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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.
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.
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.
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