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Lots of people see progress as a good in itself. But when progress costs you money, why should you embrace it?

The ongoing battle over innovations in the way people pay for things is a classic example of this phenomenon. Companies throughout the financial services industry are racing to offer new solutions that they think consumers want and need. But if you think about it, you'll realize that you're much better off going with what you have right now -- and innovation will only take away some valuable benefits.

The new way to pay
An article in yesterday's Wall Street Journal discussed how many big money-center banks are frustrated by the success of eBay's (Nasdaq: EBAY  ) PayPal, and they're not going to stand by and let the electronic-payment service go unchallenged. Instead, JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) are offering a similar service. Essentially, the new service would do what PayPal does: let people send money to each other using email addresses or smartphones rather than forcing them to use checks or cash.

The move is the latest in a series of attempts to build the long-awaited digital wallet. Last month, American Express (NYSE: AXP  ) announced an initiative to attempt to supplant debit-card use, which inordinately favors competitors Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) , with an electronic payment system. Google has been working to make Android-compatible smartphones work as conduits for payments and expects to announce a service allowing people to buy things at stores and use coupons by waving their phones at checkout readers.

All of these initiatives may sound nice. But in the long run, they'll only cost you money compared with simpler, old-fashioned payment methods.

It's fee time!
Take PayPal, for instance. According to its fee schedule, person-to-person transfers are free as long as they come from bank accounts, but they cost 2.9% plus a per-transaction fee if they come from a debit or credit card. That may make sense for a credit card, as it allows someone to make a payment without actually having the money. But debit cards only represent an extra step in moving money from your bank account to the other person. Why should that force the person you're paying to incur a fee?

Moreover, when it comes to buying things, new payment methods represent a step back, not progress. When banks made credit cards popular as an alternative to checks, customers got two real benefits: the ability to earn interest on the float between when they made a charge and when they had to pay their monthly bill in full, and a host of rewards ranging from cash back to frequent flier miles and other perks. Those initiatives put extra money in customers' pockets -- as long as they had the discipline not to fall into the trap of carrying a balance on their cards.

Goodbye, rewards

But more recently, debit cards and other electronic payment schemes take away these benefits. The float disappears, as transactions take actual money out of your accounts in short order after you buy something. And although some debit cards have modest rewards, others are disappearing -- and none of the newer electronic wallet initiatives I've seen have anything about usage rewards for customers.

Even worse, banks think they're doing you a favor by letting you use smartphone-based systems free of charge. Eventually, they may well start charging you a fee for their supposed convenience -- just as ATM transactions, which started out as a way to save banks the expense of having customers deal with human tellers, turned into a fee-reaping profit machine.

Forget progress
Fortunately, no one's forcing people to use these so-called progressive payment systems. But in time, you can expect to see commercials mocking credit-card users the same way that card companies have mocked those who still use cash and checks.

As long as you can get cash back in your pocket to use credit cards, there's no reason to jump onto the mobile-payment bandwagon. Doing so may make profit-starved banks happy, but if you want the best for yourself, you might as well stick with your rewards card.

Want to make sure you keep your credit in good shape? Check out the Fool's Credit Center today.

Fool contributor Dan Caplinger wants those darn kids off his lawn. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Google, Wells Fargo, JPMorgan Chase, and Bank of America, and has also shorted Bank of America. Motley Fool newsletter services have recommended buying shares of Google, Visa, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is free as free can be.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2011, at 8:03 PM, SpaceVegetable wrote:

    I welcome competitors to Paypal because Paypal is not a bank and I've always been a little leery of allowing them access to my accounts. I'd prefer to work with a bank that is actually subject to banking regulations.

  • Report this Comment On May 27, 2011, at 12:51 PM, jslampe wrote:

    What about new third-party networks/innovators? Doesn't an intelligent new platform, like a smartphone, provide ample opportunity for industrious startups, like Dwolla, to disrupt the status quo and solve the problem for all parties?

    Disclaimer, I work there :)

  • Report this Comment On May 30, 2011, at 2:07 AM, dbasch wrote:

    A word of warning for Motley Fool readers.

    These bank payment services which are outside of the normal CC system are dangerous.

    I was recently royally screwed over by Chase while trying to use their “QuickPay” service.

    The banks can and will freeze your account at a whim and require ridiculous actions to regain access to your own money.

    Search for “Chase Quickpay Consumerist” to read my story.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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