Electronic Money – The World has Changed

There once was a time that “Cash was King.” It was acceptable in any transaction up to any amount. When buying a car back in the day, someone might take more than ten thousand dollars with them to pay for the transaction. Paying debts with large amounts of cash was not uncommon. In the 1940’s and 1950’s, there were only three ways to pay for something; cash, check, or a wire transfer. The popularity of charge cards had not begun.

In the 1960’s charge cards or credit cards became a normal part of our financial world. Now we had a fourth way of paying for our wants and needs; a credit card. “Buy now and pay later” was the motto of many back then. It was a popular option for those with limited cash, as credit cards allowed them to purchase expensive items and pay for them at a modest interest rate over time. Credit cards changed the way we looked at cash. Cash dollars were no longer a necessity in a transaction.

The 1970’s and the introduction of the ATM was what really set us on the path to electronic money. An ATM made it possible for someone from out of town to get cash from their account without having to write a check and show several forms of ID to get it cashed. They could go to the ATM of the nearest bank and, for a small fee, access their account and get up to several hundred dollars from their account. They did not have to go to the ATM of their bank. Banks would exchange the money electronically between them to settle the transaction.

After the ATM card, came the ubiquitous debit card. The debit card was originally created by a Frenchman, Roland Moreno, in 1974. EFT/POS (Electronic Funds Transfer/Point of Sales System) or the debit card system as it is popularly referred to, changed how we all exchange money for goods and services. Suddenly, if we had the cash in our account, we could pay for any item if the merchant accepted EFT. Cash money was no longer a required part of monetary transactions. In 2011, only 27% of transactions were of the cash type and it is expected to drop to 23% by 2017. Another number that is expected to drop is the use of paper checks for payments; only 7% of transactions in 2011 involved a paper check.

There are convenience stores and other markets that are refusing cash and moving to 100% EFT transactions. Considering that merchants must pay a small fee for each transaction, why are we going to 100% EFT?

For years, checks were the way we paid for things when we did not have the cash readily available. That system worked just fine but it had pitfalls. What were the dangers of accepting a check?

·         It took several days for a check to clear. Prior to electronic check clearing in the late 80’s, it took even local checks seven days to properly clear. An out of state check would take two weeks !

·         We never knew if the money to pay the check would be available on the date the check cleared.

·         Once the check “Bounced” back to us, it would take a couple of days to get the check back to us. Taking time away from recovering on the bad check.

Checks could be stolen, duplicated, or altered. If a merchant took a bad check, the merchant paid for it and took a loss. With electronic transactions, particularly with PIN style transactions where the accountholder must enter their PIN code in order to complete a sale, it gives the merchant much more confidence that the person processing their transaction is not a fraud. Electronic transactions reduce the amount of fraud losses for merchants.

In a few years, paper checks will be a thing of the past!

Happy Holidays to everyone! Stay safe this season.

Seven Lessons on How to Pay More Bank Fees

Do you want to pay more in bank fees on your checking account? Follow my advice you will spend more than intended on bank fees!

1. Ignore your account between paychecks.

• Lots of people only look at their account on payday when they make a deposit. “I’m in a negative balance. Why?” They don’t keep a running total on their check register nor use online or mobile banking to track their usage. This can result in multiple overdrafts costing at least $35 for each occurrence.

2. Ignore financial institution correspondence that comes with your statement.

• Financial Institutions can make changes to their accountholder agreements. Often these changes affect the fee schedule of the institution. If one ignores the changes by failing to read the statement enclosures, they may fail to heed a warning that their minimum balance has increased and start paying a monthly fee or miss out on some other change that will result in higher fees.

3. Ignoring minimum balance or direct deposit requirements

• To maintain a free checking account, many financial institutions require that an accountholder maintain a specified minimum or have their paycheck directly deposited to their account. Drawing funds so the account balance falls below the required minimum or changing employers and forgetting to set up direct deposit can result in a member paying higher fees.

4. Skip Overdraft Protection

• Yeah, you probably won’t make any mistakes with your account so Overdraft Protection is probably unnecessary. But, of course, if you do make a mistake, you will pay $35 or more per occurrence. Good overdraft protection provides you with a line of credit or a transfer from your savings account that is paid to your checking account if an item is presented for payment and there are insufficient funds. Your fee for the transfer may be free or as little as $5. That is a lot less than an overdraft or Non Sufficient Funds charge.

5. Move to another financial institution and ignore your old account.

• You moved to a new bank or credit union and left a few bucks in the old account in case something comes in. After a while, you forget about the old account. Does your accountholder agreement have built in fees for inactivity? Some institutions enforce inactivity fees of $5 or more per month should you stop using your account and allow it to become inactive or dormant. Remember to close old accounts when you change institutions. Not only can you lose money with inactivity fees, your account could just get old and after three years of inactivity, it may go dormant. Allowing your account to go dormant means that any money remaining in the account at the end of three years of inactivity can be sent to the State of California’s Controller’s Office. The money can be redeemed by the accountholder but it takes time to go through the bureaucratic process.

