Cashless Payments

The way consumers pay for products and services, as well as reimburse friends and family members, has undergone a major transformation in recent years. Consumers no longer rely solely on cash. They have a range of electronic options, including credit cards, debit cards, prepaid cards, and peer-to-peer (P2P) payment options.

Credit cards: Credit cards are an important financial tool for many people. Americans held approximately $1.1 trillion billion in credit card debt in the second quarter of 2024, according to the Federal Reserve Bank of New York. Some consumers use a credit card simply for convenience or rewards. They pay off the balance in full each month and do not pay interest or late fees. Problems may occur when a consumer carries a balance and gets caught in a spiral of high interest rates, fees, and penalties. Consumers with credit card debt sometimes owe as much or more in fees and penalty interest charges as they do in principal.

Over the last several decades, the share of older adults who carry credit card debt from month to month has climbed considerably. Nearly half of adults age 50 and older have credit card debt, making it the most common type of debt held by this age group. According to AARP research, many older adults with credit card debt say that credit cards have hurt their ability to build savings. Most older adults with credit card debt do not contribute to savings. About one-quarter have made only the minimum payment at least six times in the prior year. Nearly 60 percent have done so at least once. 

The Credit Card Accountability Responsibility and Disclosure Act, enacted in 2010, provides important consumer protections. It prohibits arbitrary interest rate increases and requires fees to be reasonable, among other protections. Federal law also provides greater protections against fraud for credit cards than other cashless payment methods like debit cards, prepaid cards, and peer-to-peer (P2P) payments. 

Medical credit cards: These offerings target people with low and moderate incomes who struggle to pay for health care. They are increasingly replacing the free payment plans that were traditionally offered to patients. They could result in individuals who qualify for no-cost or reduced-cost care paying more than they owe. A particular concern is the use of “deferred interest” in these medical credit cards. Initially, they may offer a low or zero interest rate for a certain period. However, if the debt is not paid off in full at the end of that period, they charge retroactive interest. The Consumer Financial Protection Bureau reports that from 2018 to 2020, Americans paid $1 billion in deferred interest.

Prepaid cards: Consumers, particularly those with low incomes, are increasingly using prepaid cards for financial transactions instead of cash or traditional banking services like checks or credit cards. Consumer Financial Protection Bureau regulations provide consumer protections for prepaid cards. Among other protections, financial institutions must:

• limit consumers’ losses for preregistered cards that are lost or stolen,
• investigate and resolve errors for preregistered cards, and
• give consumers easy and free access to account information.

In addition, consumers must be provided “Know Before You Owe” prepaid card disclosures with clear, up-front information about fees and other key details. Before allowing consumers to overdraw their prepaid cards, issuers must evaluate and determine that the consumer can repay the loan, just like other credit. However, the regulation does not outright ban overdraft fees.

Government benefits payments: The federal government and some states deposit government benefit payments for unbanked individuals directly onto government-issued prepaid debit cards. These are called electronic benefit transfer (EBT) cards. Consumers use these cards in the same way as any debit card. Some government EBT cards lack the consumer protections that other prepaid cards have.

Consumers have experienced an array of problems related to these cards, including excessive fees. A Federal Reserve report found that consumers paid roughly $130 million in fees in 2023 for these cards. Even small fee charges for using the card could have a harsh financial impact on someone living on a limited fixed income. Consumers also report problems activating or registering their cards, withdrawing money, being charged for fraudulent or unauthorized charges, and resolving disputes.

P2P apps: These apps allow consumers to send money to individuals or businesses through their mobile devices or computers. According to a Pew Research Center 2022 survey, more than three-quarters of Americans have used them. Although convenient, there are risks. Consumers can lose money if they mistakenly send money to the wrong person, or if they send money after being targeted for scams or fraud (see also Scams and Fraud). In addition, the apps typically collect more data than necessary to run their service, share data with other companies, and make it difficult for users to delete their data. This creates privacy risks. Some risks are specific to nonbank P2P apps. The money stored on these apps is generally less secure than money stored in banks. This is because nonbank apps lack deposit insurance. If the app provider becomes insolvent, consumers are at risk of losing money stored on the app.

Cashless businesses: As fewer customers use cash, some stores have moved away from accepting cash payments. They have said that handling cash is burdensome or unsafe. Others have argued that cashless stores discriminate against certain populations, such as people with low incomes, who are more likely to be unbanked or underbanked. In response, some cities have required all businesses to accept cash. Cashless businesses can still serve cash-preferred customers through a cash conversion kiosk, also known as a reverse ATM. This allows customers to deposit cash and convert it to an electronic payment instrument, such as a prepaid card. It can be helpful to cash-preferred customers, but only if it does not charge them a fee.