Wednesday, September 08, 2004

Cash Is No Longer King

Last update: September 5, 2004 at 6:18 PM
Shoppers flock to debit cards
Chris Serres
Star Tribune
Published September 6, 2004

In the ongoing battle for shoppers' wallets, cash is no longer king.
Plastic finally has outstripped cash and checks as the most popular way to buy items at the checkout line, according to a recent study by Dove Consulting and the American Bankers Association.
The biggest factor behind the change in consumer buying habits is the explosive growth of bank-issued debit cards, which draw money directly from a consumer's account when a purchase is made.
Shoppers like the cards because they are convenient; banks are pushing them because they are cheaper to process than checks and are a lucrative source of fee revenue.
One out of three purchases now are made with debit cards, compared with one out of five purchases four years ago, according to Boston-based Dove Consulting.
People are whipping out the cards everywhere from burger joints and gas stations to parking lots and thrift stores.
"It's convenient," Danny Sanchez, 25, said after swiping his Wells Fargo debit card to buy a cheeseburger and fries at a Hardee's restaurant in St. Paul. Sanchez, a graphic design student at Minneapolis Community and Technical College, said he prefers using a card because the payments are easier to track and he doesn't like to carry cash.
Banks have a vested interest in encouraging customers like Sanchez to use their cards.
Most banks do not charge any fees to own or use a debit card. However, they do collect an interchange fee from merchants each time a customer swipes a debit card. The fee typically ranges from 0.7 to 1.5 percent of the purchase amount.
The fees add up. Last year, regional bank TCF Financial Corp. of Wayzata collected $53 million from its debit cards, more than double the $20.7 million it collected in 1999.
"Banks save on expenses and earn more fee income, so they have a clear interest in enticing more people to use these cards," said Ben Crabtree, a banking analyst with Piper Jaffray & Co.
Indeed, banks are so fond of the cards they have begun offering cash rewards and discounts similar to those traditionally offered by credit card companies.
For instance, holders of U.S. Bank's Visa check card earn a small cash reward -- equal to one-quarter of 1 percent of a purchase amount -- each time they sign for a check card purchase. Last year, U.S. Bank gave back $35 million to its check cardholders through the rebate program. Those not interested in the cash can receive airline miles or points toward the purchase of consumer items.
"This is the best debit card, hands down, anywhere in the country," boasted Christine Hobrough, U.S. Bank's retail market president for the Twin Cities.
U.S. Bank is not the only bank pushing plastic.
Last month, TCF unveiled a card, "TCF Miles Plus," that lets customers earn points that can be redeemed to buy airline tickets. Cardholders earn one point for every dollar spent. Based on an August sampling of air fares, about $25,000 spent on the card would earn enough points to buy a flight from Minneapolis to New York on a major carrier.
TCF's new product is a credit card, but it functions like a debit card with purchases deducted directly from checking accounts. And unlike most credit cards offering airline miles, TCF's card has no annual fee and is not subject to travel blackout dates or airline seat restrictions.
"Traditionally, cards have been commodity products" for banks, said Crabtree of Piper Jaffray. "But a card like [TCF's Miles Plus] is powerful enough that it might actually help the bank win some new customers."
The cards also are valuable retention tools. Banks have found that customers are less likely to switch to a competing bank if they are trying to accumulate mile points or other rewards on their cards.
"It's about creating customer loyalty," said Ed Kadletz, executive vice president and director of debit card services at Wells Fargo, which unveiled a debit card rewards program of its own in April. "Let's say you've got a [Wells Fargo] credit card, a debit card, automatic bill payment ... the relationship becomes very deep and very broad. You get comfortable and you are less likely to leave to another financial institution."
However, consumers should keep a close eye on fees. One out of five banks nationwide charges customers a fee when they enter a personal-identification number, or PIN, instead of signing for a purchase, according to Dove Consulting. None of the major Minnesota banks charge this fee, but in some parts of the country it can range from 10 cents to $1.50 per transaction.
Fear of fees is a major reason Dan Lindquist, 39, of St. Paul, uses cash for just about everything. Each Friday, Lindquist withdraws just enough cash from the bank to make it through the week, and only uses his debit card to make big purchases.
"You can swipe [a debit card] here and swipe it there and not even notice that you've just spent a few hundred dollars," said Lindquist, a delivery driver at Target Corp. "With cash, I always know how much I'm spending."