Monetary Theory and Banking Systems
Final essay, 7th December 2005
In days of old we privileged western dogs capitalists would walk around with pockets bulging with cash. While large companies are content to linger in stone age barter trading, we little consumers are proud to remain on the cutting edge of consumption technology. A variety of cards have been available for a few decades by now, and they still become continuously more popular: the United Kingdom heads card holder statistics, with each adult holding an average of 3.5 cards two years ago, making total purchases worth well over £200 billion.1 To join the consumption spree, read on for the main ways cards can be used.
Cards today can perform most major functions of cash, allowing a consumer to replace or reinforce her cash resources with electronic functionality. The primary use of money is purchasing goods or services, and so there are at least three ways cards come in handy when paying for purchases at stores or service providers. In each case the card's magnetic strip, or a more modern "intelligent" chip, is scanned with a reading device. It checks whether you have sufficient reserves available and deducts the price, or if the card represents an account at your bank, makes a payment request to the bank. Sometimes it also becomes necessary to carry cash, and many cards allow withdrawals from ATMs at the user's discretion.
Possibly the simplest form of cards is a cash card. The card is either sold with a set value, or value can be added on the card when convenient. In both cases the value is pre-paid, and the card is usable right away as direct electronic money. When doing purchases, money is directly deducted from the card, and trying to pay more than the card contains does not work any better than trying that with real cash. While cash cards are handy for small purchases and alleviate the need for making exact change, they remain vulnerable to theft, and not every store or service have cash card processing capabilities. Examples of cash cards are pre-paid phone cards and store gift cards,2 or the travel cards used in the Finnish capital city area.3
A debit card is the next step up. Instead of carrying a set amount of electronic currency, a debit card is linked to a bank account and reflects the state of the account. They are accepted in virtually all stores in developed countries, and most major stores in developing ones. From the consumer's point of view, the payment event is similar to using a cash card, with the addition of a required identity confirmation. "Online" debit cards require you to give a PIN code, and the payment is withdrawn from your account immediately via a digital network connection. "Offline" debit cards work more like credit cards, in that a physical signature on a receipt is required instead of a PIN code, and it will take a few days to deduct the bank account.4 Debit cards are somewhat theft-resistant, as a quick report to the bank will hopefully prevent your precious savings from vanishing. In some places, like Finland, displaying a photo ID is a required additional security measure for purchases over a certain amount.
It is worth noting that debit cards need not necessarily be shackled to the limited contents of your bank account. If the store's card scanner can not check your account balance, or if the bank specifically allows overdraft, you can make purchases with more than your account contains. This credit-usage of a debit card can, however, be costly in terms of interest.
That brings us neatly to credit cards such as the notorious Visa and MasterCard. Unlike cash and traditionally applied debit cards, credit cards allow you to defer actual payments up to a personalized limit. If you buy a hamburger now, your credit card company pays for it, but sends you a montly bill which you had better pay sooner or later. Credit companies may charge interest on the amount owed, or a small fee for every transaction made, so you wind up paying more than you would with cash.2 Credit cards are nonetheless the primary international payment method for consumers, as the credit companies' electronic fund transfer networks extend around the globe.4 Using them works just like "offline" debit cards - sign a receipt and you're done. Sometimes not even that is required. Credit cards have long been used for purchases over a distance, like via telephone or on the internet, and a physical signature is not a feasible requirement. Instead, just the credit card number and owner information is needed. As you can imagine, if paying with money you don't have is tempting enough to land some developed countries in serious debt, paying with money someone else doesn't have is harder to resist than the world's best chocolate.5 Indeed, as the price for ease of use, credit card fraud annually amounts to hundreds of millions of your favorite European currency.4
Carrying around a piece of plastic is not as impressive as bulging bags with the text "ill-gained loot" painted on the side. Debit cards usually double as ATM cards, allowing you to withdraw money from your account in exchange for a PIN code. Well-developed countries have extensive collaborative ATM networks which accept cards from all local banks, whereas in places like Ukraine banks are still too distrustful to let go of their private ATMs. However, even in the latter, most if not all of the infernal machines are more than happy to swallow international cards, such as anything compatible with the Visa network. Also, although I have not seen many use this option, it is possible to use debit cards to withdraw some cash simultaneously when paying at a store, which may save some transaction costs.
Electronic money can make life much sweeter, and in some cases also sourer. No doubt cards are handy and easier to keep along than cash. Fancy combination cards like Visa Electron do a good job combining beneficient sides of the technology. Perhaps the biggest barrier to wholesale conversion to cards as currency is simply reluctance to change from the tried and true. However, as statistics seem to show, cards become more and more common even outside filthy rich exploiter fairly prosperous nations. Why not do the good deed of the day by supporting your nearest market economy with some shopping... on credit?