6. Using money orders to pay for items that require guaranteed funds.

• A financial institution will charge $5 or more to issue a money order or cashier’s check. Did you know that if you send a check through your online banking it is a guaranteed check and it is free?

7. Use ATM’s indiscriminately

• If you are not using the ATM’s that are authorized by your financial institution you will likely be charged for each instance of usage. Those fees are not just from your bank, they are charged by the foreign financial institution’s ATM for non-customer usage. Costs: usually $5 -$7 per instance. You could be charged $2-3 by your institution and as much as $5 by the company that owns the ATM. 

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What is the difference between banks and credit unions? Some teenagers in Alberta, Canada came up with an ingenious video to describe the differences. It is linked here. I hope you enjoy it! 

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
Copyright 2013 Meriwest Credit Union. All rights reserved.

Why do prepaid cards have a bad reputation?

Prepaid cards have a bad rep due to fees. People with modest incomes, such as students, seniors, or those on public assistance have very limited funds to pay for their living expenses. If one is only making about $400-$500 a month, the cards can be very costly. Depending on how you use a typical prepaid card, you could lose up to 10% of your monthly income in fees. Often they are seen as a predatory type of transaction card due to the charges they have for loading the card with money, using it at merchants or accessing cash at an ATM. All three transactions would be free at a credit union or a bank if they were using their checking account.

What would a typical month’s worth of fees look like?

I have looked up several prepaid cards over the past several weeks in researching them for use by the clients of some of our nonprofit partners in the community.  The fees I am quoting here are averages based on several typical cards.

Here is an example list of typical fees charged on a prepaid card:

Initial Purchase 5.00 Monthly Charge 5.95 Often Monthly service charges may be waived if one maintains a minimum balance or performs several transactions to offset fee. ATM Withdrawals-participating ATM's                N/C (non-participating ATM's.) 2.50 There may be charges from the out of network ATM Teller Withdrawals 2.50 Transaction Fee (Point of Sale/PIN Purchase) 0.15 Balance Inquiry Fee 0.50 Reload cash fee 4.95

In this scenario, let’s say I bought the card, reloaded it twice during the month with my paycheck of $250. I am a student making $500 a month in a part time job. I get paid twice a month on the 1^st and the 15^th. I had five ATM transactions, three of which were out of the network. I used the card to make 12 purchases at various merchants. I made three inquiries at ATM’s.

Purchase price	5.00
Two reloads @ 4.95	9.90
Two In network ATM withdrawals	0.00
3 out of network withdrawals @ 2.50	7.50
Out network ATM Fees @ 3.00	9.00
12 point of sale transactions @ .15	1.80
3 ATM inquiries @ .50	1.50
Total	34.70

Would a checking account have been cheaper?

Generally, yes. It depends on where you bank. With a checking account at most credit unions, the only fees I would have paid would have been the out of network ATM fees. Most financial institutions do not charge you to make a deposit, take money from your account with a teller, make point of sale purchases, or inquire on your account. 

But many checking accounts today have a fee unless there is a minimum monthly balance or you use direct deposit. Be sure to verify what the requirements are for your checking account before you open it

How are people confused about Prepaid cards?

People mix these up with gift cards. Gift cards typically charge a fee to purchase the card itself, but not for transacting on the card. Prepaid cards often charge for both items.

Also, people are confused by the fee schedules. There are fees for virtually anything you do with the card. Often, people think these are similar to their bank or CU ATM cards and can be used the same way. The fees eat into their balance and limit the amount of money they can use to pay for expenses.

Is a prepaid card a viable option for an unbanked person?

Yes, with caveats! If one is careful about its use. Card owners must use network ATM’s to avoid withdrawal fees. Use the internet to inquire on their balances as that is generally free with most cards. They must also keep tabs on and limit their purchases to avoid excessive point of sale transaction fees. 

How about using these for travel? 
That might be a good idea. If the card is lost or stolen, it can easily replaced and your accounts back home are not subject to identity theft. I suppose you could consider the cost of the fees part of your vacation expense!

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The next Meriwest Credit Union workshop-

Tax Changes for 2013

Speaker: Will Slade of Slade and Associates. Mr. Slade is an IRS Enrolled Agent with many years of experience in counseling his tax clients and tax preparation.

10am February 9^th at the Meriwest Credit Union Main Office

5615 Chesbro Ave. San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com

The Mr. Slade will cover the following:

• Tax ramifications of “Obamacare”
• Alternative Minimum Tax (AMT) patch
• Permanent implementation of Bush era Tax Cuts

I hope you can join us.

 

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
Copyright 2013 Meriwest Credit Union. All rights reserved.