June 18, 2007
By ELIZABETH OLSON The New York Times
Every morning on his way to the Concord, Calif., high school where he teaches physical education and health, John Nunan buys his breakfast. After he swipes his card through the reader, his bank debits the purchase from his account. He often repeats the process for lunch and dinner.
The amounts are small. For example, his usual breakfast of coffee and a Western omelet bagel from a coffee shop comes to $5.35. He said he debits his bank account "pretty much for every meal that I eat out."
Nunan, 25, is part of a group that some major credit card companies and banks are calling Gen P, or Generation Plastic. It refers to spenders 18 to 25 years old who are increasingly using debit or credit cards, collectively known as payment cards, for nearly every on-the-go purchase.
The convenience and speed of such electronic transactions are drawing in users, but there are pitfalls. Those who fail to keep track of their bank balances can quickly fall into a financial danger zone. Ending up in the red can lead to costly overdraft fees.
Nevertheless, more consumers — especially younger ones — are shunning cash and paper checks almost entirely. Already, a majority of people in their 20s are using payment cards, according to a study conducted last fall by Experian Simmons Research, a market research group in Fort Lauderdale, Fla.
About 70 percent, or 23.5 million, of 20-somethings have a debit card, and 53 percent, or 17.9 million, have a credit card, the study found. While every segment of the population is increasing its use of plastic, this group uses payment cards far more often and is leading a shift away from conventional payment methods.
A nationwide survey conducted for Visa in April found that 40 percent of Gen P pays with plastic for purchases of $25 or less at least four times a week.
Emily R. Cummings, 24, a graduate student at California State University, Long Beach, is one who fits the trend. "Paper is a thing of the past," she said. "I use my debit card three or four times a day."
Three-fourths of the 1,000 debit and credit-card holders who were surveyed said they never left home without a payment card. One-third said they rarely carried cash. The respondents were questioned via telephone by an independent research firm.
Part of the increase in the use of plastic relates to comfort with things electronic, like ATMs. And card companies have been working to make the payment process faster.
Last year, for example, Visa dropped the signature requirement for transactions of less than $25, which are called small-ticket items.. Some merchants also offer this service to MasterCard holders..
These changes have helped to drive the use of payment cards for even so-called micro-purchases, which are those less than $5. About 25 percent of Gen P members in Visa's survey used their cards for a majority of such payments. That was twice as many as in their parents' age group, defined as those at least 45 years old.
And the financial stakes are large. There are 350 billion annual transactions of less than $5, and last year they totaled $1.32 billion, according to MasterCard's research. And that number is expected to rise.
What do Gen P members buy? In the survey for Visa, two-thirds reported using a payment card at gas stations, and 54 percent said they used their cards at fast-food outlets. Convenience stores came in third, at 43 percent, followed by movie theaters, at 22 percent. Cards are also used often at drugstores, and to pay for video rentals, dry cleaning, parking and taxi fares.
Users cite security as another reason for preferring payment cards.
"No one is going to pick up cash and give it back to you," Nunan said. "I put my money in the bank, and then use my PIN to get it out."
While swiping a card's magnetic strip through a reader is likely to be a payment method for some time, card companies also have cards with embedded chips. These cards can be smaller, so they can be attached to key chains for portability.
Express Pay, the American Express debit card introduced two years ago, allows the user to wave the card in front of a reader at participating stores in chains like McDonald's, 7-Eleven and CVS pharmacies, as well as at certain gas stations.
The payWave card from Visa is also passed in front of a reader. Since the payWave was introduced two years ago, 10 of Visa's largest issuing banks, including JPMorgan Chase and Wells Fargo, offer the cards, and the number of merchants equipped with readers has roughly doubled in the last year, to about 31,000, a Visa official says. They include participating BP stations as well as fast-food and convenience stores.
MasterCard Worldwide offers the PayPass card, which was introduced in 2003; cardholders pay by tapping their card on a special terminal.
(In the future, cards may take on more interesting forms. You may one day be able to pay for purchases at the checkout counter by waving a watch or bracelet with an embedded chip, according to Arthur D. Kranzley, executive vice president for advanced payments at MasterCard.)
Card companies agree that taxis, parking meters, vending machines and subway tickets are all ripe for mobile payment. While such payment methods are mostly in the pilot stage, it won't be long before card account holders will be able to pay bills, or even receive coupons, by cell phone, industry experts say.
"While they're in the store, consumers should be able to scroll through and see the coupons we send," said Niki L. Manby, senior vice president for product innovation at Visa. "And then they could use the coupon on the spot."
Quicker checkout lines have strong appeal. But Gen P members also say that the listing of purchases made by debit and credit cards, rather than cash, helps them track and manage their expenses.
Visa's survey found that 79 percent liked having the ability to monitor card purchases on their bank statement; 58 percent said they believe that they kept better track of expenses by using a payment card.
Even so, the wider use of debit cards has downsides. For example, transaction fees, often in amounts of less than $1, are not necessarily disclosed when purchases are made.
A survey released in March by the research firm Bankrate.com found that nearly all large banks had eliminated these small fees on debit cards. But some merchants still add their own fees.
Matthew E. Quinones, who works in entertainment marketing in New York City, found that out when a fee of 27 cents was being added each time he bought his morning coffee.
"It bothers me," he said, "because you don't always know what places charge the fees, but it doesn't bother me enough not to go."
A more expensive problem can occur when a bank account is accidentally overdrawn and several small debit charges are posted to the account, each one setting off a separate overdraft charge. Such fees can add up quickly.
These charges cause 46 percent of overdraft fees, according to "Debit Card Danger," a report by the Center for Responsible Lending, a nonprofit policy group, which analyzed the accounts of 2,400 customers at the nation's 15 largest banks.
Overdrafts can also be a danger with paper checks, but the study found that they are responsible for only 25 percent of overdraft charges.
Cummings says she avoids any possibility of overdrawing her account by checking it daily. Nunan logs onto his account two or three times a week.
According to the debit card report, which was released in January, the consumer pays $2.17 in fees for every overdraft debit dollar. The average debit overdraft charge is $34, the report found.
Debit cards also have less fraud protection than credit cards. If users notify banks of a missing debit card or fraudulent use within two business days, their maximum liability is only $50, said Tim Sloane, the director of the Debit Advisory Service at Mercator Advisory Group, a payments industry research firm. Waiting longer, however, can increase the liability to $500.
"If you have a dispute," Sloane said, "your money already is out the door." In contrast, a credit card user generally has no liability if the card issuer is promptly notified of a lost or stolen card.
Even so, the use of payment cards for small purchases is up. Visa reported that its volume for purchases of $25 and under totaled $56.9 million in 2006, an increase of 16 percent from the previous year.
Still, there are times when only cash works, Nunan conceded. Recently, he was dining with the girls' soccer team from Walnut Creek, Calif., that he coaches in his spare time.
"We went out for pizza after a recent game, and nobody had any cash," he said. "We couldn't divide the bill that many ways on cards, so I had to front the money and get it back later."