a bank or checks for anything.

The exact opposite of my time in Japan, where everyone carried around $10,000 in cash. No cards anywhere. I used to carry my rent to a machine that counted and sorted bills, then asked me into whose account the cash should be deposited. Of course, with lending rates something like .5%, banks may not see the point in offering cards.

posted by: Jason Ligon on 07.26.04 at 02:07 PM [permalink]

Dan, consumer debt would also increase if the amount of credit card purchases, not just their frequency as a percentage of all purchases, increased. Credit cards can also be used for cash advances, and it is likely a certain amount of money borrowed in this way finds its way into bank accounts, and is then used in debit card transactions.

But this isn't really a new phenomenon... I recall doing this (ahem- a little too frequently) 12 years ago.

1 thing that IS new(er) is the boom in paycheck loans over the past ~5 years. In the past year or 2, my bank has offered Direct Deposit advances as well.

posted by: h0mi on 07.26.04 at 02:07 PM [permalink]

OK Sam/RJT -- then if the creation of 200 or 500 Euro notes reflects the fear that the Euro may go the way of the lira (devalued over time), then that argues against the Euro overtaking the dollar as the underground currency of choice. The world continues to believe in the dollar as a safe, stable, hard currency that is accepted practically everywhere in the world, no questions asked.

The fact that the Portuguese have outlawed the 500 Euro note is a precedent for us to look at. I'm curious if anyone else out there has any thoughts about the operational issues as a nation/economy by eliminating the 100 dollar bill?

As a side note, I've always thought that people who whip out 100 dollar bills at, say, dinner are basically cheeseballs. Much more "classy", I think, would be to whip out two 50s instead.


posted by: Ed on 07.26.04 at 02:07 PM [permalink]

While we're at it, eliminating the $10 is something worth considering as well. ATMS haven't stocked $10 in years and I'm far more likely to get 2 $5s than a $10 whenever I pay for something with a $20 bill.
The expense of printing more $20s and $50s could be offset somewhat by printing fewer/no $10s.

posted by: h0mi on 07.26.04 at 02:07 PM [permalink]

I recently withdrew $1000 in 100s to pay a building court fine which was then waived. I used them for walking-around money for the following weeks. Since our grocery purchase ranges from $85 to $150 per week I had no trouble at all with passing them.

By the way, there was a stretch of several years during which the small amount of pot I smoke was payed for entirely by bartering computer services and physical labor to the growers. No cash of any sort was involved.

posted by: triticale on 07.26.04 at 02:07 PM [permalink]

triticale - why not use a check to pay your fine? or a credit card? regardless, i put your example in the "aberration" column as it is an example of the need for very large bills (actually, would 20 50s have been that bad?) for an infrequently used purpose. The costs of using $100 bills far outweigh the convenience factor here, i'd argue.

For people living off the grid, elimating the $100 bill becomes a minor nuisance ... those people living off the grid who keep their money under the mattress ... let's say they keep $100,000 under the mattress (we're talking about the upper crust of the bohemians off the grid, now), or 1000 $100 bills. Doubling this to 2000 bills (50s) is somewhat aggravating I suppose, but again the benefits of keeping the $100s dont' outweigh the costs, I believe.

Sure it was cool to have a few ben franklins on you to buy groceries, but 50s would have worked just as well, right?

I'm still waiting for the examples of the compelling need for $100 bills out there. So far, I haven't heard any.


posted by: Ed on 07.26.04 at 02:07 PM [permalink]

I think there international use of USD has been very underplayed in the article and the comments.
Firstly, in a country like Russia (where I am from), while the rouble has stabilized recently, many goods/services are still paid for in dollars, and I mean, don't even bother offerring 20s. Gotta be large denominations. And I am talking perfectly legitimate transactions, "underground" only from the point of view of not being accounted for as part of the _US_ economy.

Secondly, many people in developing nations (who distrust the banking system), have learned that money under the mattress becomes worthless with inflation (Russia is again a good example, but far from only one). So the relatively stable US dollar is used not as a means of transaction, but as a means of savings storage.

Thirdly, in recent years some South American countrries, tired to see the value of their currencies repeatedly go down the tubes with political/economic turbulence, have declared the USD THEIR official currency. See here, for example. Granted, Ecuador's economy is not that big, but nevertheless, it's another use of the greenbacks that the Fed keeps printing.

This is not to say that the "underground economy" hypothesis is incorrect--it's just there are many other factors, and the NRO article ran with a single tempting explanation.

posted by: Ivan B. Zhabin on 07.26.04 at 02:07 PM [permalink]

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