Those who tout credit cards over debit cards claim usage of the latter is tantamount to giving away one’s money. Conversely, charge cards offer cash-back plans, airline miles, credit toward future purchases, and countless other perks. Given the myriad extras that credit cards yield, everyone should switch from debit to credit cards, right? And everyone should eat cake too!
Missed by those who disdain debit cards is that it wasn’t always this way. Back before various governmental attacks on debit-card interchange fees, the cards came with lots of benefits themselves. For instance, Citibank used to offer debit-card users frequent flyer points at American Airlines for every dollar spent.
Then the Federal Reserve pursued a .12 cent per swipe maximum charge that could be levied on retailers by debit-card providers. Stated more bluntly, the Fed threatened debit-card issuers with draconian price controls. Readers can probably guess who paid for the central bank’s compassion.
While the Fed’s .12 cent price ceiling decree didn’t fly, .21 cents eventually did. Suddenly the ability of debit-card issuers to provide perks and services for their customers was severely limited. About this, keep in mind that debit cards are the predominant way that consumers access or spend money in their accounts; meaning, the Fed’s price controls would negatively affect a large portion of total card users. Yes, the masses. Out of nowhere, Citi debit cards came in the mail as replacement for the Citi/American Airlines cards that formerly existed as a way for debit-card users to build up mileage balances while shopping.
You see, it once again wasn’t always true that debit-card usage was the same as “giving away money.” When financial institutions were “allowed” to make money in return for providing an essential service for debit-card using customers, they could yet again offer extras for usage of those cards. In the pre price control past, debit-card issuers could compete for the business of debit-card users.
Which brings us to where we are today. To mitigate the negative consequences of price controls on debit swipes, debit card users are being told to get credit cards. To, you know, eat cake. Except that it’s not so simple. Precisely because financial institutions are financing customer debit-card purchases with money already in their bank accounts, debit cards are logically much easier to attain. You’re being financed with your own money.
On the other hand, acquiring a credit card requires, well, credit. Which not everyone has. Or not everyone can get because of a poor credit history. More broadly, some debit-card users prefer using them because of the natural spending limits they impose, while others desire debit cards over credit cards because they like neither debt nor making monthly payments related to debt.
Which is just a reminder that debit cards exist as the answer to two crucial problems: spending beyond one’s means, and much more troublesome, spending beyond one’s means while running up enormous debt. Call debit cards the personification of prudence.
Except that thanks to the governmental decrees, the cards that most enable prudence no longer come with perks. Worse, the Fed is revisiting its price controls. Its aim is to push interchange fees down from .21 cents per swipe to .14 cents. Ok, but there aren’t price controls as much as there are shortages. Watch services provided to the least banked shrink even more.
Which is ultimately the point. The broad use of debit cards exists as a signal that they’ve proven the market answer for banking customers with the least. Put another way, the Fed’s imposition of price ceilings on debit cards will be felt most uncomfortably by those with the most limited access to banking and its various services. Let them get credit cards…
Republished from RealClear Markets
