As online commerce has grown, credit cards have become ever-more ubiquitous for American consumers. The number of people with credit cards and personal loans hit record highs in mid-2022, and the tally of total credit cards exceeded 500 million for the first time ever.
As cash declines and digital money gains ever more share of wallet, it seems as if credit cards — with all their fees and convenience, and despite their risks — are unshakeable. But actually, it doesn’t have to be this way, and there are even signs that younger people are already becoming more cautious in their approach to using cards.
In this article, we are going to look at some of the hidden costs of credit cards, and a payment method that has the potential to save consumers money, reduce fraud, and lower online costs for everybody — consumers and businesses alike.
The (many) problems with credit cards
A number of problems around credit cards for consumers are well-known. These include the risks of overspending, paying a high-interest rate on your purchases, hidden or unexpected fees, going into debt, misunderstanding complex credit card terms, and so on. Likewise, your card can get lost or expire at an inconvenient moment.
But actually, these common issues are just the tip of the iceberg, and obscure much larger, structural issues with credit cards as a whole.
Points are not worth it
One of the benefits that credit card companies try to sell is their points systems. However, for the vast majority of cardholders, real rewards are slim to nil at best. Households that bring in more than $135,000 a year recoup in points or perks around only 0.6 percentage points of the fees they pay. And even they are, in a sense, subsidized by another group — households with an annual income of less than $25,000 (roughly a quarter of the total number). On average this group gets no net rewards since any they do receive are entirely offset by fees.
For most people, credit card points are a bug dressed up as a feature.
Credit card fees raise the costs of shopping for everybody
Beyond the direct risk to you as an individual consumer trying to responsibly manage their finances, credit card companies extract a huge, hidden tax on every item you buy online.
Card fees typically cost the business that you are shopping at from 1-3% of each and every transaction that you make. While they add these fees in every country, in the US they are the highest in the world. A business will not eat these costs — they get passed on to consumers in the form of higher prices.
And so does online credit card fraud
We tend to think about credit card fraud as having a single victim — the consumer in question. However, every incident of credit card fraud raises the costs for businesses too — directly if they do not recover stolen items, and indirectly as they have to invest in fraud prevention solutions and people to manage fraud risk. And the cost of these get passed to? You guessed it — you as a consumer.
In 2022, online credit card payment fraud losses are expected to reach $8.75 billion in the US, up by 11.3% over last year. Fraud on pay-by-bank payment rails is an order of magnitude lower than credit card fraud and is the lowest of all payment types.
It is already possible to eliminate credit cards from online purchases
As a consumer, limiting — or even removing — credit cards from your online purchase may sound like an unrealistic idea right now. However, there are already reliable options out there that could become readily available, faster than you may think.
One of these is a type of direct bank transfer, where you as a consumer authorize payment within your banking app, which is then deposited directly to the account of the business you are buying from. This payment method — already offered by providers such as Link Money — is based on a concept known as Open banking. This means that the customer and the merchant can avoid credit card payment rails entirely.
What this means for consumers
Pay-by-bank offers numerous benefits for consumers.
First and foremost, payments are 70-80% cheaper for businesses when compared to credit cards, because there are no credit card networks, risk solutions, or other extra parties taking a cut — just you, the payment method provider, and the business you are buying from, meaning less of a need for the business to raise prices to pay the credit card companies.
You authenticate the payment in your bank app with your regular log in or, increasingly, stronger biometric credentials such as thumbprint or face, rather than using card details, which can be stolen. This means less fraud. Once again, this lowers costs for businesses, which eventually flow back to consumers.
Since you are using a bank account, there is zero risk that you can go into debt — a win for financial health and living within your means.
You will always have uninterrupted services for subscription, and no risk of a decline due to expired or compromised cards, since your bank account never goes out of date.
You can help accelerate the transition
If you buy online and want to accelerate this trend, there are a few things you can do:
Keep an eye out for pay-by-bank payment options at the checkout when you buy, and use them where possible.
Talk to families and friends about the hidden costs of credit cards and how options such as pay-by-bank can bring down prices and increase online security.
Ask businesses you shop at frequently to offer pay-by-bank payment methods to both help them save on fees and ensure you remain a loyal customer.
Regarding point three, it is also worth noting that businesses are, in a sense, hostages to credit card companies’ market share and pricing power. Businesses need to offer these payment methods because they are expected by most consumers, but they don’t necessarily like them. In fact, many would jump at the opportunity to offer better alternatives to their valuable customers — so convincing them may be easier than you imagine!
A fairer, cheaper, and more secure way to buy online is here — let’s get started!
Credit cards currently dominate the way we buy online, but the cost of that habit is high and rising higher. In fact, credit card balances jumped 15% in the third quarter of 2022. Driven by inflation and a declining economy, this is the largest year-over-year increase in more than 20 years. Not only is this costly to consumers, it is also completely unnecessary.
Over the mid-long term, there will be better, fairer, and cheaper ways to buy, and with a little nudge from the right places, pay-by-bank will be available at your favorite online stores sooner rather than later.